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Regulation and Compliance > Federal Regulation > SEC

SEC Exam Team Targeting Broker 'Recidivism'

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The Securities and Exchange Commission’s exam division is targeting bad brokers to complement the crackdown being conducted by the securities regulator’s enforcement division, according to Pete Driscoll, director of the agency’s Office of Compliance Inspections and Examinations.

The number of advisors being examined by the agency also is “up 20% from where we were last year,” said Driscoll at the SEC Speaks annual conference, which took place in Washington on Saturday.

Former SEC Chairman Harvey Pitt asked Driscoll if OCIE is “complementing” the SEC enforcement division’s focus on broker recidivism through its exams.

“We do look at recidivism in a number of ways,” Driscoll responded at the conference, sponsored by the Practising Law Institute.

OCIE’s Risk Analytics and Surveillance, or RAS team, he explained, spends “a lot of time tracking registered reps” that have disclosures or reps that the agency or the Financial Industry Regulatory Authority have levied actions against.

“In an era when firms are trying to grow, particularly the middle market firms, to bring in as many reps as possible to spread that overhead for their businesses, we worry that they’re taking on reps that may have been let go [by] another firm or may have had a disciplinary history,” Driscoll said. So the RAS team tracks “where those reps go.”

Firms gathering reps with “a lot of disclosures” or a prior action against them, he continued, “will lead us to focus on that particular firm as a high-risk firm.”

Boost in IA Exams

The shifting of 100 examiners from the broker-dealer to investment advisory space last year resulted in 15% of advisors being examined in 2017 — a 40% increase from the 11% rate of 2016, according to Driscoll.

“So far this year we’re up 20% [in advisor exams] from where we were last year,” Driscoll said. OCIE staff, he added, have “focused on efficiencies, high level data analytics and risk selection.”

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.


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