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 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.
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.
In recent testimony about the SEC’s proposed 2018 budget, Chairman Jay Clayton emphasized enforcement and examination activities. Mr. Clayton noted that 50% of requested budget resources will go to enforcement and examinations. He said that the SEC is on track to deliver a 20% increase in adviser examinations and plans a further 5% increase. He noted that the staff will put a special focus on cybersecurity efforts. Mr. Clayton also committed to continue the SEC’s “vigorous enforcement efforts to investigate and bring civil charges” including critical areas such as “investment professional misconduct.”
OUR TAKE: It appears that the Clayton SEC will continue the examinations and enforcement focus of the Mary Jo White SEC. The more things change, the more they stay the same.