The 10 most significant FINRA and SEC exam priorities
May 8, 2017 4:07 PM
Advisors need not wait for a warning call from OCIE to prepare their firms for an examination — regulators have already offered a hint about their enforcement priorities.
In what some might call an early heads up, the SEC and FINRA in January issued annual guidance to the firms they regulate, according to a blog by Todd Cipperman of Wayne, Pennsylvania-based Cipperman Compliance Services.
“If past is prelude, the regulators will fulfill their promises to examine the highlighted areas,” Cipperman writes. Among top priorities, the regulatory agencies recommended that compliance teams “spruce up procedures and testing” aroundcybersecurity, robo advice and elder abuse .
The SEC’s Office of Compliance Inspections and Examinations oversees 12,000 RIAs and 4,000 broker-dealers, according to the agency. FINRA supervises more than 634,800 brokers and 3,800 securities firms, levyinga record-breaking $176 million in fines last year.
Both OCIE and FINRA said they welcome feedback about their priorities, with FINRA CEO Robert Cook specifically mentioning a “listening tour” of member firms.
“Some have asked me when my listening tour will be finished,” he wrote. “The short answer is: never.”
For Cipperman’s top 10 significant priorities in exams this year, click through our slideshow. To view his commentary on the 10 most significant changes to Form ADV,click here .
In what some might call an early heads up, the SEC and FINRA in January issued annual guidance to the firms they regulate, according to a blog by Todd Cipperman of Wayne, Pennsylvania-based Cipperman Compliance Services.
“If past is prelude, the regulators will fulfill their promises to examine the highlighted areas,” Cipperman writes. Among top priorities, the regulatory agencies recommended that compliance teams “spruce up procedures and testing” around
The SEC’s Office of Compliance Inspections and Examinations oversees 12,000 RIAs and 4,000 broker-dealers, according to the agency. FINRA supervises more than 634,800 brokers and 3,800 securities firms, levying
Both OCIE and FINRA said they welcome feedback about their priorities, with FINRA CEO Robert Cook specifically mentioning a “listening tour” of member firms.
“Some have asked me when my listening tour will be finished,” he wrote. “The short answer is: never.”
For Cipperman’s top 10 significant priorities in exams this year, click through our slideshow. To view his commentary on the 10 most significant changes to Form ADV,
Michael Nagle/Bloomberg News
Suitability
Advisors must pay particular attention to concerns around suitability this year, according to Cipperman.
The SEC warned against conflicts of interest involved with some classes of mutual funds, as well as possible breaches of fiduciary duty with respect to wrap fee programs, he notes. FINRA pledged to examine training practices and clients’ concentration in high-risk investment products. (Photo by Bloomberg News)
The SEC warned against conflicts of interest involved with some classes of mutual funds, as well as possible breaches of fiduciary duty with respect to wrap fee programs, he notes. FINRA pledged to examine training practices and clients’ concentration in high-risk investment products. (Photo by Bloomberg News)
Cybersecurity
The regulators plan to review information security, data storage, passwords, service provider supervision and traditional security, Cipperman says.
“In 2017, we will continue our initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls,” according to OCIE’s guidance.
“In 2017, we will continue our initiative to examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls,” according to OCIE’s guidance.
Daniel Acker/Bloomberg News
Bad brokers
Firms retaining or employing repeat-offender brokers could find themselves in hot water with either regulator, according to Cipperman. Hiring and training, as well as supervision, make up other key areas of interest, he says.
FINRA devoted a section of its guidance letter to the issue.
The regulator “will assess whether firms develop and implement a supervisory plan reasonably tailored to detect and prevent future misconduct by a particular broker based on prior misconduct and regulatory disclosures,” according to its letter.
“We will also focus on firms with a concentration of brokers with significant past disciplinary records or a number of sales practice complaints or arbitrations.”
FINRA devoted a section of its guidance letter to the issue.
The regulator “will assess whether firms develop and implement a supervisory plan reasonably tailored to detect and prevent future misconduct by a particular broker based on prior misconduct and regulatory disclosures,” according to its letter.
“We will also focus on firms with a concentration of brokers with significant past disciplinary records or a number of sales practice complaints or arbitrations.”
Bloomberg News
Senior investors
SEC and FINRA will focus regulatory crosshairs on sales practices toward clients who are seniors, according to Cipperman. Both will be on the lookout for elder financial abuse, in particular.
“The regulators are concerned with suitability, especially related to high-yield products, target-date funds and variable insurance products,” Cipperman writes.
“The regulators are concerned with suitability, especially related to high-yield products, target-date funds and variable insurance products,” Cipperman writes.
Bloomberg News
Public pensions
OCIE staff will probe how those who advise public pension plans live up to their fiduciary duties, Cipperman says.
Practices such as “pay to play and undisclosed gifts and entertainment” merit more scrutiny this year, according to OCIE’s guidance letter.
“Pension plans of states, municipalities and other government entities hold a large amount of U.S. investors’ retirement assets,” OCIE wrote in its letter. “We will examine investment advisors to these entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty.”
Practices such as “pay to play and undisclosed gifts and entertainment” merit more scrutiny this year, according to OCIE’s guidance letter.
“Pension plans of states, municipalities and other government entities hold a large amount of U.S. investors’ retirement assets,” OCIE wrote in its letter. “We will examine investment advisors to these entities to assess how they are managing conflicts of interest and fulfilling their fiduciary duty.”
Branches
Parent firms’ supervision of their branches also represents an area of emphasis for the regulators this year, according to Cipperman. Exams will include probes of marketing activities, client communications and outside businesses, FINRA’s guidance letter shows.
Andrew Harrer/Bloomberg
Anti-money laundering
Advisors should expect the SEC and FINRA aggressively test their firms’ AML compliance, Cipperman says. Suspicious activity procedures, independent audits, automated trading, foreign currency transactions and other movements of money comprise particular topics of interest.
“Money laundering and terrorist financing continue to be risk areas that are considered in our examination program,” according to OCIE.
“Money laundering and terrorist financing continue to be risk areas that are considered in our examination program,” according to OCIE.
Bloomberg News
Robo advice
OCIE singled out what it referred to as “electronic investment advice” in its guidance letter. Exams will focus on firms’ compliance programs, marketing language, data protection and procedures around algorithms that come up with robo advisors’ recommendations.
ETFs
ETFs also demand scrutiny with respect to their suitability for clients, according to OCIE. Staff will examine the unit creation and redemption processes, as well as sales practices and disclosures, Cipperman notes.
Michael Nagle/Bloomberg
Private funds
Hedge funds, private equity funds, real estate funds and other kinds of private funds may also see increased oversight this year, according to Cipperman. OCIE listed private fund advisors as an area of focus in its guidance letter.
The reviews will center on “conflicts of interest and disclosure of conflicts as well as actions that appear to benefit the advisor at the expense of investors,” according to OCIE.
The reviews will center on “conflicts of interest and disclosure of conflicts as well as actions that appear to benefit the advisor at the expense of investors,” according to OCIE.
