We look forward to speaking with you in the coming weeks to discuss how best to integrate any relevant areas of focus into your 2017 compliance program and the firms overall compliance readiness initiatives.
Priorities related to Registered Investment Advisers include:
Protecting Retail Investors
Electronic Investment Advice
- Investors are increasingly able to obtain investment advice through automated or digital platforms. Examinations of registered investment advisers that offer such services, including “robo-advisers” that primarily interact with clients online and firms that utilize automation as a component of their services while also offering clients access to financial professionals will likely focus on registrants’ compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures relating to conflicts of interest. Also included will be a review of firms’ compliance practices for overseeing algorithms that generate recommendations.
Wrap Fee Programs
- There will be an expansion on the focus on registered investment advisers associated with wrap fee programs, which charge investors a single bundled fee for advisory and brokerage services. Likely to be reviewed will be whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients. Areas of interest may include wrap account suitability, effectiveness of disclosures, conflicts of interest, and brokerage practices, including best execution and trading away.
Never-Before Examined Investment Advisers
- There will be an expansion of this initiative to include focused risk-based examinations of newly registered advisers as well as selected advisers that have been registered for a longer period but have never been examined by OCIE.
Recidivist Representatives and their Employers
- Will continue to identify individuals with a track record of misconduct and examine the investment advisers that employ them. Will assess the compliance oversight and controls of investment advisers that have employed such individuals, including those who have been subject to a regulatory action or barred from associating with a broker-dealer.
- Will continue to focus on registered investment advisers that provide advisory services from multiple locations. The use of a branch office model can pose unique risks and challenges to advisers, particularly in the design and implementation of a compliance program and the oversight of advisory services provided at branch offices.
Share Class Selection
- Will continue to review conflicts of interest and other factors that may affect registrants’ recommendations to invest, or remain invested, in particular share classes of mutual funds. For example, will identify and assess conflicts that certain investment advisory personnel may have, such as those who also are registered representatives of a broker-dealer, which may influence recommendations in favor of share classes that have higher loads or distribution fees. Will also assess the formulation of investment recommendations and the management of client portfolios.
Senior Investors and Retirement Investments
- Will continue the multi-year ReTIRE initiative, focusing on investment advisers and broker-dealers along with the services they offer to investors with retirement accounts. This year, these examinations will likely focus on, among other things, registrants’ recommendations and sales of variable insurance products as well as the sales and management of target date funds. Will also assess controls surrounding cross-transactions, particularly with respect to fixed income securities.
Public Pension Advisers
- Will examine investment advisers to pension plans of states, municipalities, and other government entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty. Will also review other risks specific to these advisers, including pay-to-play and undisclosed gifts and entertainment practices.
- Will evaluate how firms manage their interactions with senior investors, including their ability to identify financial exploitation of seniors. Examinations will likely focus on registrants’ supervisory programs and controls relating to products and services directed at senior investors.
Assessing Market-Wide Risks
- Will continue the initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls.
- Will continue to conduct examinations of municipal advisors to evaluate their compliance with SEC and Municipal Securities Rulemaking Board rules. This initiative will continue to include industry outreach and education.
Private Fund Advisers
- Will continue to examine private fund advisers, focusing on conflicts of interest and disclosure of conflicts as well as actions that appear to benefit the adviser at the expense of investors.