Articles Tagged with Examination

Following its publication of a Risk Alert in late 2017 detailing findings from examinations of municipal advisers, the SEC’s Office of Compliance Inspections and Examinations (OCIE) continues to examine municipal advisers in 2018.  In 2014, OCIE established the Municipal Advisor Examination Initiative to perform an examination on municipal advisers who recently registered for the first time.  OCIE performed over 110 examinations in the course of the Initiative and found that many municipal advisers did not have adequate knowledge of regulatory requirements for municipal advisers.  As a result, many municipal advisers were found not to be in adequate compliance with regulatory requirements pertaining to registration, recordkeeping, and supervision.  OCIE hoped that in publishing the 2017 Risk Alert, municipal advisers will be compelled to evaluate their policies and procedures to find possible areas for improvement.

Municipal advisers are obligated to register with the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  The SEC established its municipal adviser registration rules in September 2013, and the rules became effective in July 2014.  The Dodd-Frank Act also established the Municipal Securities Rulemaking Board (“MSRB”), which exercises regulatory authority over municipal advisers.  OCIE’s examinations of municipal advisers covered “compliance with regulatory obligations including registration, statutory fiduciary standard of care, fair dealing, recordkeeping, and supervision, among other things.”  OCIE discovered that the most common deficiencies among municipal advisers related to registration, books and records, and supervision requirements. Continue reading

In December 2016, then acting Chairwoman of the Securities and Exchange Commission (“SEC”) Mary Jo White drafted a proposal that, if adopted, would enable third-parties, such as private sector organizations, to perform compliance exams of investment advisers.  Chairwoman White drafted this proposal in order to “increase SEC oversight of the approximately 11,800 registered investment advisers.”  In 2016, the SEC conducted evaluations of only 11% of all registered investment advisers.

However, Michael Piwowar, the current SEC Chairman, has expressed opposition to the proposal.  Piwowar claims that allowing third parties to conduct investment adviser exams would not increase the SEC’s efficiency because the SEC would still be required to monitor the third parties that it hires to conduct the exams.  He is also of the opinion that requiring SEC employees to conduct the exams would better enable the SEC to become aware of “trends in the industry.” Continue reading

On January 12, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) published its examination priorities for 2017.  OCIE selects its priorities based on practices and products that it believes to constitute significant risks to investors and the investment markets.  It also receives insight from a variety of sources, such as staff from the SEC’s regional offices and other regulators.  The priorities for 2017 are primarily based around protection of retail investors, protection of elderly and retiring investors, and addressing market-wide risks like cybersecurity and anti-money laundering.

The first priority that OCIE plans to emphasize is the protection of retail investors.  Over the years, new technology has provided investors with new, innovative ways to invest their finances.  As a result, the SEC and other regulators must regulate new potential risks that are bound to occur.  To address the possible challenges that retail investors face, OCIE plans to implement a number of examination initiatives.  For example, it plans to evaluate registered investment advisers and broker-dealers who provide electronic investment advice, such as “robo-advisers.”  It also intends to pay particular attention to wrap fee programs and exchange-traded funds (“ETFs”), as well as enlarge its Never-Before-Examined Adviser Initiative program.  Finally, OCIE intends to address the challenges related to investment advisers who operate on a multi-branch business model Continue reading

On January 4, 2017, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“Priorities Letter”).  The Priorities Letter notifies firms about issues that FINRA intends to examine in 2017.  It is also intended to let firms know which of these issues are relevant to their businesses so that the firms can improve their compliance with FINRA rules and their risk management programs.

According to the Priorities Letter, FINRA draws its examination priorities from both observations made in the course of regulation and suggestions from a variety of outside sources.  Evidence has shown that many FINRA-registered firms have found past Priorities Letters helpful in making sure their business is in compliance with FINRA rules.  Finally, FINRA assures readers of the Priorities Letter that in formulating an examination, FINRA looks to factors such a firm’s “business model, size and complexity of operations, and the nature and extent of a firm’s activities against the priorities outlined in this letter.”

FINRA intends to prioritize the following issues in 2017. Continue reading

The Louisiana Office of Financial Institutions recently adopted amendments to the written examination requirements that enable investment adviser representatives to be registered with the Louisiana Securities Commissioner.  These amendments became effective on September 1, 2016.  The Office of Financial Institutions explained that the amendments were adopted to ensure that all investment advisers are properly qualified to provide investment advice to Louisiana’s citizens.

The amendments that the Office of Financial Institutions made are detailed in LAC 10:XIII.1301-1311, Investment Adviser Registration Procedure.  The amendments are as follows: Continue reading

As part of its overall goal to increase its ability to examine registered investment advisers, earlier this month the Security and Exchange Commission (“SEC”) announced that it has created a new office within the Office of Compliance Inspections and Examinations (“OCIE”) designed to consolidate the SEC’s current operation in the area of market surveillance, quantitative analysis and risk assessment.  The newly created office — the Office of Risk and Strategy — will also provide operational risk management and organizational strategy for OCIE.  The SEC also announced that it had selected Peter B. Driscoll to lead the new Office of Risk and Strategy.  He will manage members of the investment advisor/investment company examination staff dedicated to the new office.

