10 of the most significant examination priorities
SEC examiners are knocking on the doors of more advisors this year than last with exams on pace to reach 20% more advisory firms than in 2017, according to the regulator. Both the SEC's Office of Compliance Inspections and Examinations and FINRA recently released their 2018 examination priorities to help firms get ready for potential visits.
Anti-money laundering, suitability and best execution are perennial mainstays that appear in the letters almost every year. However, several of these priorities are brand new, including: cryptocurrency, wrap fee programs, and thinly-traded securities.
These letters can help educate firms that are preparing for compliance programs and exam readiness.
1. Disclosure of fees and expenses
Both OCIE and FINRA champion full transparency of fees and expenses so that clients can make informed decisions and understand possible conflicts of interest.
Expect a lot of attention paid to initial coin and cryptocurrency offerings including recommendations, disclosure, volatility, and security.
The regulators want to ensure that firms implement adequate cyber policies and procedures to protect client information and data systems.
4. AML and KYC
This is an area that both regulators have identified for many years, although the focus has moved to customer due diligence and firms’ gatekeeper role to keep securities markets safe.
5. Protecting senior investors
Both regulators want to protect senior investors. The SEC focuses on recommendations to retirement accounts. FINRA will review compliance with rules to prevent exploitation.
6. Wrap fee programs
The SEC continues its persecution and prosecution of wrap fee programs, including due diligence, best execution, and conflicts.
7. Thinly-traded ETFs and microcaps
The regulators have raised the red flag about recommending thinly-traded securities that are subject to market manipulation and pay exorbitant commissions.
8. High risk brokers
FINRA wants firms to enhance hiring and supervision practices to keep bad actors out of the industry.
Firms must implement procedures to vet products and train reps.
10. Best execution
FINRA is particularly concerned about order-routing practices and resulting conflicts of interest.