The Securities and Exchange Commission’s exam division plans to release soon — likely in March — risk alerts indicating how it will conduct exams on Regulation Best Interest and Form CRS and is zeroing in on the “race to zero commissions” by brokerage firms, Pete Driscoll, head of the Office of Compliance Inspections and Examinations, said Friday.
Speaking at the Investment Adviser Association’s annual compliance conference in Washington, Driscoll told attendees to brace for eight upcoming risk alerts this year on: fixed income cross-trading (very close to release); Reg BI and Form CRS (coming very soon); cryptocurrency/digital assets; Libor; alternative data gathered from outside sources; top findings in the compliance space; and top findings on private funds.
Driscoll said OCIE will continue to focus on “fees and expenses,” a mainstay for the SEC, and is continuing exams of private funds and robo-advisors.
Driscoll says he sees two groups of robos: those that provide “another style of offering investment advice by firms that have robust compliance, legal and risk programs” and those run by tech-based startups that are typically “not terribly familiar” with securities laws.
“We see risks there,” he said.
As to environmental, social and governance focused funds, “We’re worried about, if someone claims they’re ESG, are they really ESG?” Driscoll said.
As to Reg BI exams, the risk alert will include a sample list of what the SEC will ask for: “We’ll be looking at implementation beginning in July; going forward, we won’t be looking at trading likely until the winter of 2021; by that time there’ll be a healthy enough amount of trading at firms to start ingesting that into our analytic tools,” Driscoll said.
Reg BI exams, “will take longer, too,” he added.
Alternative data is “not just in the private funds space,” Driscoll said. “It’s something we’re focused on; I’m hearing more and more from CCOs of large fund complexes that they’re getting requests to purchase alternative data. … The use of alternative data can be good; if firms want to spend additional resources to get further information to make a more informed investment decision for their clients … that’s inherently good.”
The challenges, however, are “is it material nonpublic information? Was it obtained reasonably?”