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Compliance Concepts

OCIE 2019 PRIORITIES - Retail Investors

December 25, 2018

By Howard Haykin


When it comes looking out for retail investors, particularly seniors and those saving for retirement, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) plans to focus on a wide range of topics. We suggest you read through the SEC's publication, OCIE's 2019 Exam Priorities, and/or Financialish's summaries. Below, we highlight priorities pertaining to "Retail Investors, Including Seniors And Those Saving For Retirement." Good luck.



FEES AND EXPENSES: DISCLOSING THE COSTS OF INVESTING.     OCIE wants investors to get the full and accurate picture of what they'll be spending on their investments. To this end, OCIE will focus on: (i) firms with practices or business models that may create increased risks of inadequately disclosed fees, expenses, or other charges; (ii) financial incentives for financial professionals that may influence their selection of particular mutual fund share classes; and, (iii) investment advisers participating in wrap fee programs.



CONFLICTS OF INTEREST.    Conflicts of interest ("COIs") are an embedded feature of financial services and, as such, OCIE will seek to ensure that investment advisers are acting in a manner consistent with their fiduciary duty and meeting their contractual obligations to their clients. OCIE will also focus on those areas that are more likely to give rise to COIs – and for such areas, OCIE seeks to ensure that the nature and risks of potential COIs are adequately disclosed. Areas of particular concern include: (i) use of affiliated service providers and products; (ii) securities-backed non-purpose loans and lines of credit (where borrowers may use securities in their brokerage or advisory accounts as collateral to obtain a loan, the proceeds of which cannot be used for purchasing or trading securities); and, (iii) borrowing funds from clients.



SENIOR INVESTORS AND RETIREMENT ACCOUNTS AND PRODUCTS.     OCIE will seek to review how broker-dealers and investment advisers oversee their interactions with senior investors, including their ability to identify financial exploitation of seniors - by focusing on, among other things: (i) compliance programs; (ii) the appropriateness of certain investment recommendations to seniors; and, (iii) supervision by firms of their employees and independent representatives.



PORTFOLIO MANAGEMENT AND TRADING.    OCIE will review firms’ practices for executing investment transactions on behalf of clients, fairly allocating investment opportunities among clients, ensuring consistency of investments with the objectives obtained from clients, disclosing critical information to clients, and complying with other legal restrictions. As it pertains to portfolio recommendations, OCIE will assess, among other things, whether investment or trading strategies are: (i) suitable and in the best interests of investors; (ii) aligned with disclosures made to investors; (iii) directed toward 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 continue to conduct risk-based examinations of certain investment advisers that have never been examined, including newly-registered investment advisers as well as those registered for several years but that have yet to be examined. OCIE will also prioritize examinations of certain investment 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 continue to prioritize examinations of these funds, the activities of their advisers, and oversight practices of their boards of directors. OCIE will also focus on risks associated with the following: (i) index funds that track custom-built or bespoke indexes; (ii) ETFs with little secondary market trading volume and smaller assets under management; (iii) funds with higher allocations to certain securitized assets; (iv) funds with aberrational underperformance relative to their peer groups; (v) funds managed by advisers that are relatively new to managing RICs; and, (vi) advisers that provide advice to both RICs and private funds with similar investment strategies.



MUNICIPAL ADVISORS.    OCIE will seek out to conduct examinations of Municipal Advisors (which provide advice to, or on behalf of, a municipal entity with respect to the issuance of municipal securities or municipal financial products) that have never been examined, concentrating on whether these MAs have satisfied their registration requirements and professional qualifications as well as continuing education requirements. OCIE will also prioritize whether MAs provided the appropriate disclosures regarding their conflicts of interests or otherwise violated their fiduciary duty to a municipal entity. Examinations will also review for compliance with recently-effective MSRB rules.



BROKER-DEALERS ENTRUSTED WITH CUSTOMER ASSETS.    Examinations of such broker-dealers will focus on compliance with the Customer Protection Rule (Exchange Act Rule 15c3-3), as well as procedures and controls to promote compliance.



MICROCAP SECURITIES.   OCIE will continue to examine broker-dealers involved in selling stocks of companies with a market capitalization of under $250 million, reviewing for, among other things: (i) manipulative schemes (i.e., pump and dump schemes); (ii) compliance with Regulation SHO; and, (iii) compliance with Exchange Act Rule 15c2-11 (pertaining to certain OTC equity securities).