Simons Says: What’s Hot, and What’s Not?


The question that I am asked most often is, “What are the SEC’s current hot topics?”  That can be a difficult question to answer, depending on the SEC region that the individuals work in and the cases that the SEC is bringing against investment advisers.


When I started at the SEC as an investment adviser examiner in 1988, the financial services industry was a different world.  Almost everyone who imagined what it would be like to be an investment adviser was registered with the SEC.  Although there were examination requirements on the broker-dealer side, that was not so on the investment adviser side.  The only requirements to be registered were a completed Form ADV and a check for $100.  Later, Congress determined that the $100 fee was an unintended tax and, as such, a barrier to entry that should not be allowed, so the fee was eliminated.  There was no incentive for a registered investment adviser to withdraw registration, so many advisers, after some number of years, just stopped providing advice and either closed down the business or sold it to someone else.  Those years were referred to as “the good old days,” when all examinations were unannounced, the request list was a single page of eleven items, and most exams were conducted by one examiner (with as little as two months training before going out on his own).  The examiners would often have the name of the firm, an address, and perhaps the amount of assets under management, but many firms did not update their AUM because there was a rumor going around the industry that if you had assets it increased your chances of being examined, which actually was true. (This was determined in 1997, when suddenly an adviser had to have more than twenty-five million dollars under management to remain registered with the SEC.  A large number of advisers who previously indicated on Form ADV that they had no AUM suddenly had a hundred million dollars under management but had mistakenly failed to report that to the SEC.)  It was not uncommon for the address to be someone’s home, with the registered adviser long gone from that address.

The most common deficiencies from that time were misleading marketing materials, inaccurate information on the Form ADV, unregistered investment advisers, and churning (excessive trading in client accounts), since many of the registered advisers were also registered reps with a broker-dealer, which broker-dealer may or may not have known about the registration as an investment adviser. Back then, the SEC did not disclose their hot topics. Instead, advisers learned about them from conferences, deficiency letters shared by advisers, and articles in the financial press.


Comparison of Exam Priorities since 2013

Since 2013, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has provided a list of their examination priorities each year. However, in many cases, the priorities were not new but merely recycled.


In 2013, the priorities were:
  1. Fraud detection and prevention
  2. Corporate governance and enterprise risk management
  3. Conflicts of interest
  4. Technology
  5. Safety of assets
  6. Marketing/performance
  7. Fund governance
  8. New registrants
  9. Dually registered IA/BD
  10. Alternative ICs
  11. Payment for distribution in guise
  12. Money market funds
  13. Compliance with exemptive orders
  14. Compliance with Pay-to-Play Rule

Most of these published priorities were not new but were either carry-overs from the prior year or older concerns that had again raised their heads.


In 2014, OCIE’s priorities were:
  1. Fraud detection and prevention
  2. Corporate governance and enterprise risk management
  3. Dual registrants
  4. Conflicts of interest
  5. Technology
  6. Safety of assets and custody
  7. Marketing/performance
  8. Payments for distribution in guise
  9. Money market funds
  10. Alternative ICs
  11. Never-before examined advisers
  12. Wrap fee programs
  13. Fixed income ICs
  14. Presence exams
  15. Quantitative trading models
  16. Securities lending arrangements

The first ten were carry-overs, the remaining six were not, but had been priorities in the past, recycled.


In 2015, OCIE’s published Priorities were:
  1. Fixed income ICs
  2. Suitability
  3. Alternative ICs
  4. Sales practices
  5. Large firm monitoring
  6. Cybersecurity
  7. Recidivist representatives
  8. Microcap fraud
  9. Excessive trading
  10. AML
  11. Never-before examined ICs
  12. Fee selection and reverse churning (using asset-based fees and limited trading)
  13. Municipal advisors
  14. Fees and expenses in private equity
  15. Proxy services

The first eleven priorities were recycled from prior years and the last four were new.


OCIE’s current Priorities for 2016 were again a mix of the old and the new:
  • Services offered to retirement accounts
  • Exchange-Traded Funds (“ETFs”)
  • Fee Selection and Reverse Churning
  • Variable Annuities
  • Cybersecurity
  • Liquidity Controls for  mutual funds, ETFs, and private funds
  • Recidivist Representatives and their Employers
  • Microcap Fraud
  • Excessive Trading (first time churning and reverse churning made the same list)
  • Product Promotion
  • Municipal Advisors
  • Private Placements
  • Never-Before-Examined IAs and ICs
  • Private Fund Advisers

All of the priorities for 2016, other than ETFs, have been priorities in the past.  At this point, the SEC is running out of new priorities.

That doesn’t mean that the priorities are not valid; I want to be clear on that point.  The SEC cannot conduct a soup-to-nuts examination on every investment adviser; there are not enough resources at the SEC to do that.  By identifying the priorities, the SEC encourages advisers to look at those areas, which are typically areas in which the SEC has found issues in the recent past.  The reason that the SEC has to recycle priorities is because the industry forgets concerns from the past and the SEC has to resurrect them in the present, and when you look at the increase in the number of registered investment advisers each year, you can see why.  We still have individuals that have spent twenty years in the industry as traders or portfolio managers, started their own firm, and suddenly found themselves to be the Chief Compliance Officer of their firm.  Some of these individuals have not ever been involved in compliance and don’t know what the SEC’s concerns have been historically.


What’s Hot

The SEC tells us at the beginning of the year what their priorities will be for that year, but that is not the final list of priorities.  The final list starts with the identified priorities and grows from there.  The SEC examination staff will identify a particular practice common to many firms that has somehow been twisted to take advantage of clients or other participants in the marketplace.  I remember back in the late nineties, when someone in the SEC headquarters decided that soft dollars were being used by advisers for products and services not acceptable under Section 28(e), in other words, not related to research or trade execution.  The SEC contacted the largest broker-dealers involved in providing services and products for soft dollars, asked for a list of advisers that were large users of soft dollars, and the examination staff visited those advisers across the country performing a “soft dollar review” on each.  That became a top priority for that year, even though it resulted in very few enforcement actions.  Any scandal in the press involving one or more investment advisers, may become a new priority for that year, involving affiliated advisers to those attacked in the press or advisers managing similar strategies or using the same service providers, depending on the nature of the scandal.

Ultimately, the answer to the question “What’s hot and what’s not?” depends on the environment in the industry at that time. It can change tomorrow because of something in the press, something identified in an examination, or something that members of Congress decide is important to their constituents.  That doesn’t mean that the SEC will immediately ignore OCIE’s priority list if you have been identified as a potential examinee; the exam will just be expanded to cover the newest priority.

If you see an activity or practice occurring that you think should be an SEC priority, just wait, and it will be.  Anything that the SEC examination staff thinks is important and applies to your firm will become a priority, published or not, and any priority of the SEC is a hot topic. The key to knowing the hot topics is to follow the SEC, on their website, through webinars, or newsletters from firms with an SEC expertise, and you will know what the current priorities are or soon will be.

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