Compliance Solutions for Investment Advisers

SEC Exam Priorities 2015

The SEC today announced its Office of Compliance Inspections and Examinations’ (commonly known as OCIE) priorities for 2015 which focus on three areas: protecting retail investors, especially those saving for or in retirement; assessing market-wide risks; and using data analytics to identify signs of potential illegal activity. Unlike in past years, the information for investment advisers was a bit sparse. Here are the areas that do touch upon the lives of investment advisers:

  • Fee Selection and Reverse Churning. Financial professionals serving retail investors are increasingly choosing to operate as an investment adviser or as a dually registered investment adviser/broker-dealer, rather than solely as a broker-dealer. Unlike broker-dealers, which typically charge investors a commission or mark-up on purchases and sales of securities, investment advisers employ a variety of fee structures for the services offered to clients, including fees based on assets under management, hourly fees, performance-based fees, wrap fees, and unified fees. Where an adviser offers a variety of fee arrangements, we will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.

  • Sales Practices. We will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.

  • Suitability. We will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities, including whether the due diligence conducted, the disclosures made, and the suitability of the recommendations or determinations are consistent with existing legal requirements.

  • Cybersecurity. Last year, we launched an initiative to examine broker-dealers’ and investment advisers’ cybersecurity compliance and controls. In 2015, we will continue these efforts and will expand them to include transfer agents.

  • Potential Equity Order Routing Conflicts. We will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.

 

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