The SEC currently examines annually about 10% of all 11,000 registered investment advisers.  The newly created Office of Risk and Strategy is part of a series of steps designed to heighten RIA oversight.  The SEC has announced that it plans to in increase the number of examiners of investment advisers by almost 20% this year, bringing the number to 630. Informally, commissioners have also suggested that the Commission may require RIAs to hire third parties to conduct private compliance reviews.

For many years, and to an increasing degree over the past few years, the SEC’s examination program has been driven by risk evaluations derived in part from data-driven surveillance and reviews.  According to the director of OCIE, Marc Wyatt, the new Office of Risk and Strategy will lead the SEC’s existing risk-based, data-driven exam program in a way which he describes will bring a “transparent approach to protecting investors.”  Continue reading

The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities Exchange Commission (“SEC”) recently released its Examination Priorities for 2016. These examination priorities provide valuable insight into what OCIE perceives to be the greatest risk to investors and what it will be focusing its efforts on throughout the year. This year its overall goals stayed approximately the same as last year: 1) protecting investors saving for retirement; 2) assessing market-wide risks; and 3) using data analytics to identify and examine illegal activity.

In regards to its goal of protecting investors saving for retirement, OCIE intends to continue its Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) initiative which focuses on the suitability of investment recommendations made to investors, supervision and compliance procedures, conflicts of interest, and marketing practices. It will also continue to review the supervision procedures of branch offices of SEC-registered entities and fee selections which can lead to reverse churning. New areas of focus include exchange-traded funds (“ETFs”) which OCIE intends to examine for compliance with various regulatory requirements. It will focus on sales strategies, trading practices, disclosures, excessive portfolio concentration, and suitability, and will pay particularly close attention to niche or leveraged/inverse ETFs. In addition, variable annuities have become a large part of many investors’ retirement plans and OCIE intends to assess the suitability of these sales as well as the adequacy of disclosures. Lastly, OCIE will examine public pension advisers to ensure these advisers are not engaging in any pay-to-play activities or giving undisclosed gifts in return for appointments or other favors.

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In August of this year the Securities and Exchange Commission (“SEC”) settled an administrative proceeding that related to statements an investment adviser made during the SEC’s on-site examination. The adviser at issue, Parallax Capital Partners, LLC, is a registered investment adviser that focuses primarily on mortgage-backed bonds and other similar fixed income securities. Parallax also advises a private fund in addition to providing advisory services to individuals and other entities. During an examination of Parallax that the SEC conducted in April 2011, the firm’s Chief Compliance Officer represented to the examination staff that he had performed and documented the annual compliance review required by Adviser’s Act Rule 206(4)-7 for the year 2010. The CCO further represented that the review and documentation had been conducted in February 2011, and provided the examination staff with a memorandum purportedly documenting the compliance review for 2010 that stated: “This memo documents that I have performed the review and reported significant compliance events and material compliance matters.”

The SEC examination staff was able to determine, by a review of the metadata attached to the compliance memorandum, that it had not been drafted in February 2011 as the CCO had represented, but instead that it had been created and completed in April 2011, just three days prior to the onsite examination and after Parallax received notice of the impending examination.
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On August 5th, 2015 in a decision that has implications for registered investment advisers and broker-dealers, SEC judge Cameron Elliot ruled on an enforcement action regarding the extent of liability for Compliance Officers in In the Matter of Judy K. Wolf, available here. Sanctions were not imposed against Ms. Wolf due to the violation being “decisively outweighed by the remaining public interest factors: egregiousness, degree of harm, and deterrence.” However, it was found that Wolf purposefully lied about her records violation.

In In the Matter of Judy K. Wolf, Judge Elliot stated he believed the further sanction against Wolf would be pursuit of “the low-hanging fruit” that is compliance officers.
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The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) on Sept. 15, 2015 issued Risk Alert to announce its new focus on cybersecurity of securities firms and registered investment advisers. Cybersecurity programs of securities firms had best be strengthened, otherwise they may be subject to additional regulatory scrutiny according to the Risk Alert, which is meant to serve as helpful guidance for firms that need to create or heighten a cybersecurity program. The National Exam Program in 2014 conducted cybersecurity examinations on 106 securities firms. As a follow-up to the 2014 SEC security examinations The Risk Alert highlights certain additional measures the national registered entities need to be aware of when the SEC is conducting examinations.

A sample examination request with a list of information that the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations may review in conducting examinations of registered entities regarding cybersecurity matters may be viewed here.
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