Advisers take heed: For the first time, the SEC will begin scrutinizing financial professionals who offer advice through robo platforms in 2017.
For firms that provide electronic advice, the SEC's Office of Compliance Inspections and Examinations is warning that exams this year may examine marketing, disclosures of conflicts, compliance programs and the manner in which investment recommendations are produced.
In its annual exam guidance, the commission also signaled it will not relent on evaluating registrants' cybersecurity policies and procedures, an ongoing area of concern as cyber thieves are increasingly targeting financial firms' data. The commission also indicated that it will ramp up scrutiny of professionals who advise seniors, as it looks to ensure that appropriate investment recommendations are made to aging clients.
Data security will also be under scrutiny, fitting into the commission's concern about cybersecurity generally, which it identifies as a "marketwide risk."
Outside of the commission’s new focus on robo advice, the exam’s priorities may sound familiar to some planners.
Continuity between this year's exam priorities and past guidance, suggests that commission examiners will have little patience with firms that ignore the repeated warnings, says Daniel Bernstein, chief compliance counsel at MarketCounsel, an RIA consultancy.
"That should tell advisers that the SEC's been telling you about these issues for a few years, so you should know," Bernstein says.
A CRUCIAL DIFFERENCE
The exam guidance, which OCIE offers early into the new year, offers advisers, brokers and other regulated entities a window into the commission's priorities for the coming year.
In a statement, OCIE Director Marc Wyatt says that the exam guidance serves to "identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements."
Of course, this year is unlike past years' in one crucially important respect. In a week, the Trump administration will take office, bringing with it an extensive upheaval in the leadership of the SEC and other federal agencies. SEC Chairwoman Mary Jo White and other commission leaders have announced that they will leave their positions, though there has been no word yet on Wyatt's future. A spokeswoman for the SEC declined to comment on Wyatt's plans or the commission's efforts to facilitate the transition to the incoming leadership.
Trump has tapped Wall Street lawyer Jay Clayton to chair the SEC. Many observers, Bernstein included, anticipate that a Trump-administration SEC will ease up on enforcement activity targeting advisers and other regulated entities. But he does not expect a significant disruption in the activities of OCIE, what the SEC terms the "eyes and ears" of the commission.
"I think there'll be pretty good continuity. I think there might be changes in enforcement, but I think on an OCIE level I expect less change based on the administration changes. I think that the priorities that we have here are the priorities that we will have in 2017, until we have new priorities announced in some release," Bernstein says.
QuoteOCIE says that it intends to expand its "never before examined" program.
"I think we're going to see more of the same," he adds. "I do think OCIE will continue doing what they do."
OCIE says that it intends to expand its "never before examined" program, which it launched in early 2014, to focus on practices that had never come under review. This year, the commission says that the program will expand to include "risk-based" reviews of newly registered firms that OCIE finds warrant an exam as soon as possible. When the program launched, OCIE was primarily focused on firms that had been registered with the SEC for at least three years, but had never been examined.
OCIE is also looking at RIA firms that work under a multi-branch model, which it says "can pose unique risks and challenges to advisers, particularly in the design and implementation of a compliance program and the oversight of advisory services provided at branch offices." The commission will also continue to fine-tune its computer-enabled surveillance to identify recidivist reps and examine the firms that employ them.
A WELCOME REMINDER
The focus on senior investors and those planning for retirement, though not new, is a welcome reminder to the industry for investor advocates like Carolyn Rosenblatt, who calls the SEC's warning on issues like product recommendations for elderly clients a "step forward," if a modest one.
Rosenblatt is an elder-law attorney who co-runs the AgingInvestor website counseling advisers who work with senior clients. While she praises the SEC's focus on elder-abuse issues, she would like to see the commission actually lay out guidance that firms can implement to train employees on how to spot signs of abuse and escalate the issue when they believe abuse is occurring.
"They've said what firms are doing and what they want firms to do, but they are doing nothing to make sure that happens," Rosenblatt says. "How many seniors are getting ripped off a year? How much money is being stolen? That number is not going down."
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