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FINRA Releases 2018 Examination Results

FINRA has released its 2018 Examinations Findings as a “resource for firms to strengthen their compliance programs and supervisory controls.” FINRA says the report selected certain observations because of “their potential significance, frequency, and impact on investors and the markets.” The report highlights widespread deficiencies in suitability policies and procedures including “quantitative suitability” (i.e. series of transactions), overconcentrations, excessive trading, and variable annuities. FINRA also cites widespread failures to ensure fulsome disclosure of fixed income mark-ups, reasonable private placement due diligence, and abuse of discretionary authority. The broker-dealer regulator summarizes other concerns including anti-money laundering, net capital and customer protection calculations, best execution and outside business activities.

This extensive list (15 pages) covers many of FINRA’s greatest regulatory hits. It’s a great document for new compliance officers because it covers a wide range of broker-dealer compliance requirements. Rather than helping compli-pros focus resources, it works better as a checklist to verify that the firm has addressed the most serious regulatory requirements.

SEC Is Examining Registered Funds and ETFs for Oversight, Policies, and Conflicts


The SEC’s Office of Compliance Inspections and Examinations has announced a sweep of certain mutual funds and ETFs. The OCIE staff will target smaller ETFs and funds/ETFs that use custom indexes, allocate to securitized assets, exhibit aberrational underperformance, or employ inexperienced managers or private fund sponsors that manage a similar mutual fund.  The SEC will assess compliance policies and procedures and fund oversight of risks and conflicts, disclosures to shareholders and the Board, and oversight processes.  Among some of the issues of concern to the OCIE staff include bid/ask spreads for secondary market trading of smaller ETFs, portfolio management for underperforming funds, the effect of unexpected market stresses on securitized assets, and side-by-side allocations for private and public funds.  OCIE is encouraging fund sponsors and boards “to consider improvements in their supervisory, oversight, and compliance programs.”

Compli-pros and fund lawyers should mobilize to review policies and procedures for affected advisers and boards, consult about changes, and implement enhanced oversight and processes.  We recommend taking action before the OCIE staff arrives for its examination. 

SEC Examined 15% of Advisers Last Year and Wants to Expand Exam Program

In recent testimony before Congress, SEC Chairman Jay Clayton reported that the SEC examined approximately 15% of all investment advisers in fiscal 2017, a 40% increase over the prior year.  Mr. Clayton said that the SEC achieved these results through the reallocation of resources, advancements in technology, and “other efficiencies.”  He advocated for continuing to increase investment adviser coverage levels by requesting 24 additional positions in his 2019 budget request.

OUR TAKE: The SEC still falls short of FINRA who claims to examine 40% of broker-dealers per year.  Perhaps, Chairman Clayton should reconsider requiring third party compliance reviews, a revenue-neutral policy idea, championed by former Republican Commissioner Dan Gallagher.  Regardless, the chance of an exam continues to increase every year.


The Friday List: 2018 Examination Priorities

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Both FINRA and the SEC OCIE staff recently released their 2018 examination priorities.  Today’s list synthesizes their missives into the 10 most significant regulatory priorities for investment management firms.   Several of these priorities are new this year including cryptocurrency, wrap fee programs, and thinly-traded securities.  Others such as AML, suitability and best execution are regulatory greatest hits that appear nearly every year.   Compli-pros should use these letters to prepare their compliance programs and exam readiness.


