More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
The Securities and Exchange Commission today announced its examination priorities for 2014, which include advisors who have never been examined, including new private fund advisors; wrap fee programs; quantitative trading models; and payments by advisors and funds to entities that distribute mutual funds.
As for broker-dealers, the securities regulator says it will zero in on sales practices and fraud, issues related to the fixed income market, and trading issues, including compliance with the new market access rule.
Like the Financial Industry Regulatory Authority, the SEC will also focus on advisor and broker-dealer IRA rollover activity this year. Yet another area of focus will be dually registered advisors.
Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, said in releasing the list that it highlights areas “that we perceive to have heightened risk.”
The marketwide priorities, the agency said, “include fraud detection and prevention, corporate governance and enterprise risk management, technology controls, issues posed by the convergence of broker-dealer and investment advisor businesses and by new rules and regulations and retirement investments and rollovers.”
OCIE chief Bowden said in October that the agency would take aim at the group of about 4,000 RIAs that have never been examined before. Bowden says in the priority letter that the SEC will use "presence exams," a 2012 initiative to examine a significant percentage of the advisors registered since the effective date of Section 402 of the Dodd-Frank Act.
The five key focus areas of these presence exams will be marketing, portfolio management, conflicts of interest, safety of client assets and valuation. The vast majority of these new registrants are advisors to hedge funds and private equity funds that were not registered or regulated by the SEC prior to the Dodd-Frank Act, and have never been examined by the SEC.
The letter says that staff will also continue to prioritize examinations of private fund advisors where the staff’s analytics indicate higher risks to investors, or where there are indicia of fraud, broker-dealer status concerns, or other serious wrongdoing.
Duane Thompson, senior policy analyst at fi360, told ThinkAdvisor in a recent interview that he doubts the agency can do much more on the exam front.
The SEC’s examiners “can incrementally increase their exam numbers by mov[ing] around their resources, but I don’t think they have a lot [of resources] to move around,” Thompson said. The agency can take advantage of presence exams, “which are exams where [SEC examiners] work from the office and request a lot of documentation from advisors instead of going onsite.”
If the agency focuses “on the vast majority of advisors, the ones where the average is eight to 10 employees who mainly [do] passive investing, with no exotic [activities] where it won’t take as long to go through the books and records, they could bump up their [exam] numbers,” he concedes.
But, adds Thompson: “Unless Congress gives the [agency] more money or a bill passes” to allow the SEC to collect user fees to fund advisor exams, “I don’t see how the [agency] can increase” the number of exams.
Check out IRA Rollovers Among Hot Areas for FINRA Scrutiny in 2014 on ThinkAdvisor.