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Regulation and Compliance > Federal Regulation > SEC

SEC’s Top Exam Priorities for 2016

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The Securities and Exchange Commission said Monday that the agency’s examiners will zero in this year on several new areas — liquidity controls, public pension advisors and product promotion among them, as well as exchange-traded funds and variable annuities.

The agency’s Office of Compliance Inspections and Examinations also said in releasing its 2016 exam priorities that examiners will continue their multiyear initiative dubbed ReTIRE, launched last June, which focuses on SEC-registered investment advisors and broker-dealers and the services they offer to investors with retirement accounts.

The ReTIRE exams focus on the “reasonable basis” for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.

OCIE also said that examiners would “advance” in 2016 the second round of cybersecurity exams launched by the agency last September by including testing and assessments of firms’ implementation of procedures and controls.

The Financial Industry Regulatory Authority said cybersecurity exams would also be a priority for the self-regulator in releasing its 2016 priorities last week.

FINRA CEO Richard Ketchum told ThinkAdvisor when the self-regulator’s exam priorities were released that he didn’t see FINRA issuing a formal cybersecurity rule. Rather, he said, FINRA expects brokerage firms “to continue to raise the [cybersecurity compliance] bar just as the efforts of attacks have increased.”

Susan Axelrod, executive vice president of FINRA’s regulatory operations, agreed during the interview that issuing formal rules is unlikely because the constantly evolving nature of cybersecurity would likely render such rules obsolete. “It’s much more important for us to continue to be engaged with firms on the [cyber] topic, understand their infrastructure and their cyber programs and continue to articulate best practices as they evolve.”

While the SEC’s 2016 exam priorities letter is “extremely similar” to the one the agency released in 2015, notes Amy Lynch, founder of FrontLine Compliance and a former SEC staff accountant, the agency’s focus on ETFs, pension advisors and liquidity controls are to be expected given the recent market events in these areas as well as SEC staff’s “strong focus” on retirement issues.

“ETFs continue to gain popularity with the average retail investor as well as financial advisors working within the retail retirement space so it’s understandable the SEC would be taking a look at these products both from the sales side as well as the issuer,” Lynch says.

Pension advisors will also be under scrutiny from the “pay-to-play rule perspective,” Lynch said, since the SEC brought its first case against an advisor for pay-to-play violations last year. The SEC is “looking for more” violations in this area, Lynch said.

Both FINRA and the Municipal Securities Rulemaking Board recently filed their proposed pay-to-play rules with the SEC, which starts the clock ticking on when advisors must start complying with the third-party solicitor provision of the SEC’s pay-to-play rule, Karen Barr, president and CEO of the Investment Adviser Association, told ThinkAdvisor recently.

While advisors have been required to comply with most provisions of the SEC’s pay-to-play rule since 2011, the SEC delayed the compliance date of the third-party solicitor aspect of the rule so that FINRA and the MSRB would have time to adopt a pay-to-play rule for broker-dealers and municipal advisors, Barr said.

Barr told ThinkAdvisor Monday that the SEC’s focus on advisors to public pension plans and pay-to-play is particularly notable in an election year, adding that another notable focus for the SEC this year will be to scrutinize advisors that hire former brokers with a disciplinary history.

Liquidity controls are a “huge concern these days regarding the fixed-income markets,” Lynch noted. “With the recent closures of a couple of mutual funds that were overconcentrated in illiquid issuers this is a very hot topic right now.”

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