10 Most Significant 2018 Examination Priorities


  1. Disclosure of fees and expenses: Both OCIE and FINRA champion full transparency of fees and expenses so that clients can make informed decisions and understand possible conflicts of interest.
  2. Cryptocurrency:  Expect a lot of attention paid to initial coin and cryptocurrency offerings including recommendations, disclosure, volatility, and security.
  3. Cybersecurity:  The regulators want to ensure that firms implement adequate cyber policies and procedures to protect client information and data systems.
  4. AML and KYC:  This is an area that both regulators have identified for many years, although the focus has moved to customer due diligence and firms’ gatekeeper role to keep securities markets safe.
  5. Protecting senior investors: Both regulators want to protect senior investors.  The SEC focuses on recommendations to retirement accounts.  FINRA will review compliance with rules to prevent exploitation.
  6. Wrap fee programs: The SEC continues its persecution and prosecution of wrap fee programs, including due diligence, best execution, and conflicts.
  7. Thinly-traded ETFs and microcaps:  The regulators have raised the red flag about recommending thinly-traded securities that are subject to market manipulation and pay exorbitant commissions.
  8. High risk brokers:  FINRA wants firms to enhance hiring and supervision practices to keep bad actors out of the industry.
  9. Suitability: Firms must implement procedures to vet products and train reps.
  10. Best execution:  FINRA is particularly concerned about order-routing practices and resulting conflicts of interest.

OCIE Releases 2018 Exam Priorities

The SEC’s Office of Compliance Inspections and Examinations released its 2018 examination priorities, focusing on retail investors, market infrastructure, FINRA, cybersecurity, and anti-money laundering.  As part of its mission to protect retail investors, OCIE will focus on (i) disclosure and receipt of compensation that could suggest a conflict of interest, (ii) robo-advisers, (iii) wrap fee programs, (iv) poor-performing mutual funds and ETFs, and (v) cryptocurrency offerings.  OCIE also plans to supervise FINRA’s “operations and regulatory programs” including the quality of its examinations.  OCIE also intends to scrutinize cybersecurity and anti-money laundering practices including risk assessment and customer due diligence.  OCIE makes clear that its priorities list is “not exhaustive” and could be expanded as a result of regulatory developments, examination information, complaints and tips, and other regulators.

OUR TAKE: OCIE is fairly transparent.  Now that the staff has identified these issues, compli-pros should expect a heavy focus during examinations.  Compliance departments should review policies and procedures and testing to get ready.


FINRA Releases Annual Exam Priorities Letter

FINRA released its annual Regulatory and Examination Priorities Letter identifying areas of FINRA focus for 2018.  FINRA announced a focus on fraud including insider trading, microcap pump-and-dump, Ponzi schemes and the resulting referrals to the SEC, even if the wrongdoing is outside of FINRA’s jurisdiction.  FINRA will also target supervision practices including the hiring and review of high-risk brokers, branch offices, and outside business activities.  New this year is a focus on cryptocurrency offerings and the role registered reps play in effecting transactions.  FINRA also highlights best execution, cybersecurity, anti-money laundering, and business continuity.  Consistent with prior years, FINRA will devote resources to customer protection and net capital, suitability, and liquidity risk.

OUR TAKE: Compli-pros should use the Priorities Letter as a checklist to review the Written Supervisory Procedures.  FINRA generally means what it says and addresses these topics during exams.


SEC Prosecutes De-Registered Adviser for Prior Compliance Failures

The SEC fined a deregistered investment adviser and barred its former principal for multiple compliance failures involving double dipping, Form ADV disclosures, fee rebates, and misrepresentations.  The respondents recommended that clients invest in private funds in which the principal held ownership and managerial interests.  Although the SEC acknowledges that clients knew about the conflict, the firm failed to list and describe the conflicts on Form ADV.  The SEC also charges the firm with multiple compliance program failures including inadequate policies and procedures and failing to conduct annual testing of the compliance program.

OUR TAKE: There is no such thing as declaring regulatory bankruptcy: the SEC’s long arm won’t let a firm engage in wrongdoing and then simply de-register to avoid consequences.    Compli-pros should also note that disclosure alone will not always cure significant conflicts of interest, such as fee double dipping for advisory services along with underlying products. 


