SEC’s Office of Compliance Inspections and Examinations:Examination Priorities for 2015

The OCIE serves as the “eyes and ears” of the SEC.

Conducts examinations of registered entities to promote compliance, prevent fraud, identify risk, and inform policy.

The 2015 Examination Priorities reflect certain practices and products that the OCIE perceives to present potentially heightened risk to investors and/or the integrity of our capital markets.

Office of Compliance Inspections and Examinations (“OCIE”)

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

Analyzing data to identify and examine registrants that may be engaged in illegal activity, such as excessive trading and penny stock pump-and-dump schemes

2015 Examination Focus

Protecting Retail Investors and Investors Saving for Retirement

As investors become more dependent than ever on their investments for retirement, the financial services industry is offering a variety of new products and services formerly characterized as alternative or institutional, including:

Private funds

Illiquid investments

Structured products

The OCIE is planning on assessing the risks of these products and services that are intended to generate higher yields in a low-interest rate environment.

Protecting Retail Investors and Investors Saving for Retirement

OCIE will evaluate recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities

Due diligence on products

Properly disclose risks associated with each product

Suitability

Dually registered investment adviser/broker-dealers need to ensure that clients are being placed in the appropriate types of commission or fee-based accounts.

Unlike broker-dealers, investment advisers have a fiduciary duty to serve their client’s best interests.

When an adviser offers a variety of fee arrangements, the OCIE will focus on recommendations of account types and whether they are in the best interest of the client. i.e. fees charged, services provided, and disclosures about the

relationship

Fee Selection and Reverse Churning

OCIE will assess whether investment advisers 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

Sales Practices

OCIE will begin focusing on registered entities’ supervision of registered representatives and financial adviser representatives in branch offices.

Using data analytics to identity branches that may be deviating from the compliance practices of the firm’s home office.

Branch Offices

OCIE will continue to asses firms offering “alternative” investment strategies, with a particular focus on:

leverage, liquidity and valuation policies and practices;

the staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and

the manner in which such funds are marketed to investors.

OCIE will also review representations and recommendations made regarding the suitability of such investments.

“Alternative” Investment Companies

The OCIE will continue to monitor the risks associated with a changing interest rate environment and the impact this may have on bond funds and related disclosures of risks to investors.

Fixed Income Investment Companies

Assessing Market-Wide Risks

OCIE has announced that it will continue to collaborate with the Division of Trading and Markets and the Division of Investment Management to monitor the largest broker-dealers and asset managers.

The purpose of this focus is to: Assess the risk to individual firms and

Maintain early awareness of developments industry-wide.

Large Firm Monitoring

The OCIE will continue to conduct annual examinations of all clearing agencies designated systemically important, pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Areas for review will be determined through a risk-based approach in collaboration with the Division of Trading and Markets and other regulators.

Clearing Agencies

Last year, the OCIE launched an initiative to examine broker-dealers’ and investment advisers’ cybersecurity compliance and controls. The OCIE will be expanding those efforts in 2015.

Cybersecurity

The OCIE will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.

Potential Equity Order Routing Conflicts

Using Data Analytics to Identify Signals of Potential Illegal Activity

Individuals with a track record of misconduct and the firms that employ them will be tracked using data analytics.

Recidivist Representatives

Data analytics will be used to examine the operations of broker-dealers and transfer agents for activities that indicate they may be engaged in, or aiding and abetting, pump-and-dump schemes or market manipulation.

Microcap Fund

The OCIE will use data obtained from clearing brokers to identify and examine introducing brokers and registered representatives that appear to be engaged in excessive trading.

Excessive Trading

OCIE will continue to examine clearing and introducing broker-dealers’ AML programs.

Data analytics will be used to focus on firms that have not filed suspicious activity reports (“SARs”) or have filed incomplete or late SARs.

Broker-dealers that allow customers to deposit and withdraw cash and/or provide customers direct access to markets from higher-risk jurisdictions will also be examined.

Anti-Money Laundering (“AML”)

Other OCIE Examination Initiatives

Newly registered municipal advisors will be examined in order to ensure compliance with recently adopted SEC and Municipal Securities Rulemaking Board rules.

Outreach

Education

Municipal Advisors

Select proxy advisory service firms will be examined for the following:

How they make recommendations on proxy voting

How they mitigate potential conflicts of interest

Whether they are compliant with their fiduciary duty in voting proxies on behalf of investors

Proxy Services

OCIE is conducting focused, risk-based examinations of advisers that have been registered for more than three years but may not have been previously examined

Never-Before-Examined Investment Companies

Given the high rate of deficiencies that the OCIE has observed among advisers to private equity funds in connection with fees and expenses, they will continue to conduct examinations in this area.

Fees and Expenses in Private Equity

The OCIE has announced that they will allocate more resources to examining transfer agents, particularly those involved with microcap securities and private offerings.

Transfer Agents

ConclusionThis description of OCIE priorities is not exhaustive. The OCIE has also asserted that it will also conduct examinations focused on risks, issues, and policy matters that arise from market developments, new information learned from examinations or other sources, including tips, complaints, and referrals, and coordination with other regulators.

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