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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.