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SEC Sets Examination Priorities for 2016

Alexander Moshinsky 02.09.2016 | Client Alert

The Securities and Exchange Commission (SEC) has issued its 2016 Regulatory and Examination Priorities Letter identifying new areas of focus, as well as issues of ongoing concern for investment advisors and broker dealers.  This document can serve as a guideline for investment advisors and broker dealers to examine and adjust compliance  and risk management functions in order to better protect both investors and the organization itself.

For 2016, the SEC's examination program will focus on three key areas:

1. Examining matters of importance to retail investors, including investors saving for retirement;
2. Assessing issues related to market-wide risks; and
3. Using data analytics to identify and examine registrants who may be engaged in illegal activity.
Protecting Retail Investors and Investors Saving for Retirement

Retirement-Targeted Industry Reviews and Examinations (ReTIRE): This SEC initiative will continue to focus on services offered to investors with retirement accounts.  Examinations will include assessing potential conflicts of interest, whether there is a reasonable basis for the recommendations to investors, supervision and compliance controls over registered representatives and representatives of investment advisors, and marketing and disclosure practices.

Exchange-Traded Funds (ETFs):  The Commission will examine compliance with applicable regulations under the Securities and Exchange Act of 1934, the Investment Company Act of 1940, and other regulatory requirements.  In addition, the SEC will review redemption processes and unit creation, along with sales strategies, disclosures, and the adequacy of risk management.  The Commission will also review trading practices, excessive portfolio concentration, and the suitability, particularly in niche or leveraged/inverse ETFs.

Branch Offices:  The Commission will continue to review supervision of registered representatives and investment advisor representatives in branch offices of SEC registered investment advisors and broker dealers.  Data analytics, among other tools, will be used to identify potentially inappropriate trading activities.

Fee Selection and Reverse Churning:  The SEC will continue its focus on various types of fee arrangements (asset-based fees, hourly fees, wrap fees, commissions) between the investment advisors/broker dealers and their retail investors. The goal is to determine whether the recommendations were in the best interest of the client.  

Variable Annuities:  With variable annuities becoming a more prevalent investment strategy for many retirees, the commission will assess the suitability of these products for investors, as well as the adequacy of fee and service disclosures.

Public Pension Advisers: The Commission will review advisors to municipalities and other government entities - focusing on pay-to-play and other key risk areas related to relationships between advisors and public pensions. 

Assessing Market-Wide Risks

Cybersecurity: The focus this year will be on assessing the implementation of procedures and controls relating to cybersecurity. 

Regulation Systems Compliance and Integrity (SCI):  The Commission will examine written policies and procedures designed to ensure the capacity, integrity, resiliency, availability, and security of systems at exchanges and market centers.  Examination priorities will include a review of the resiliency of primary and backup data centers, geographical diversity of primary and backup data processing centers, and security operations risk factors.  

Liquidity Controls: There will be a review of advisors to mutual funds, ETFs, and private funds that have exposure to potentially illiquid fixed income securities.  Examination priorities will include market risk management, valuation, liquidity management, trading activity, and regulatory capital.
Using Data Analytics to Identify Signs of Potential Illegal Activity

Recidivist Representatives and their Employers:  Ongoing examination initiatives will look at employee hires of investment advisors/broker dealers who have been disciplined or barred by regulatory agencies.

Anti-Money Laundering (AML): The SEC will assess the AML programs at broker dealers. The examination priorities will include suspicious activity reports (SARs) - reviewing numbers or reports filed based on the firm's business model and incomplete or late SARs.  The commission will assess the adequacy of the independent testing and the extent to which firms consider and adapt their programs to current money laundering and terrorist financing risks.

Micro Fraud: The SEC will use data to examine potential "pump and dump" schemes or other forms of market manipulation.

Product Promotion:  There will be a focus on sales practices associated with complex new and potentially high risk products.

Other Initiatives 

The SEC has also noted additional examination priorities, specifically, municipal advisors, private placements, never-before-examined registered investment advisors, private fund advisors, and transfer agents


The SEC is continuing to focus on investor protection, managing operational risk and use of advanced analytics to identify potentially illegal behavior.  In addition, the Commission has committed to conducting risk based exams at those investment advisors and investment companies that have not previously been examined.  Significant resources have been committed to the examination program and firms should be well prepared for these examinations.    

Questions? Contact your Berdon advisor or Alexander Moshinsky at 212.331.7448 | Berdon LLP, New York Accountants

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