SEC’s National Examination Priorities for 2016
According to Office of Compliance Inspections and Examinations
i) Protecting Retail Investors and Investors Saving for Retirement
The Securities and Exchange Commission (“SEC”) will continue to focus on whether there is a reasonable basis made for recommendations to investors, supervision and compliance controls, conflicts of interest disclosure and marketing to the groups mentioned above.
ii) Fee Selection and Reverse Churning
This refers to looking at investment advisers, investment adviser representatives and dually registered broker-dealers and RIAs that offer a variety of fee arrangements to make sure that the recommendation of account types at the beginning of the relationship and in the future serves the best interest of the investor when looking at fees charged, services provided and disclosures made. Reverse churning is the situation where an account suffers from a dearth of activity, but the account pays a fixed fee.
The SEC will be following up on its second initiative examining RIAs and BDs cybersecurity controls and compliance. This will be refined to examine testing and assessment of controls and procedures. Generally, cybersecurity refers to unauthorized internal and external access to client accounts, trading systems, wrongful asset transfers and data loss.
iv) Bad Apple Brokers
The SEC says that they will use data analytics to examine individuals with a history of misconduct and examine the firms that now employ them. For instance, if someone was banned from acting as a registered representative and now seeks to be become registered as an investment adviser representative (“IAR”) that could trigger an examination of the new registered investment advisor (“RIA”).
v) Anti-Money Laundering
The SEC will continue to examine the AML procedures of both introducing and clearing broker-dealers. The will compare the number of suspicious activity reports (“SARs”), those that are late or incomplete with those that would be consistent with the firm’s stated business models. This will also to see if the testing of independent obligation when contrasted with each firm’s business model and to see whether programs adapt, when appropriate to current terrorist financing risks and current money laundering risks.
vi) Private Placements
The SEC will examine Regulation D offerings, including those involving “crowdfunding” as well as the Immigrant Investor Program (EB-5). This latter provides a path to citizenship for foreign investors who make a qualifying investment into a business in the United States that creates or preserves at least ten (10) permanent full time jobs for a qualified U.S. worker. The SEC will review whether the offerings meet the legal requirements as to disclosure, due diligence and suitability.