The SEC will highlight issues including cybersecurity and cryptocurrencies when it performs examinations of broker-dealers and financial advisors in 2019, according to the regulator's recent forecast.
Additionally, the SEC has been increasing the quantity of inspections. The number of broker-dealers evaluated increased by 45% in 2018, according to the report. Overall, the number of exams went up by 10% year-over-year.
“I think what they’re looking at is establishing themselves as more relevant to current concerns than they have been in the past,” says Mitch Crabbe, senior content specialist at Kaplan Financial Education and former instructor for securities pre-licensing exams.
The regulator has already taken action
That warning might not solely be based on broker misconduct — the SEC’s most recent report shows it is increasingly cautious about cybersecurity vulnerabilities, according to Crabbe.
“Anytime you tie together two forms of communication, there’s a link, and that link can be a weak spot for cyber incursion,” he says.
The regulator will seek to evaluate proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security, according to the SEC.
The regulator will pay close attention to digital assets, such as cryptocurrencies.
“[The Office of Compliance Inspections and Investigations] will take steps to identify market participants offering, selling, trading, and managing these products or considering or actively seeking to offer these products and then assess the extent of their activities,” the report said.
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In its exams, the SEC will further investigate topics such as compliance, disclosure, calculations of fees and anti-money laundering policies.
The regulator also intends to look over FINRA’s operations and regulatory programs, as well as the quality of FINRA examinations on broker-dealers and advisors. The SEC will also evaluate whether or not MSRB operations and “select internal policies, procedures and controls” are effective.
While newly registered advisors — as well as those who have not been examined in some time — will be under closer scrutiny this year, the SEC said it would also be looking to evaluate advisors who are growing substantially, or who have undergone a change to their business model.
“Just know ahead of time that if your business is growing outside the norm, you are going to draw some attention to a different degree,” Crabbe says.
Additionally, if an advisor just moved firms, he or she might be subject to closer scrutiny.
These insiders are well placed to propel their firms forward and encourage colleagues to address the industry’s shortcomings.
“It always has been a concern when an advisor goes from one firm to another,” Crabbe says.
Other advisors on watch are planners involved in wrap-fee programs charging investors a single bundled fee for advisory and brokerage services, according to the SEC.
The regulator will also scrutinize advisors selling products more likely to include conflicts of interest, such as securities-backed non-purpose loans and lines of credit.
Expanding the number of companies that are SEC-registered and addressing (or removing) rules that are out of touch are among the regulator's goals for the next four years, Chairman
“In today’s global and rapidly changing markets, it is important for the SEC to continually analyze and seek feedback from investors and others about where rules are, or are not, functioning as intended,” the goal report said.
