What are the Top Exam Priorities for the SEC in 2017?

The Securities and Exchange Commission has released its exam priorities letter for the new year, with some key new points and takeaways.

While it’s worth noting this year’s examination priorities are from an administration on its way out—and there may be different areas of focus under a Trump presidency—the SEC makes it clear it will continue to look at traditional issues that impact markets in 2017, as well as new risk areas related to technologies such as automated investment advice.

Like previous years, the SEC shares many of its examination priorities with FINRA across its three thematic areas: protecting retail investors; protecting elderly and retiring investors; and assessing market-wide risks.  Overall, there are 21 key areas listed in the SEC’s priorities letter, but the following includes some of the stand-outs.

1. Protecting retail investors

Retail investors face a dizzying array of choices when figuring out how to invest their money, as the financial services industry continues to offer a wider range of information, advice, products and services. The SEC will put examinations in place that assess risks for retail investors in this complex environment.

  • NEW this year: Firms that offer electronic investment advice and ‘robo-advisors’ will be examined. Automated and digital platforms for investing have become mainstream, and investors can easily get advice through them. The SEC will examine registered investment advisors and broker-dealers that offer these types of services online this year. The examinations will likely focus on compliance programs, marketing, investment recommendations, data protection, and disclosure related to conflicts of interest. Compliance practices for oversight of algorithms that create investment recommendations will also be reviewed. This highlights the increasing concern regulators’ have about investor risk related to digital investment platforms and services.
  • The Never-Before-Examined Investment Advisor Initiative will expand. The SEC will continue to perform and amp up focused, high-risk examinations for newly-registered advisors, and select advisors who have been registered for a while but never examined.
  • High-risk brokers and their firms will be looked at closely. The regulator will closely review those with a track record of misconduct, and the organizations that employ them. FINRA is also focused on recidivist broker-dealers this year.
  • Multi-branch advisors who provide services from several locations will be assessed. Branch offices can present specific risks and challenges. The SEC will pay attention to the design and running of compliance programs for this type of advisor in 2017.

2. Protecting elderly and retiring investors

Elderly investors are now more dependent on their own investments for retirement income than ever before, so the SEC is taking further steps to put protections in place for seniors, and others investing for retirement.

  • The SEC will continue to examine how firms manage interactions and recommendations to senior investors. Americans rely more on their investment portfolio to fund their retirement than previous generations ever did. Because of this, the SEC will look at how firms manage interactions with senior investors, with careful attention given to situations that point to financial exploitation of seniors. Firms will need to make sure their supervisory programs and practices related to seniors are in top shape.
  • Pension plan advisors also need to prepare for exams. Advisors who hold a large amount of U.S. investor retirements assets, including pension plans of states, municipalities and other government organizations, will be examined to see how they manage any conflicts of interest and fulfill their fiduciary duty in 2017.

3. Assessing market-wide risks.

The SEC will also look at larger industry risks and trends that may affect the stability of fair, efficient and orderly markets.

  • NEW this year: The SEC will bump up its oversight of FINRA. The SEC says it will enhance its oversight of FINRA’s operations and regulatory programs. This is an area that the SEC periodically raises in its priorities, but it wasn’t included in last year’s letter. This could result in broker-dealers seeing SEC examinations this year, either with or instead of a FINRA examination. FINRA now has greater responsibility for conducting examinations for broker-dealers, so the SEC will also assess the quality of FINRA’s BD exams.
  • Cybersecurity is still on the examination radar. This year, the SEC will continue to examine cybersecurity compliance procedures and controls for registrants, including testing of the implementation of those procedures and controls.
  • Antimoney laundering continues to be a key examination point. The SEC will continue to review the risk areas of money laundering and terrorist financing. The regulator will assess whether programs are tailored to address these specific risks, and determine if firms can adapt programs in line with current money laundering and terrorist financing risks.

Last year, the SEC announced a record number of investment advisor enforcement cases for the 2016 fiscal year, and advisors can expect a similar outcome in 2017. While the SEC’s 2017 priorities letter includes general descriptions of key examination areas, firms will want to make sure they understand the key points that led to SEC enforcement actions last year, to help prepare for examinations now.

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