Federally licensed investment advisors often grouse about the heavy hand of government regulation. But the good news is the Securities and Exchange Commission each year gives its licensees a heads up in terms of its enforcement priorities. If you pay attention, an SEC action should never take you by surprise.
To that end, the agency in early February 2018 released its examination priorities for the year. Among them are protecting Main Street investors; further tightening cybersecurity; making sure investment advisors comply with anti-money laundering regulations; assuring that FINRA and MSRB operate effectively; and making sure clearing agencies, securities exchanges, and transfer agents support the capital markets.
According to the SEC’s Office of Compliance Inspections and Examinations (OCIE), the agency’s work stands on four regulatory pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policies. Its 2018 priorities document is designed to provide transparency into its “thinking on issues and areas that we believe constitute an appropriate focus for us in the upcoming year and which entail the most effective use of examination resources . . . .”
The SEC’s enforcement document spells out its concerns in great detail. Five areas will receive the majority of its attention in 2018:
- Retail investors, including seniors and those saving for retirement. The SEC says protecting Main Street investors will continue to be a concern in 2018. Look for the agency to address the disclosure and calculation of fees, expenses, and other charges; firm supervision of their investment advisor representatives; and the execution of customer orders in the fixed-income securities arena. In addition, OCIE will continue to keep a close eye on the growth of cryptocurrencies and initial coin offerings to make sure investors receive sufficient risk disclosures.
- Cyber-security. Concerned that cyber-risks to the industry are increasing dramatically, OCIE says it will prioritize cyber-security governance, risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
- Anti-money laundering programs. The SEC’s examiners will review licensee efforts to comply with all anti-money laundering requirements, including establishing written programs to identify their customers, performing client due diligence, and monitoring accounts for suspicious activity. If they spot such activity, they are required to file Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network. In 2018, the OCIE will focus on making sure licensees are taking reasonable steps to understand the nature and purpose of customer relationships and to properly address risks. They will also assess wither RIAs are filing timely, complete, and accurate SARs.
- FINRA and MSRB. Similarly, SEC’s OCIE will train its microscope on FINRA to make sure it is operating effectively and providing adequate oversight of broker-dealers and municipal advisors. The agency will also focus on the Municipal Securities Rulemaking Board’s (MSRB) internal policies, procedures, and controls.
- Compliance and risks in critical market infrastructure. Finally, SEC’s OCIE will evaluate all entities that provide critical services to America’s capital markets, including clearing agencies, national securities exchanges, and transfer agencies.
You can find further information about these initiatives in the SEC document, 2018 National Exam Program Examination Priorities. If you have specific questions about how these priorities might affect your firm, please check with your registered investment advisor and/or with a consulting firm that specializes in investment-advisor compliance. Good luck!
