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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.

The Friday List: Our 2017 Predictions

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.

Every year, we offer our predictions on what will happen in the investment management regulatory world.  Two years ago, we went 6-4, accurately predicting that the SEC would bring a landmark enforcement action against a private equity firm and that both Norm Champ (Investment Management) and Drew Bowden (OCIE) would resign.  Last year, we went 4-3-3.  We accurately predicted such events as the SEC bringing a gatekeeper case against a law firm and that the insurance industry would start offering CCO insurance.  We claim “ties” for predictions that were close: the SEC will commence an enforcement action against a robo-adviser (wrong, but Massachusetts came out strongly against robos), and the SEC will propose third party compliance reviews (wrong, but Mary Jo White said the proposal is on the desk of the Commissioners).

So, without further sandbagging, here are our 2017 predictions:


10 Predictions for the 2017 Regulatory Year:

  1. The new Administration will delay implementation of the DoL Fiduciary Rule.   Although we think the Rule will ultimately take effect with some modification, it may take some time.  Most agree with the basic principle of protecting retail IRAs, but many industry participants are struggling with adequate and expeditious implementation.
  2. The SEC will propose third party RIA compliance exams.  Paul Atkins, who leads the transition team on financial regulatory issues, works with Dan Gallagher, who, as an SEC Commissioner, initially suggested this concept to ensure more reviews of registered investment advisers.
  3. Whistleblowers: The Office of the Whistleblower will survive, and there will be more claims and more retaliation cases.  We believe this is one part of Dodd-Frank that will survive because everybody gets behind blowing the whistle on corporate wrongdoing.
  4. The SEC will raise the threshold for private fund registration above $150 Million.  Both Democrats and Republicans can agree to this change to Dodd-Frank and which has been supported by Barney Frank himself.
  5. FINRA will become the primary regulator for retail advisers and brokers.  As the SEC backs away from retail enforcement and examination efforts, look for FINRA to step into the regulatory void.
  6. State regulators will bring 2-3 precedent-setting enforcement actions.  Consistent with the FINRA theme, look for Spitzer-esque regulators to flex their regulatory muscles if the SEC shrinks away.
  7. SEC penalty caps will increase.  This is a component of the Rep. Hensarling-sponsored CHOICE Act (aimed at Dodd-Frank reform) with which both parties agree.
  8. The SEC will focus on prosecuting individuals, not firms.  Mr. Atkins has opposed large corporate penalties that ultimately hurt shareholders.  However, the SEC will continue its policy of prosecuting individuals.
  9. There will be an acceleration of outsourcing non-core functions.  As scale becomes increasingly important, look for firms to find new ways to focus on their core competencies and outsource non-core functions.
  10. Firms and regulators will struggle with bond pricing.  The more volatile bond markets resulting from changes in macro-economic policy will make life difficult for those responsible for bond pricing.

The Friday List: 10 Characteristics of an Effective Compliance Program

Effective Compliance Program


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.

What makes a good compliance program?  It seems confusing when executive management listens to SEC speeches, interviews compliance professionals, or reads enforcement actions.  Today’s list provides the key characteristics that we examine when assessing a compliance program.


10 Characteristics of an Effective Compliance Program


  1. A qualified and dedicated Chief Compliance Officer: The CCO should have significant (at least 5 years) Advisers Act regulatory knowledge and experience.  Additionally, the CCO should be fully dedicated to the compliance function and not undertake other executive management roles.
  2. Tailored policies and procedures: The policies and procedures must be specifically tailored to the firm’s business and continually reviewed and updated.  An “off-the-shelf” manual is about as useful as internet-based medical advice.
  3. Tone at the top:  How committed senior management is to compliance can be measured by 3 key variables:  (1) total firm budget allocated to compliance (should be at least 5%); (2) executive time spent on compliance issues (at least quarterly); and (3) discipline for employees that violate compliance policies and procedures.
  4. Training and communication: A good compliance program must ensure that the entire organization has access to compliance information.  Recommended practices include ongoing training and communication.
  5. Testing and Reporting:  A firm cannot have a good compliance program without requiring its people follow the rules.  Firms must annually test all policies and procedures, record the findings and recommendations in a written report for management, and continually follow-up to ensure remediation.
  6. Compliance Calendar: A good compliance calendar will serve as the working project plan of every activity required during the year.  It should be written so that any new employee could follow the plan.
  7. Books and records:  Documentation is the hallmark of a good compliance program.  Only through well-maintained books and records can a firm log its compliance activities and demonstrate their effectiveness to senior management, clients, and the regulators.  If it’s not documented, it didn’t happen.
  8. Email review: Very little transpires in an investment management firm without email communications.  Email review can un-earth issues that annual testing may not.  Email review adds “forensic” to testing.
  9. Marketing materials: An investment firm’s marketing materials are its “canary in a coal mine” i.e. if the marketing materials are misleading or omit disclosures, very often the firm has deeper regulatory problems.
  10. Outside advisers: The best compliance programs use outside advisers to provide advice and an independent and best practices assessment.  The regulatory world has become too complicated to go it alone.