FINRA Issues Examinations Findings Report

FINRA has issued a report summarizing its observations on the compliance and supervision issues arising from recent examinations.  Highlighted concerns include cybersecurity, outside business activities, anti-money laundering, product suitability, best execution, and alternatives in IRA accounts.  FINRA found weaknesses in cybersecurity programs including failure to control access to data, insufficient risk assessments, and inadequate vendor supervision.  FINRA expressed concerns about failures to report OBAs and failures to execute adequate reviews or retain documentation.  AML programs fell behind as firms changed and grew but failed to properly resource growing AML volume.  FINRA raised suitability concerns over recommendations of UITs, fund share classes, and complex products.  FINRA hopes that firms will use the report as a “resource in tailoring their compliance and supervisory programs to their business.”

OUR TAKE:  It’s always good to get more transparency into the examination program.   What’s less clear is how firms should react to this information especially since FINRA generally issues its examination priorities letter in January.  Regardless, expect FINRA to focus on these issues during cycle exams.

The Friday List: 2017 Examination Priorities

the list

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Within the last 2 weeks, the SEC OCIE staff and FINRA published their 2017 examination priorities letters (see SEC letter here and FINRA letter here).  If past is prelude, the regulators will fulfill their promises to examine the highlighted areas.  Also, the regulators have advised compliance staff to spruce up procedures and testing in these areas.  We did a breakdown of the two letters and offer our view of the most significant priorities.


10 Most Significant 2017 Examination Priorities


  1. Suitability:  The SEC expressed significant concern about mutual fund share classes and wrap programs.  FINRA will look at rep training as well as over-concentration of high-risk products.
  2. Cybersecurity: Each of the SEC and FINRA specifically highlighted cybersecurity.  They will review information security, data storage formats, password controls, physical security, and service provider oversight.
  3. Bad Brokers: Both the SEC and FINRA will target firms that retain and/or hire recidivist brokers.  The regulators will review supervision as well as hiring and training practices.
  4. Senior Investors: Both regulators will focus on sales practices to, and products for, senior investors.   The regulators are concerned with suitability especially related to high-yield products, target-date funds, and variable insurance products.
  5. Public Plans: The OCIE staff will scrutinize how advisers to public pension plans fulfill their fiduciary duties.  The staff also plans to examine pay-to-play practices.
  6. Branch Offices: Both regulators will examine how firms supervise branch locations.  These exams will include reviews of marketing, client communications, and outside business activities.
  7. Anti-Money Laundering:  Both the SEC and FINRA expressed continued concern about AML compliance.  They will test suspicious activity reporting, independent testing, automated trading, money movement, and foreign currency transactions.
  8. Robos: The SEC will focus on compliance programs, suitability, data protection, and algorithm oversight.
  9. ETFs: The SEC wants to ensure compliance with exemptive relief conditions.  The staff also promised reviews of the creation/redemption processes and sales practices.
  10. Private Funds: The SEC staff expressed concern about the private fund industry including conflicts of interest, disclosure and fees.

SEC Staff Publishes 2017 Exam Priorities

priorities II

The staff of the SEC’s Office of Compliance Inspections and Examinations has released the 2017 Examination Priorities, which focus on retail investment products, retirement advice, FINRA supervision, and private funds.  The staff’s retail initiatives will include a focus on robo-advisers (compliance programs, suitability, data protection); wrap programs (suitability, trading away), ETFs (exemptive relief compliance, creation/redemption processes), and newly-registered advisers.  As part of its emphasis on retirement products, the SEC will scrutinize variable insurance and target date funds and assess how pension plan advisers satisfy their fiduciary obligations.  The staff will continue to target private fund advisers and cybersecurity.  As part of its obligation to assess market-wide risks, OCIE will enhance oversight of FINRA, including assessing the quality of broker-dealer exams.  OCIE’s Director advised registrants to “evaluate their own compliance programs in these important areas and make necessary changes and enhancements.”

OUR TAKE: Many of these areas – wrap, ETFs, variable insurance, target date funds, cybersecurity – continue longstanding initiatives.  Others – robos, private advisers, FINRA – are more recent regulatory objectives.  Compliance officers should use this exam priorities letter as a tool to upgrade their own compliance programs.