5. Risk and Technology Use of third-party service providers and other vendors by registrants continues to increase, which can bring improved expertise and effectiveness, but also additional challenges and risks to organizations. OCIE will continue to focus on third-party risk management in fiscal 2020, and also closely track and evaluate the impact of information security and resiliency risks, geopolitical events and the industry’s transition away from Libor.
4. Retail-Targeted Investments OCIE will continue to prioritize exams of issues focused on retail investors, including those related to mutual funds and ETFs, municipal securities and other fixed income securities, and microcap securities.
3. Information Security Exams will focus on proper configuration of network storage devices, information security governance generally, and retail trading information security. Specific to RIAs, OCIE will continue to focus its exams on assessing RIAs’ protection of clients’ personal financial information — with a specific focus on governance and risk management, access controls, data loss prevention, vendor management, training, and incident response and resiliency.
2. Digital Assets and Electronic Advice Exams will assess: (1) investment suitability, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employee outside business activities. When it comes to electronic investment advice, OCIE will continue its focus on RIAs that provide services to their clients through automated investment tools and platforms, often referred to as “robo-advisors.” Areas of focus: SEC registration eligibility, cybersecurity policies and procedures, marketing practices, adherence to fiduciary duty, including adequacy of disclosures, and effectiveness of compliance programs.
1. Standards of Care Before the June 30, 2020, compliance date for Regulation Best Interest and Form CRS, OCIE will engage with broker-dealers during exams on their progress on implementing the new rules and questions they may have regarding the new rules. After the compliance dates, OCIE intends to assess implementation of the requirements of Reg BI, including policies and procedures regarding conflicts disclosures, and for both broker-dealers and RIAs, the content and delivery of Form CRS.
(Related: SEC Releases FAQ on Reg BI Compliance)
In tandem with its must-read annual exam priorities list, the Securities and Exchange Commission said in early January that its exam division covered approximately 15% of registered investment advisors in 2019.
Pete Driscoll, director of the SEC’s Office of Compliance Inspections and Examinations, noted last year that the agency’s advisor exam rate would drop in 2019 due to the 35 days lost during the government shutdown. OCIE, he said, “will not hit the 17% exam rate reached” in 2018.
OCIE completed 3,089 examinations in FY 2019, a 2.7% decrease from the 2,312 advisor exams in FY 2018.
Exams of RIAs in FY 2019, however, “remained strong at approximately 2,180, covering 15% of this population,” OCIE states.
In just the last five years, the number of RIAs overseen by OCIE jumped from about 11,500 to 13,475, and the assets under management of RIAs increased from approximately $62 trillion to $84 trillion.
OCIE completed more than 350 exams of broker-dealers, 110 examinations of national securities exchanges, and more than 90 exams of municipal advisors and transfer agents.
Also completed in 2019 were more than 160 exams of the Financial Industry Regulatory Authority, including exams of critical FINRA program areas as well as oversight reviews of FINRA exams.
As to OCIE’s exam priorities in 2020, see the gallery above.
— Check out FINRA’s Top 5 Exam Priorities in 2020 on ThinkAdvisor.