In a December 2018 press release, the SEC (Securities and Exchange Commission) announced the publication of the OCIE (Office of Compliance Inspections and Examinations) examination priorities for 2019.
OCIE will continue to examine entities that provide services critical to the proper functioning of capital markets, including clearing agencies, national securities exchanges, transfer agents, and others.
The SEC press release is available here.
This year’s priorities are broken down into 6 specific themes that comprise perennial areas of concern and newer financial products, including:
- Protection for retail investors, including seniors and those saving for retirement
- Compliance and risk in registrants responsible for critical market infrastructure
- FINRA and MSRB
- Digital assets
- Anti-money laundering programs
Short summaries containing highlights from each category of the complete OCIE 2019 Examination Priorities release are provided below.
1. The Protection of Retail Investors and Their Retirement
OCIE prioritizes the protection of retail investors, with special attention paid to seniors and those saving for retirement. Regular examinations will continue for firms that provide products and services to these investors, focusing on the following areas of concern:
- Inadequate disclosure of fees, expenses, or other charges that affect the actual cost of investing
- Conflicts of interest where financial incentives may impact investment professionals’ selections of particular investment products
- Wrap fee programs
Heavy emphasis is being placed on the adequacy of disclosures and explanation of brokerage practices, with the intent being to better protect the retail investor.
Core Compliance’s “The CCO Buzz” Podcast discusses the Senior$afe Act in a two-part series, click here for Part 1. And don’t forget to follow up with Part 2, by clicking here.
2. Stable Market Infrastructure: Registration Compliance and Risk Mitigation
OCIE will continue to examine firms who provide services that are critical to the proper functioning of capital markets. Such firms include, but are not limited to the following:
- Clearing agencies
- National securities exchanges
- Transfer agents
Regular examinations are required to ensure policies and procedures comply with constantly developing investment regulations.
3. Focus on FINRA and MSRB
OCIE will examine the effectiveness of policies, procedures, and operations utilized by these organizations who work in tandem to maintain regulatory and rule-making responsibilities, making sure they are fulfilling their role in protecting investors, enforcing high ethical standards for investment professionals, enhancing investor safeguards, and upholding market integrity.
4. Digital Assets
Considering the significant growth and risks presented in the relatively new cryptocurrency market, OCIE will monitor the offer and sale, trading, and management of digital assets.
In the case of digital products that are deemed securities, the OCIE will examine for regulatory compliance.
Given the still loosely-regulated landscape of digital currencies and investment products, OCIE will conduct examinations focused on the following:
- Portfolio management of digital assets
- Trading practices
- Safety of client funds and assets
- Pricing of client portfolios
- Internal controls
Read here for more information on trading cryptocurrencies and the inherent risks involved.
A successful cyber-attack may have far-reaching consequences that may affect the compromised firm, overall market integrity, and the retail investors themselves. OCIE will encourage firms to actively identify and manage cybersecurity risks by examining:
- Proper configuration of network storage devices
- General information security governance
- Policies and procedures related to retail trading information security
Click here for more information on small business cybersecurity concerns and issues.
6. Money Laundering
In 2019, OCIE will continue to prioritize examining broker-dealers for compliance with their AML (anti-money laundering) obligations, which are laid out in the Bank Secrecy Act. Firms are obligated to meet all of their SAR filing obligations; implement all elements of their AML program; and conduct thorough, frequent, independent tests of their AML program.
The hope is that examinations will ensure broker-dealers have policies and procedures in place to identify suspicious activity and illegal money laundering activities.
Concerned About Upcoming Examinations?
The release of 2019 examination priorities provides an excellent opportunity for firms to conduct internal examinations to locate weaknesses in compliance, training, firm regulations, or other issues, and take the necessary measures to ensure they are in compliance, thus avoiding potential enforcement action.
Advisory firms should investigate getting additional assistance from outside consultants, like Core Compliance, to perform mock audits and employee training to help ensure they are prepared.
Contact Core Compliance & Legal Services, Inc. in the event you have questions or need support in the development or implementation of internal examinations or the bolstering of processes and procedures related to any of these exam priorities — help is available here.