The Securities and Exchange Commission released late Thursday its examination priorities for this year, which cover a wide swath of issues including fraud detection and prevention, corporate governance and enterprise risk management, conflicts of interest and technology controls.
Specifically for advisors and broker-dealers, the agency also highlights the "ongoing risks"—which include safety of assets and conflicts of interest—and "emerging risks"—such as new advisor registrants as well as dually registered advisors—the staff will focus on.
Carlo di Florio, director of the SEC's Office of Compliance Inspections and Examinations (OCIE), said in a statement that the exam priorities reflect areas that the SEC "perceives to have heightened risk."
The priorities cover a wide range of issues at financial institutions, including broker-dealers, advisors, clearing agencies, exchanges and self-regulatory organizations, investment companies, hedge funds and private equity funds and transfer agents, di Florio said.
Priorities for advisors and broker-dealers include:
- For investment advisors and investment companies–presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds;
- For broker-dealers—sales practices and fraud, and compliance with the new market access rule.
For advisors specifically, the exam guidance states that SEC staff anticipates that the "ongoing risks" selected as focus areas for investment advisors and investment companies in 2013 will include:
Safety of Assets
As it has in the past, the staff will continue to utilize a risk-based asset verification process to confirm the safety of client assets and compliance with custody requirements. The staff will review the measures taken by registrants to protect client assets from loss or theft, the adequacy of audits of private funds, and the effectiveness of policies and procedures in this area. Recent examinations of investment advisers have found a high frequency of issues regarding the custody and safety of client assets under Advisers Act Rule 206(4)-2.
Conflicts of Interest Related to Compensation Arrangements
The staff will review financial and other records to identify undisclosed compensation arrangements and the conflicts of interest that they present. These activities may include undisclosed fee or solicitation arrangements, referral arrangements (particularly to affiliated entities), and receipt of payment for services allegedly provided to third parties.
Marketing/Performance
Marketing and performance advertising is an inherently high-risk area due to the highly competitive nature of the investment management industry. Aberrational performance of certain registrants and funds can be an indicator of fraudulent or weak valuation procedures or practices. The staff will also focus on the accuracy of advertised performance and also review changes in advertising practices related to the JOBS Act, which requires modification of the rules restricting general solicitations.
