The Securities and Exchange Commission’s exam priorities this year will include — for the first time — assessing how advisors are handling compliance related to the rapidly growing cryptocurrency market.
In releasing the exam list — which includes zeroing in on senior investor protections, fee disclosure, digital advice, cybersecurity, anti-money laundering, ETFs and the continued scrutiny of the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board, the agency noted that not only is the crypto market exploding, but the number of advisors and broker-dealers “engaged in this space” continues to grow as well.
What’s the SEC going to look for in crypto compliance? The securities regulator says it plans to monitor the sale of such products, “and where the products are securities, examine for regulatory compliance.” SEC Chairman Jay Clayton told Senators in early February that from his vantage point, all Initial Coin Offerings are securities — and since none have registered with the Commission, they are illegal. (More on this later).
Financial professionals dealing in the crypto space will also be scrutinized on whether they’re maintaining “adequate controls and safeguards to protect these assets from theft or misappropriation,” the SEC’s Office of Compliance Inspections and Examination said, and whether financial professionals “are providing investors with disclosure about the risks associated with these investments, including the risk of investment losses, liquidity risks, price volatility and potential fraud.”
Also, OCIE said examiners “will continue to prioritize our commitment to protect retail investors, including seniors and those saving for retirement,” focusing a close eye on products and services offered to retail investors, and the disclosures investors receive about those investments.
The group plans to conduct exams targeting “circumstances in which retail investors may have been harmed and reviewing whether financial service professionals have met their legal obligations,” according to OCIE Director Pete Driscoll.
AML Audits Amy Lynch, president of FrontLine Compliance, told me at press time in mid-February that her firm is seeing an uptick in SEC exams covering anti-money laundering audits, so she’s “not surprised” AML compliance is a priority this year.
What’s the SEC looking for in the AML realm?
In 2018, examiners plan to continue to focus on whether entities regulated by the agency are appropriately “adapting their AML programs to address their obligations,” with reviews looking for such things as “customer due diligence” and also determining whether the entities are taking “reasonable steps to understand the nature and purpose of customer relationships and to properly address risks.”
Advisors and broker-dealers must also show that they’ve been “filing timely, complete and accurate” suspicious activity reports, or SARS. Examiners will also evaluate whether these entities are “conducting robust and timely independent tests of their AML programs.” Scrutiny of variable insurance products also remains on the SEC’s radar as well, Lynch adds.
In focusing on senior investors, OCIE says exams will be conducted of investment advisors and broker-dealers that offer services and products to investors with retirement accounts, with those “exams drilling down on, among other things, investment recommendations, sales of variable insurance products, and sales and management of target date funds.”
OCIE also plans to examine investment advisor and broker-dealer “facilitation and involvement in retirement vehicles” that primarily serve state and local government employees and non-profit employees, including 403(b) and 457 plans.
One “glaring omission,” according to attorneys with the law firm Drinker Biddle & Reath in a February client alert, is that OCIE “does not discuss how the anticipated rulemaking by the Commission regarding the development of a fiduciary standard may impact its priorities.”