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SEC's Top 6 Exam Priorities for 2017

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The Securities and Exchange Commission on Thursday released its list of exam priorities for the year.

In releasing its 2017 exam list, the agency’s Office of Compliance Inspections and Examinations outlines areas “where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements,” said OCIE Director Marc Wyatt.

Wyatt said in October that OCIE had launched a dedicated inspection team to oversee the Financial Industry Regulatory Authority, FINRA and Securities Industry Oversight (FISIO), which is headed by Kevin Goodman, head of the agency’s broker-dealer exam program.

“We took resources from the broker-dealer program and moved them into” the advisor and investment company exams, Wyatt said then. “As a result of doing that, we’re somewhat more reliant on FINRA. So in relying more on FINRA, we need to make sure we’re enhancing our oversight.”

Outgoing SEC Chairwoman Mary Jo White said the priorities “make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as marketwide risks to new forms of technology including automated investment advice.”

Also included in the list is the exam division’s focus on the challenges advisors face in operating multi-branch locations, and OCIE is also expanding its Never-Before Examined Adviser initiative to include focused, risk-based exams of newly registered advisors.

The SEC’s 2017 exam priorities address issues across a variety of financial institutions, including advisors, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges and municipal advisors.

Read on to see some of the top focus areas, including which products, the agency will zero in on this year.

1. Electronic Investment Advice. OCIE will examine registered investment advisors and broker-dealers that offer such services, including robo-advisors that primarily interact with clients online and firms that utilize automation as a component of their services while also offering clients access to financial professionals. Examinations will likely focus on registrants’ compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures relating to conflicts of interest. Firms’ compliance practices for overseeing algorithms that generate recommendations will also be reviwed.

2. Wrap Fee Programs. OCIE will expand its focus on RIAs and broker-dealers associated with wrap fee programs, which charge investors a single bundled fee for advisory and brokerage services to review whether advisors are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients. Areas of interest may include wrap account suitability, effectiveness of disclosures, conflicts of interest, and brokerage practices, including best execution and trading away.

3. Exchange-Traded Funds. ETFs will be examined for compliance with applicable exemptive relief granted under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and with other regulatory requirements, as well as review ETFs’ unit creation and redemption processes. Also of focus will be sales practices and disclosures involving ETFs and the suitability of broker-dealers’ recommendations to purchase ETFs with niche strategies.

4. Share Class Selection. Exams will review conflicts of interest and other factors that may affect registrants’ recommendations to invest, or remain invested, in particular share classes of mutual funds.

5. Recidivist Reps and Their Employers. OCIE will continue to use its analytic capabilities to identify individuals with a track record of misconduct and examine the investment advisors that employ them. 

6. ReTIRE. OCIE will continue its multiyear ReTIRE initiative, focusing on investment advisors and broker-dealers along with the services they offer to investors with retirement accounts. Exams in 2017 will focus on, among other things, registrants’ recommendations and sales of variable insurance products as well as the sales and management of target date funds. Controls surrounding cross-transactions, particularly with respect to fixed income securities, will also be assessed. 

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