Simons Says: 2014 Year-End Review


Simons Says


In November, the SEC issued its 2014 Agency Financial Report.  Not exactly exciting reading, except for Management’s Discussion and Analysis (“MD&A”).

In MD&A, we can skip down to an area that directly impacts us: FY 2014 Year in Review.  The examination staff conducted more than 1,850 formal examinations of registrants, an increase over each of the prior four fiscal years, and 10% of the registered investment advisers were examined.  In addition to these onsite exams, the SEC’s regional offices performed thousands of desk reviews. Through these reviews, the SEC determined which firm’s documents were sufficient to conclude the examination and which firms were riskier and should be examined on site.  These desk reviews have allowed the SEC to better utilize its examination staff, prioritizing registrants to be examined, whether on site or on paper.  Examinations resulted in the return of more than $40 million to investors, and more than $300 million in fines, penalties, and disgorgement was assessed as a result of actions involving a referral to Enforcement from an examination.

We review, with a certain amount of awe, cases that the SEC has brought against regulated entities: broker-dealers and exchanges; gatekeepers, such as attorneys and accountants; and investment advisers.  Investment adviser cases included:

  • Failure to maintain an adequate internal compliance system ($15 million fine and requirement to engage an independent compliance consultant);
  • Concealing investor losses and cross trading to favor some clients ($17 million disgorgement, $2 million fine, and requirement to engage an independent compliance consultant);
  • Failing to comply with money market fund rules (barred from advising any mutual fund, censure for portfolio manager, and $800,000 fine); and,
  • Three advisers violating the custody rule (varied monetary penalties depending on the severity of the violations).

Additionally, the SEC sanctioned three advisers that failed to correct compliance deficiencies from prior examinations and hit them with financial penalties and requirements to hire compliance consultants.  If the SEC determines that you don’t have the knowledge or experience necessary to correct identified deficiencies, they will require you to hire someone who can.  It used to be that you were allowed three strikes before you were out, but more often recently, it’s been two strikes and you get an enforcement referral.  In FY 2014, the examination staff referred more than 200 cases to Enforcement.  Many of which resulted in enforcement investigations and/or actions.

For years, the Office of Compliance Inspections and Examinations (“OCIE”) Risk Assessment and Surveillance Group (“RAS”) has aggregated and analyzed data from SEC filings to identify activity that may warrant examination. That has expanded to collecting data from sources internal and external to the Commission (including, for example, data collected by or filed with other regulators, SROs, and exchanges).  That may also include information that registrants provide to data aggregators, regarding their business activities and marketing-related efforts.  This has enhanced OCIE’s ability to identify operational red flags—such as firms with aberrant swings in reported assets under management, changes in key individuals, business activities, and affiliates, and other possible indicia of heightened risk—but has also enabled examiners to better understand each firm’s business activities prior to conducting an examination.

In FY 2014, an OCIE team developed the National Exam Analytics Tool (“NEAT”), which enables examiners to access and systematically analyze years’ worth of a registrant’s trading data in minutes.  NEAT replaced what was formerly a labor-intensive process that often consumed weeks or months of examiner time.

OCIE continues to improve its ability to assess and monitor risk. Because OCIE’s examination programs are risk based, these enhanced capabilities have enabled the programs to better allocate limited resources to high-risk firms and practices.  OCIE has continued to expand the use of targeted examinations as a technique to identify and address higher risk activities such as:

  • the potential misuse by mutual funds of payments to intermediaries as payment for distribution;
  • the use of purported “alternative” investment strategies by registered investment companies;
  • the fulfillment of fiduciary and contractual obligations by investment advisers when advising wrap fee programs;
  • compliance with exemptive orders and relevant no-action letters;
  • representations of investment advisers and sales practices when recommending to customers a movement of retirement plan assets into rollover vehicles; and,
  • cybersecurity practices of broker-dealers and investment advisers.

RAS has continued to devote resources to help guide OCIE’s risk-based examination strategy. In addition to RAS’ development of its data gathering and analytics, other examples of RAS’ efforts include:

  • close collaboration with the Regional Offices and others throughout the SEC, to focus examinations on registrants and practices that pose the greatest risk to capital markets and investors;
  • ongoing surveillance of registrants and markets and communicating risks to OCIE staff;
  • enhancing information gathering and data analysis techniques to use information submitted by private fund advisers on Form PF, as well as information about disciplinary and employment histories of bad actors in the financial industry to utilize such intelligence to identify risks to investors and the markets.

Enforcement and OCIE will continue to build on their strong results from FY 2014 by focusing on current and emerging high-priority areas and on enhancing their use of cutting-edge technology and analytics.  Enforcement’s priorities for the coming year include a continued focus on complex financial products, gatekeepers, financial reporting, market structure, insider trading, investment advisers and private funds, and municipal securities.

OCIE will:

  • continue to invest in and use data analytics that enable preemptive detection of risk and more effective identification of fraud in examinations.
  • continue to focus on issues affecting investors’ retirement accounts, including sales and marketing practices related to financial advisers’ recommendations that retirement plan assets be placed in investment vehicles offered by their firms.
  • make governance and supervision of information technology systems a priority, including operational capability, business continuity planning, and cybersecurity.
  • track individuals that have prior disciplinary histories and assess the compliance programs of firms that hire or conduct business with such individuals.
  • conduct reviews to assess implementation of compliance frameworks at municipal advisers in light of rules finalizing registration requirements adopted in FY 2013.


In the conclusion of its report, the SEC indicated that it believed that it “continued to achieve important results by leveraging technology, employing sophisticated data analytics, and pursuing focused rulemaking and policy initiatives, aggressive enforcement, and risk-based examinations. Through the work of its talented and dedicated staff, the SEC is committed to building on its successes in FY 2015. The agency will continue to promote its strategic values of integrity, accountability, effectiveness, teamwork, fairness and a commitment to excellence through improving collaboration and coordination among its divisions and offices, employing new technology, and supporting the more than 4,000 talented men and women who work tirelessly to fulfill the agency’s important mission.”  The SEC will continue to develop more efficient examination techniques with a more focused selection of firms to be

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