2018 SEC Exam Priorities, Part 1



Hello, this is Michelle Jacko, CEO of Core Compliance and Legal Services. And on this week's CCO Buzz, we will be talking about the 2018 National Exam Program Examination Priorities, which was just issued on February 7, 2018 by the US Securities and Exchange Commission. 

What is of particular note this year is that at the beginning of this priorities list, the staff spent time talking about OC's leadership team, and what the examination team's focused on. The core principles that the SEC stands for are very simple. They're risk based in their examination program, which is data driven and attempts to be transparent. 

In fact, during the fiscal year 2017, their national examination program published over 6 risk alerts to the industry, to discuss what was most important to the staff in their examination focus areas. 

That included such areas as cybersecurity, protection of retail investors, municipal advisor examinations, the most frequent advertising compliance issues identified, OC examinations of investment advisers, cybersecurity ransom alerts, as well as the five most frequent compliance topics identified in OC examinations of investment advisers. 

From this examination priority list, we see that the SEC is focused on trying to put their resources to their highest and best use by trying to attain experienced staff, often who have industry knowledge, that can detect problem behavior from the financial industry and those who serve it. 

Finally, the fifth principle is that the staff embraces innovation and new technology both as a means to do more with less, and as a necessary focal point of their analytic efforts. Currently, the examination program is driven by data analytics, through information that is available through the internet, through Form ADV, and through other means, such as social media. 

As a result of this, the SEC is able to detect higher risk registrants so they can focus their examination efforts on those particular firms. 

Today what we're going to do is focus on just one of the examination priorities, which includes protection of retail investors, including seniors and those saving for retirement. One of the key points that the SEC will be focusing on this year is looking at how and when a retail investor hires a financial professional, and the type of information that that financial professional may provide to that investor. 

This would include disclosures related to the fees charged, other compensation that the financial professional may receive, the proper disclosure and calculation of fees, expenses, and other charges that investors pay is critically important.  And it's going to be essential for those that provide those services to look at their disclosure documents in the form of contracts, Forms ADV, and marketing collateral to ensure that those disclosures and the firms policies and procedures which support such disclosures are strong and robust so that it is transparent to the end investor exactly what they are going to be paying and the effect of those charges could have in affecting the performance of that investment. 

One of the things that the SEC is focused on is advisory personnel that may receive finaicial incentives to recommend that others invest or remain invested in particular share classes of mutual fund, where that investor pays higher sales load or distribution fees, and as a result, there are inherent conflicts of interest in that model. 

In addition, the SEC will be focusing on accounts where investment advisor representatives have parted from firms and the accounts have not been assigned to a new representative to properly oversee them and provide active management. 

Finally, for those that are private fund advisers that manage funds with a high concentration of investors investing for the benefit of retail clients, including nonprofit organizations and pension plans, the staff will be looking at the disclosures related to fees, expenses, and other charges associated, and the pecuniary gains a fund adviser may enjoy, and whether or not that's disclosed in appropriate documentation. 

 At this time of year, when most advisers are drafting their Forms ADV, it's essential to review how you're disclosing compensation arrangements and conflicts of interest in general. 

For more information on considerations for these important disclosures, please contact us at area code 619.279.0020, or at info@corecls.com. Thank you.