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OCIE Warns of Transfer Agent Failures to Safeguard Assets


The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert citing transfer agents for deficient safeguards and lost securityholder procedures.  Reporting on 75 transfer agent examinations over three years, OCIE observed misappropriation of shareholder funds and theft of physical certificates, inadequate account reconciliation processes, commingling of funds, and failures to secure physical access.  OCIE also observed failures to adequately search for lost securityholders including neglecting to send written notices.  OCIE recommends heightened policies and procedures, fund segregation, frequent reconciliations, locked vaults, video cameras, periodic audits, and controls around lost property.  OCIE published the Risk Alert “in order to encourage TAs to review and strengthen their applicable policies, procedures, and controls related to their paying agent operations.”

This is the regulatory warning shot for transfer agents.  Expect sweeps and enforcement actions to follow.  This Risk Alert also puts registered funds and their Boards and CCOs on notice that they should consider oversight procedures. 

The Friday List: Top 10 OCIE Priorities for 2019

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.

Christmas came early this year as the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2019 priorities, which in prior years came out in January or February.  OCIE has expanded its activities under the new Administration, boasting that it completed over 3,150 exams during the past year.  OCIE increased investment company exams by 45% and reviewed 17% of investment advisers, making good on its prior commitment to double adviser exams.  The Exam Priorities letter is long (12 single space pages) and covers many topics.  To help synthesize the data, we offer the Top 10 OCIE Priorities for 2019:

 

Top 10 OCIE Priorities for 2019

  1. Fees and Expenses:  OCIE will review disclosure and calculation of fees charged to clients.
  2. Portfolio Management: The staff will scrutinize how firms allocate investment opportunities and whether assets are managed according to stated investment objectives.
  3. New Advisers: OCIE continues to focus on never-before examined advisers and advisers that have not been examined in many years.
  4. Mutual Fund Share Classes:  The SEC will focus on which mutual fund share classes are recommended and whether reps have a financial incentive.
  5. Wrap Fee Programs: Firms must monitor wrap programs to make certain that the bundled fee is the best deal for clients.
  6. Affiliated Products/Services:  OCIE will examine the use of affiliated services or products for undisclosed conflicts of interest.
  7. Senior Investors:  The regulators are concerned about unsuitable recommendations to senior investors and supervision of reps.
  8. ETFs: The staff has prioritized ETFs with custom indexes, limited secondary market trading, and risky assets.
  9. Digital Assets: Concerned about the volatile cryptocurrency markets, the SEC remains vigilant about the sale, trading, and management of digital assets.
  10. Cybersecurity: OCIE wants firms to identify and manage cybersecurity risks including devices, governance, and policies and procedures.