SEC announced it’s examination priorities for 2020!

And we are off to 2020, this past Tuesday the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced it’s exam priorities for 2020.
They do so to improve transparency and to help firms evaluate and improve their compliance programs. Click here to go directly to the SEC’s website, or read a few of the highlights here.

In my last article, I wrote about the past which included the 2019 priorities. Many are continuing to be a focus in 2020, such as protecting retail investors, market infrastructure, market integrity but there are some new areas of focus too.

I’ll mainly hit the hot points for Registered Investment Advisors.

This year’s priorities have emphasis on the crucial role of CCOs and compliance associates.  Also, this year’s priorities focus on new developments, such as Regulation Best Interest (Reg BI), LIBOR transition, Environmental, Social and Governance (ESG) investing, and new AML beneficial ownership requirements. The priorities also put greater emphasis on operational resilience, including cyber-security, privacy of client information, information security and vendor risk management. Finally, the priorities explicitly focus on private funds.

2020 Priorities at a Glance

The SEC Press Release organized the 2020 examination priorities around the following themes:

• Retail investors, including seniors and people saving for retirement;
• Information security;
• Financial technology (FinTech) and innovation, including digital assets and electronic investment advice;
• Additional focus areas involving RIAs and Investment Companies;
• Additional focus areas involving Broker-Dealers and Municipal Advisors;
• Market infrastructure;
• Anti-money laundering programs; and
• Focus on Financial Industry Regulatory Authority (“FINRA”) and Municipal Securities Rulemaking Board (“MSRB”).

More detail on 2020 Priorities

Additional Focus Areas Involving RIA’s and Investment Companies

Last year, the SEC was able to examine approximately 15% of RIA population. The SEC’s exams will continue to review the compliance programs of RIA’s. For 2020, there will be a particular interest in the accuracy and adequacy of disclosures provided by RIA’s offering clients new types or emerging investment strategies, such as strategies focused on sustainable and responsible investing,  environmental, social, and governance (ESG) criteria. Make your compliance team strong, make sure written procedures implemented, followed and well-documented.

Priorities for examinations include:

• newly registered investment advisers, and advisers that have been registered but have never been examined
• mutual funds and ETFs; the RIA’s, and supervision and oversight practices of these products
• RIA’s to private funds, such as firms that provide management to separately managed accounts side-by-side with private funds.

Protecting Retail Investors, Including Seniors and Those Saving for Retirement
They will continue their initiative to protect retail investors from issues that arise from the increasingly complex and constantly evolving investment world.

Fraud, Sales Practices, and Conflicts
The SEC emphasized the importance of providing investors with disclosures relating to fees, expenses and conflicts of interest.
Examiners will also continue to focus on whether fees are calculated and charged in accordance with agreements provided to their clients. They will focus on identifying firm practices that could potentially create conflicts of interest such as inadequately disclosed fees, expenses, or other sales charges.  Basically, disclose disclose and disclose some more, lol!

Retail-Targeted Investments 

• Mutual Funds and Exchange Traded Funds (ETFs)
  There will be continued focus on mutual funds and ETFs as to whether advisers are adequately disclosing investment risks, providing mutual fund fee discounts that should be provided to investors as a result of policies, and compliance oversight of these areas.

Standards of Care
As most every RIA knows by now, firms will need to be compliant with the June 2019 adoption of Regulation Best Interest; create and file their Form CRS Relationship Summary (or ADV Part 3) by June 30, 2020.

Financial Technology (FinTech) and Innovation, including Digital Assets and Electronic Investment Advice

FinTech continues to develop at a rapid pace. The SEC remains focused on new and evolving technologies to assess the effectiveness of related compliance controls related to firms’ usage of alternative data and technologies.

Digital Assets
There has been significant growth in this market, also increased risk. The SEC exams will continue to monitor the offer and sale, trading, and management of digital assets, and for firms actively engaged in the digital asset market. Examinations will focus on investment suitability, portfolio management, trading, safety of client funds, pricing, compliance programs, internal controls, and supervision of employee outside business activities (OBAs).

Electronic Investment Advice or Robo-Advisors
Areas of focus will include, among others, SEC registration eligibility, cyber-security policies and procedures, marketing practices, adherence to fiduciary duty, including adequacy of disclosures, and the effectiveness of compliance programs.

Information Security

Cyber-security has been a major focal point for the for the past few years, but I feel this year the topic has been broadened to acknowledge that a breach in information security, including a successful cyber-attack, may have consequences extending beyond the firm compromised. Focus areas will include proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security, among others.  The will examine third-party and vendor risk management, and focus on oversight practices related to certain service providers and network solutions, including those leveraging cloud-based storage.

Anti-Money Laundering Programs

Examiners will continue to review whether firms are in compliance with applicable anti-money laundering requirements, with a focus on the compliance and testing of AML programs.

Cheers from Sonja Rae @ RIA-CCO