Category: Examinations and Audits

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced its 2018 examination priorities. This year, the examination priorities are broken down into five categories:

1. Compliance and risks in critical market infrastructure;
2. Matters of importance to retail investors, including seniors and those saving for retirement;
3. FINRA and MSRB;
4. Cybersecurity; and
5. Anti-money laundering programs.

The retail investor focus and the cybersecurity focus are carryovers from last year. MSRB was added to the FINRA focus. I expect cybersecurity will be on the list for the foreseeable future.

I think it’s interesting to see anti-money laundering on the list. The current rules are not explicitly applicable to many investment advisers and private fund managers. Those fall outside the definition of “covered financial institution.” Broker-dealers and mutual funds are “covered financial institutions.”

This was true in the latest AML customer due diligence released by FiinCEN in 2016. FinCEN released a proposed rule to include investment advisers in the general definition of “financial institution” in 2015. That proposed rule seems to have stalled out.

On top of that, the rules and regulations are not generated by the SEC. Regardless, it’s against the law to do financial transactions with people and companies on the sanctions list. At a minimum, advisers should be checking their investors and clients against those lists.

It will be interesting to see how that works it’s may into the examination process. perhaps part of it will be fact-finding for once again creating an explicit rule for investment advisers.

Sources:

• SEC Office of Compliance Inspections and Examinations Announces 2018 Examination Priorities
• SEC’s 2017 Exam Priorities
• New Anti-Money Laundering Rules (2016)
• Proposed Anti-Money Laundering Regulations for Investment Advisers and Fund Managers (2015)

The SEC’s Office of Compliance Inspections and Examinations published a list of the five compliance topics most frequently identified in deficiency letters that were sent to SEC-registered investment advisers.

The five are actually the bulk of advisor compliance requirements. It’s the examples in the five topics that are the most useful indicators.

Compliance Rule

• Compliance manuals are not reasonably tailored to the adviser’s business practices.
• Annual reviews are not performed or did not address the adequacy of the adviser’s policies and procedures.
• Adviser does not follow compliance policies and procedures.
• Compliance manuals are not current.

Regulatory Filings

• Inaccurate disclosures
• Untimely amendments to Form ADVs
• Incorrect and untimely Form PF filings
• Incorrect and untimely Form D filings

Custody Rule

• Advisers did not recognize that they may have custody due to online access to client accounts.
• Advisers with custody obtained surprise examinations that do not meet the requirements of the Custody Rule.
• Advisers did not recognize that they may have custody as a result of certain authority over client
  accounts.

Code of Ethics Rule

• Access persons not identified
• Codes of ethics missing required information
• Untimely submission of transactions and holdings.
• No description of code of ethics in Form ADVs

Books and Records Rule

• Did not maintain all required records.
• Books and records are inaccurate or not updated.
• Inconsistent recordkeeping.

The only thing surprising about this publication is that conflicts are not mentioned.  I had assumed that undisclosed conflicts or improperly managed conflicts was the biggest problem found in SEC exams. This list makes it seem like ministerial missteps and sloppy paperwork are the most common problems.

Sources:

• The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers (February 7, 2017)

Last week the Securities and Exchange Commission issued the 2017 priorities for the Office of Compliance Inspections and Examinations. There are five main items on the list, plus some others. Private funds are still on the list.

Retail Investors –

• Roboadvisers
• wrap fee programs
• ETFs – redemption and sales practices
• Never-before examined
• Recidivist
• Multi-branch -(Are your smaller branches as compliant as the main office?)
• Share class selection

Senior Investors and Retirement Investments

• Continuing the multi-year ReTIRE initiative, focusing on investment advisers and broker-dealers along with the services they offer to investors with retirement accounts.
• Variable insurance products
• Target date funds
• Public pension plan advisers. “We will examine investment advisers to these entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty. We will also review other risks specific to these advisers, including pay-to-play and undisclosed gifts and entertainment practices.

Market-Wide Risks

• Money market funds under the new rules.
• Payment for order flow programs
• Clearing agencies
• Regulation SCI and anti-money laundering rules

FINRA – Consistent with OCIE’s goal of enhancing oversight of FINRA to protect investors and the integrity of our markets, it will continue conducting inspections of FINRA’s operations and regulatory programs, and focus resources on assessing the examinations of individual broker-dealers.

Cybersecurity – OCIE will continue its ongoing initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers and investment advisers.

In addition to those big ones, OCIE is continuing to look at municipal advisors, transfer agents and private fund advisers.

“We will continue to examine private fund advisers, focusing on conflicts of interest and disclosure of conflicts as well as actions that appear to benefit the adviser at the expense of investors.”

Sources:

• Examination Priorities – 2017

Last week I was able to share with you the introductory letter from a firm that recently registered with the Securities and Exchange Commission and quickly received a meet and greet request. That same reader was nice enough to share his experience with me and the readers of Compliance Building.

The SEC had a four office pilot program last year to do these meet and greet outreach calls. The purpose is to inform newly registered advisers of SEC resources available to them: conferences and compliance staff available on a hotline. The SEC also wants the advisor to note that exams happen and what to expect.

The meet and greet outreach program has now been picked up nationally so this letter will become more common.

The meet and greet examiner asked some basic questions about the business and what the firm is doing about compliance. The topics covered were:

1. History of the firm and confirm owners.
2. Do you have a program and manual?
3. How often do you access the program?
4. The business strategies of the funds.
5. Experience of the leadership of the people of the firm
6. Experience of the compliance staff of the firm
7. How do you communicate track record?
8. Affiliate relationships and approvals
9. How do you satisfy custody?
10. What is your biggest compliance challenge?

If you are a firm that is getting ready to register or have recently registered, get ready to answer these questions.

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