OCIE has now issued examination observations related to cybersecurity and operational resiliency practices taken by investment advisers and other market participants. With examples, the observations included governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness. Members are encouraged to incorporate these observations in their cybersecurity assessments. A copy of the examination guidance can be found here.
OCIE has announced its 2020 exam priorities as part of its risk-based approach to protecting investors. As in the past, key risk areas that are prioritized impacting SROs, clearing firms, investment advisers and other market participants include:
- Retail Investors, Including Seniors and Those Saving for Retirement
- Market Infrastructure related to capital markets, including clearing agencies, national securities exchanges, alternative trading systems and transfer agents
- Cyber and information security risks
- Examining RIAs, including investment companies, ETFs, private funds that have never been examined, including new RIAs and RIAs never examined and oversight practices of their boards of directors
- AML requirements
Fintech and innovation, including digital assets and electronic advice
- Oversight of FINRA and MSRB operations, programs and their examinations of broker-dealers and municipal advisors
OCIE makes clear that the above risk areas is not exhaustive and will be dependent on risk-based approaches employed by OCIE and its staff. A copy of the 2020 exam priorities can be found here.
The SEC National Exam Program has issued a new Risk Alert addressing some of the most common deficiencies associated with advisers’ best execution obligations identified by OCIE staff. In addressing the deficiencies, the alert reminds advisers of existing requirement that in determining best execution an adviser must seek to obtain the execution of transactions for clients in such a manner that the client’s total cost in each transaction is the most favorable under the circumstances. “[T]he determinative factor [in an adviser’s best execution analysis] is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.” The SEC has brought enforcement actions against advisers who fail to meet this standard.
Common adviser best execution deficiencies that were observed by the staff include:
• failure to demonstrate periodic and systematic evaluation of the execution performance of broker-dealers used to execute client transactions.
•failure to consider the full range and quality of a broker-dealer’s services in directing brokerage.
•failure to seek or consider the quality and costs of services available from other broker-dealers.
•advisers who failed to provide full disclosure of best execution practices.
•failure to provide full and fair disclosure in Form ADV of their soft dollar arrangements.
•advisers who did not “appear to make a reasonable allocation of the cost of a mixed use product or service according to its use or did not produce support, through documentation or otherwise, of the rationale for mixed use allocations.”
•advisers that appeared to fail to have adequate compliance policies and procedures or internal controls for best execution.
•advisers who failed to follow their policies and procedures regarding best execution, including failing to seek comparisons from competing broker-dealers to test for pricing and execution, not allocating soft dollar expenses in accordance with their policies, and not conducting ongoing monitoring of execution price, research, and responsiveness of their broker-dealers.
Advisers should remember that as fiduciaries, they have a duty to obtain best execution in client transactions. The alert list several actions advisers may want to consider when cleaning up such deficiencies. Actions that might be taken by advisers include, amending their best execution or soft dollar arrangements disclosures, revising compliance policies and procedures, and changing their practices regarding best execution or soft dollar arrangements.
Advisers are reminded the SEC’s annual compliance outreach program National Seminar will be held on January 30, 2014, at its headquarters in Washington, D.C. Investment adviser and investment company senior officers, including chief compliance officers (CCOs) are invited to register and attend.
This year’s agenda will likely include panel discussions with SEC staff from the Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement’s Asset Management Unit and investment adviser personnel. The agenda’s topics will include SEC exam priorities in 2014, private fund advisers, registered investment companies, valuation, and the role of the CCO. Continue reading “Reminder: SEC National Compliance Outreach Program”
The SEC’s Office of Compliance Inspections and Examinations (OCIE) has now issued a new Risk Alert raised by its examination staff’s observation that some options trading strategies are being used to evade the short-sale rule, Rule 10b-21. The alert addresses the need for customers, broker-dealers and clearing firms to be aware of options trading activity that could be used to avoid complying with the close-out requirements of Reg SHO.
Under the rule, it is fraudulent to sell an equity security if it deceives a person participating in the transaction about the seller’s intention or ability to deliver the security by settlement date. Rule 10b-21 covers such situations where a seller deceives a broker-dealer, participant of a registered clearing agency, or a purchaser about its intention to deliver securities by settlement date, and the seller then fails to deliver securities by settlement date. The violative activity would include broker-dealers (including market makers) acting for their own accounts. Broker-dealers could also be held liable for aiding and abetting a customer’s fraud under Rule 10b-21.
In addition to addressing, with examples, trading strategies that could be used to circumvent Reg SHO requirements, and other helpful ways that OCIE has observed that some firms have used to effectively detect and prevent violation of the rule, the alert provides summary guidance covering (a) Reg SHO Close-out Requirement; (b) Reg SHO Locate Requirement; (c) Rule 10b-21; (d) Key Trading Terms and Concepts; and (d) Option Activity Related to Hard to Borrow and/or Threshold Securities.
The SEC has announced its schedule for the upcoming Compliance Outreach Program regional seminars to be held in Chicago, New York, Atlanta and San Francisco. Investment adviser and investment company senior officers, including chief compliance officers (CCOs) are invited to register and attend. The first meeting will occur in Chicago on August 28.
This years’ Compliance Outreach Program, which started off in Boston in May, will likely include panel discussions with SEC staff from the Office of Compliance Inspections and Examinations (OCIE), Division of Investment Management, and Division of Enforcement’s Asset Management Unit. Topics will vary depending on location. For example, the Chicago seminar will address traded and non-traded real estate investment trusts, investment companies with special emphasis on alternative investment funds and money market funds, and current enforcement actions in the investment management industry. The New York seminar will focus more on newly registered investment advisers, dual registrants and to investment advisers affiliated broker-dealers, and will topics like the SEC’s examination process, priorities, risk surveillance, and examination selection process.
As we’ve alerted our audience in previous blogs, investment advisers should attend these meetings because “[t]he seminars highlight areas of focus for compliance professionals. They provide an opportunity for the SEC staff to identify common issues found in related examinations or investigations and discuss industry practices, including how compliance professionals have addressed such matters.”
Registration information about the regional seminars is available at:
As part of its National Exam Program, the SEC’s Office of Compliance and Examinations (“OCIE”) has just mailed a letter to senior executives and Chief Compliance Officers of newly-registered investment advisers apprising them of what practices they can expect to be examined.
While the letter primarily concerns risk-based exams of advisers to private funds that registered with the SEC after July 21, 2011, the significance the OCIE examination staff is attaching to certain adviser practices in these so-called “Presence Exams” should be weighed by all advisers regardless – whether they’re new or a private fund. As we have discussed these and other areas of exam focus in previous posts, OCIE’s hot areas referenced, and set for review, include:
- Marketing materials;
- Portfolio management;
- Conflicts of interest;
- Safety of Client Assets; and
- Valuation of Client holdings and assessment of fees based on valuations.
Through the SEC’s lens, each of these topics is being viewed in three phases: engagement; examination; and reporting.