The year is only a week old, but don’t blame compli-pros if they’re already exhausted. Even before the year started, compliance professionals faced a mountain of new work because of Regulation BI and Form CRS. Next comes a massive 28-page priorities letter with dozens of new “ToDos.” We recommend that senior management seriously consider a budget increase for the compliance team.
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
Fees and Expenses: OCIE will review disclosure and calculation of fees charged to clients.
Portfolio Management: The staff will scrutinize how firms allocate investment opportunities and whether assets are managed according to stated investment objectives.
New Advisers: OCIE continues to focus on never-before examined advisers and advisers that have not been examined in many years.
Mutual Fund Share Classes: The SEC will focus on which mutual fund share classes are recommended and whether reps have a financial incentive.
Wrap Fee Programs: Firms must monitor wrap programs to make certain that the bundled fee is the best deal for clients.
Affiliated Products/Services: OCIE will examine the use of affiliated services or products for undisclosed conflicts of interest.
Senior Investors: The regulators are concerned about unsuitable recommendations to senior investors and supervision of reps.
ETFs: The staff has prioritized ETFs with custom indexes, limited secondary market trading, and risky assets.
Digital Assets: Concerned about the volatile cryptocurrency markets, the SEC remains vigilant about the sale, trading, and management of digital assets.
Cybersecurity: OCIE wants firms to identify and manage cybersecurity risks including devices, governance, and policies and procedures.
Emily Silva and Bridget Garcia of Cipperman Compliance Services recently attended the Philadelphia Compliance Roundtable meeting that included presentations by the Investment Adviser Association about its regulatory priorities and Morgan, Lewis & Bockius about SEC and FINRA Enforcement Trends. Linked below is a more detailed summary of the meeting prepared by Emily and Bridget, who would be happy to discuss with you in more detail. Representatives of the IAA said that they would advocate for a uniform fiduciary standard, simplification of the custody rule, and protecting customer information. The Morgan Lewis lawyers outlined recent enforcement trends including protecting retail investors, undisclosed compensation, anti-money laundering, and compliance. The Roundtable is a group of Philadelphia-area investment compliance professionals that meets periodically throughout the year to discuss compliance best practices.
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 has published its annual Regulatory and Examination Priorities Letter, which focuses on high risk and recidivist brokers, protecting senior investors, and cybersecurity. FINRA will examine how firms hire and supervise brokers with disciplinary records. FINRA will evaluate branch-office inspection programs including client communications and outside business activities. Examination staff will scrutinize sales practices for senior investors including suitability when recommending complex products and penny stocks. FINRA expressed significant concern about cybersecurity including how firms prevent data loss, monitor passwords, ensure physical security, and maintain records. In addition to these central themes, FINRA will continue to examine product suitability and concentration, outside business activities, liquidity risks, supervisory controls, anti-money laundering, and best execution. FINRA CEO Robert Cook characterized FINRA’s priorities as a “focus on core ‘blocking and tackling’ issues of compliance, supervision and risk management.”
OUR TAKE: In past years, FINRA exams closely followed the Exam Priorities Letter. Compli-pros should tailor their compliance programs and training to the topics and practices described in the Letter.