Simons Says: SEC 2018 Examination Priorities

Timothy M. Simons, CFA, CIPM, CSCP
Member
Focus 1 Associates LLC
January 31, 2018

 

SEC 2018 Examination Priorities?

Like the DOL Fiduciary Rule, the SEC’s examination priorities for 2018 are not readily available. Since 2014, the SEC has released the National Examination Program’s Examination Priorities in January of the fiscal year starting October 1 of the preceding calendar year and ending September 30 of the current year. I expected to see something from the Office of Compliance Inspections and Examinations (“OCIE”) two weeks ago (since 2014, the latest date OCIE released them was January 13, in 2015). Alas, the 13th came and went, but no release, perhaps due to the Commission being short two Commissioners until January 11, 2018.

 

DOL Fiduciary Rule

Verdict: uncertain, at best. Even with an implementation date of July 1, 2019, the ongoing review by the DOL could change anything, including the implementation date, and if the SEC decides to implement its own version for SEC registrants, or coordinate with the DOL and present a joint rule, just about anything could happen.

In testimony before the House Committee on Financial Services on October 4, 2017, Chairman Clayton stated:

“While the SEC and the DOL have different statutory mandates, rulemaking processes and jurisdictions, actions taken by one regarding standards of conduct are going to have a significant effect on the other’s regulated entities and the marketplace. In other words, effects of the DOL rule extend well beyond the DOL’s jurisdiction, and vice versa. It is important that we understand these effects and work closely and constructively with DOL to implement appropriate standards of conduct for financial professionals who provide advice to retail investors. We are engaging expeditiously and constructively with our colleagues at the DOL to best serve the interests of investors.”

View the testimony

 

Swearing In Ceremony

We don’t typically think much about, nor say much about, the swearing in of SEC Commissioners; and I think part of that is because we think of the SEC as our friend when they catch some other registrant taking advantage of the investing public, but maybe not so much our friend when they are examining our operations. Chairman Clayton said something at the Ceremonial Swearing In that puts the SEC’s role in perspective:

“As many of you have heard me say, the SEC is about its people. We are a human capital organization. We have office space, we have IT, and, most of all, we have people and our reputation. That’s it. We don’t have sizable physical assets on our balance sheet — we cannot buy or sell securities, lend money or otherwise engage in our markets. We do not write the federal securities laws. We do not have authority to pursue criminal charges. We have 4600 people. That’s less than 2% of the number of people who work at our largest financial institution. Another point of comparison – approximately 6.3 million people work in the financial services sector in the United States. We are less than one-one thousandth of that amount. Last year, the IT budget of one of our largest banks was over five times our total budget.”

For those of you not familiar with the two new Commissioners, Robert J. Jackson, Jr. and Hester M. Peirce, the Chairman provided a short bio for each:

“Commissioner Jackson joins us from NYU School of Law where he was a Professor of Law. Prior to NYU, he was a Professor at Columbia Law School and Director of the Program on Corporate Law and Policy. Rob also served at the United States Treasury Department. He has three degrees from the University of Pennsylvania and two from Harvard University, all received in an astonishingly short period of time and with distinction.

Commissioner Peirce returns — yes, returns — she is one of the many who has SEC service in her blood — to the Commission from the Mercatus Center at George Mason University where she served as Senior Research Fellow and Director of the Financial Markets Working Group. She also served on the staffs of Senator Richard Shelby and Commissioner Paul Atkins. Prior to serving on Commissioner Atkins’ staff, Hester was a staff attorney in our Division of Investment Management. Commissioner Peirce earned her BA in economics from Case Western Reserve University and her JD from Yale Law School.”

View remarks at the swearing in

 

2018 Examination Priorities

What I said above was that the SEC had not released Examination Priorities for 2018, but they have provided us with some clues with regard to those priorities. Essentially the same thematic areas have been selected for examinations in 2015, 2016, and 2017. Since the SEC has not been able to eliminate all of the concerns in these three areas, nor even identify all of the current and future risks in these areas, I would expect them to be identified for 2018, as well as any newly identified risks.

1. Examining matters of importance to retail investors and investors saving for retirement, including whether the information, advice, products, and services being offered is consistent with applicable laws, rules, and regulations;

2. Assessing issues related to market-wide risks; and

3. Using our evolving ability to analyze data to identify and examine registrants that may be engaged in illegal activity, such as excessive trading and penny stock pump-and-dump schemes.”

View examination priorities for 2015

Those themes were only slightly reworded in 2016 and 2017 and probably will be in 2018.

Additional clues provided by the SEC are in the form of Risk Alerts. If the SEC thinks it is important enough to issue a Risk Alert, then it is probably important enough for me to know what is in the Risk Alert.:

  • Risk Alert: Examining Whistleblower Rule Compliance
      October 24, 2016
  • Risk Alert: Multi-Branch Adviser Initiative
      December 12, 2016
  • Risk Alert: The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers
      February 7, 2017
  • Risk Alert: Cybersecurity: Ransomware Alert
      May 17, 2017
  • Risk Alert: Observations from Cybersecurity Examinations
      August 7, 2017
  • Risk Alert: The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers
      September 14, 2017
  • Risk Alert: Observations from Municipal Advisor Examinations
      November 7, 2017
  •  
    All of the Priorities Memos and Risk Alerts can be accessed here

    Other clues as to SEC concerns have been identified by the press, such as concerns about senior citizens and those trying to save for retirement, and concerns about cybersecurity after hacks into Equifax and the SEC’s own website. As more and more information is stored on computers, the ability of that information to be accessed by outsiders becomes a greater risk and concern, not only for personal non-public information, which potentially puts client assets at risk, but also for material non-public business-related information which potentially puts our whole market trading system at risk.

    Other clues as to SEC concerns have been identified by the press, such as concerns about senior citizens and those trying to save for retirement, and concerns about cybersecurity after hacks into Equifax and the SEC’s own website. As more and more information is stored on computers, the ability of that information to be accessed by outsiders becomes a greater risk and concern, not only for personal non-public information, which potentially puts client assets at risk, but also for material non-public business-related information which potentially puts our whole market trading system at risk.

     

    My Perspective

    My thought on a Fiduciary Rule, either from the SEC or the SEC/DOL, is that it is too soon to tell. We have had a full Commission for almost 2 ½ weeks, and I think they need a little bit of time to put out some fires, like the Administrative Law Judge issue (whether the ALJ system is constitutional), which could have huge impact on ALJ decisions in the past, and the cybersecurity steps to protect information provided to the SEC through EDGAR and other avenues. We also need the SEC or OCIE to provide us a roadmap for examination priorities for 2018. I remember the “good old days” when the SEC’s examinations request list was one page, with eleven items, and examiners first started carrying portable computers (no such thing as a laptop) because advisers were storing data on discs, and now everything seems to be “in the Cloud.”

    I really do hope we have 2018 Examination Priorities sometime before the end of February, and a Fiduciary Rule before July of 2019, and a prosperous New Year for us all.

     

    Last Minute Note

    We just received information that the deadline for filing annual updating amendments of Form ADV will be 3/31/2018 (for advisers with fiscal year ending 12/31). Some advisers thought with Good Friday and Easter, the filings would be accepted on April 2nd, but the IARD will be open on Saturday, March 31st for your filing pleasure.

     

    Another Last Minute Note

    The five most frequent compliance topics identified in OCIE examinations of investment advisers were:

    Compliance Rule

    Regulatory Filings

    Custody Rule

    Code of Ethics Rule

    Books and Records Rule

    More on the top 5 compliance topics

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