SEC Exam Team Targeting Broker 'Recidivism'

Full-scope exam have been replaced with a focus “on one or two areas that are high risk,” Driscoll said. “The goal is to focus on the high-risk areas and move quickly and get our coverage up. It’s a huge risk to the investing public if we’re not getting to a lot of IA firms.”

‘Still Seeing Problems’

Beyond zeroing in on firms with “undisclosed or opaque fees and expense,” added Kristin Snyder, co-director of OCIE’s advisor and investment company exams, who sat on the panel with Driscoll, OCIE is “still seeing problems is in the area of mutual fund share class selection.”

Noting the recent launch of the Share Class Disclosure Initiative by the SEC Enforcement Division’s Asset Management Unit, the agency’ exam teams will continue to look at the share class issue this year, Snyder said.

Other exam priorities, according to Snyder, include accounts left unmanaged after advisory reps depart from a firm, exams of target date funds and whether the glide path is “functioning as disclosed,” and the “product mix” being sold to investors in 403(b) and 457 accounts.

Targeted initiatives also are in play regarding mutual funds that are not performing well compared to their peer group that “may take on additional risk in order to juice their returns,” Snyder explained, as well as ETFs that may be using “bespoke indexes” to understand the relationship between the fund and the index provider as well as the advisor — to see if any undisclosed conflicts of interest exist.

The Electronic Investment Advice Initiative, launched by OCIE last year to oversee the “emerging risk” area of robo-advice, will continue this year, Snyder relayed. The national initiative, she said, looks at issues like “compliance, governance around the models being used, supervision, marketing and advertising.”

Kevin Goodman, associate director of OCIE’s FINRA and Securities Industry Oversight (FSIO), noted that beyond FSIO’s focus on ensuring that “the reliance we’re placing on FINRA is well founded,” in examining broker-dealers and municipal advisors.

FSIO will also examine the Municipal Securities Rulemaking Board this year, Goodman said. While MSRB does not have an exam or enforcement program, FSIO will examine its functions of promulgating rules, promoting transparency and educating investors.