Each year OCIE publishes its exam priorities to promote transparency of its examination program which oversees investment advisers, mutual funds and exchange traded funds, broker-dealers, transfer agents, clearing agencies, national securities exchanges, municipal advisors, FINRA, MSRB, SIPC and PCAOB. This year the examination priorities are broken down into six categories:
- Compliance and Risks in Critical Market Infrastructure – this will include examinations of clearing agencies, national securities exchanges, and transfer agents.
- Retail Investors, Including Seniors and Those Saving for Retirement – focus will be on the disclosure and calculation of fees, expenses, and other charges investors pay, the supervision of representatives selling products and services to investors, broker-dealers entrusted with customer assets, and portfolio management and trading.
- FINRA and MSRB – continued oversight of FINRA’s operations and regulatory programs and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also examine MSRB to evaluate the effectiveness of select operations and internal policies, procedures and controls.
- Digital Assets – this will include cryptocurrencies, coins, and tokens.
- Cybersecurity – each of OCIE’s examination programs will prioritize cybersecurity with emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security.
- Anti-Money Laundering Programs – examiners will review for compliance with applicable anti-money laundering requirements, including whether firms are appropriately adapting their AML programs to address their regulatory obligations.
Focus areas of interest to Investment Advisers
- Fees and Expenses: Disclosure of the Costs of Investing
a. proper disclosures of fees and expenses including the accurate calculation of fees in accordance with the disclosures;
b. mutual fund share classes will be evaluated for financial incentives for financial professionals that may influence the selection of particular share classes;
c. investment advisers participating in wrap fee programs; and
d. adequacy of disclosures and brokerage practices.
- Conflicts of Interest
a. use of affiliated service providers and products focusing on the impact to clients and related disclosures of conflicts of interest that may be present;
b. securities-backed non-purpose loans and lines of credit – OCIE observed that advisers, broker-dealers, and their employees receive certain financial incentives for recommending these products and will assess the practice to determine if there is adequate disclosure of the risks to clients and any conflicts of interest presented by recommending these loans; and
c. borrowing funds from clients with an emphasis will be on whether adequate disclosures are made to the client and that the investment adviser acted consistently with the disclosures.
- Senior Investors and Retirement Accounts and Products – OCIE will review the services and products offered to seniors and those saving for retirement focusing on:
a. compliance programs of investment advisers;
b. the appropriateness of certain investment recommendations to seniors; and
c. the supervision by firms of their employees and independent representatives.
- Portfolio Management and Trading – OCIE will review firms’ practices for executing investment transactions:
a. fairly allocating investment opportunities among clients;
b. ensuring consistency of investments with objectives as provided by clients;
c. disclosing critical information to clients;
d. complying with other legal restrictions; and
e. examining investment adviser portfolio recommendations to assess whether investment or trading strategies of advisers are:
i. suitable for and in the best interests of investors based on investment objectives and risk tolerance;
ii. contrary to, or drifted from, disclosures to investors;
iii. venturing into new, risky investments or products without adequate risk disclosure; and
iv. appropriately monitored for attendant risks.
- Never-Before or Not Recently-Examined Investment Advisers – OCIE will conduct risk-based examinations of advisers that have never been examined, including newly-registered advisers as well as those registered for several years but not yet examined and will prioritize examinations for certain advisers that have not been examined for a number of years and may have substantially grown or changed business models.
- Mutual Funds and Exchange Traded Funds – OCIE will focus on risks associated with funds managed by advisers that are relatively new to managing Registered Investment Companies and advisers that provide advice to both RICs and private funds with similar investment strategies.
- Digital Assets – OCIE will conduct examinations focused on portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.
- Cybersecurity – OCIE will emphasize cybersecurity practices at investment advisers with multiple branch offices, including those that have recently merged with other investment advisers, and will continue to focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.