The SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2015 examination priorities. OCIE stated that the priorities reflect certain practices and products that OCIE perceives to present potentially heightened risk to investors and/or the integrity of our capital markets. OCIE conducts examinations of registered entities, including investment advisers, to promote compliance, prevent fraud, identify risk, and inform policy. It selected its 2015 examination priorities in consultation with the SEC’s five Commissioners, senior staff from the SEC’s eleven regional offices, the SEC’s policy-making and enforcement divisions, the SEC’s Investor Advocate, and other regulators.
OCIE stated that its priorities are organized around three thematic areas: • 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; • Assessing issues related to market-wide risks; and • Using its 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.
OCIE noted that investment advisers employ a variety of fee structures for the services offered to clients, including fees based on assets under management, hourly fees, performance-based fees, wrap fees, and unified fees. Where an adviser offers a variety of fee arrangements, OCIE will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.
OCIE stated that it will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees. It will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities, including whether the due diligence conducted, the disclosures made, and the suitability of the recommendations or determinations are consistent with existing legal requirements.
The release also discussed alternative investments. OCIE said that funds holding “alternative” investments, or those offering returns uncorrelated with the stock market, have experienced rapid and significant growth compared to other categories of mutual funds. OCIE will continue to assess funds offering alternative investments and using alternative investment strategies, with a particular focus on: • leverage, liquidity, and valuation policies and practices; • factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and • the manner in which such funds are marketed to investors.
OCIE also discussed fixed-income investment companies. With interest rates expected to rise at some point in the future, it will review whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading and that their investments and liquidity profiles are consistent with those disclosures.
OCIE stated that it has made significant enhancements in data analytics that enable it to efficiently and effectively analyze the data to which it has access. It will use these capabilities to focus on registrants and firms that appear to be potentially engaged in fraudulent and/or other potential illegal activity, including the following examination initiatives: • recidivist representatives; • microcap fraud; • excessive trading; and • anti-money laundering.
OCIE concluded by noting initiatives in other areas: • municipal advisors; • proxy services; • never-before-examined investment companies; • fees and expenses in private equity; and • transfer agents.
Click here to access the release announcing the priorities.