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SEC Announces 2017 RIA Examination Priorities

Posted by RIA in a Box

Jan 12, 2017 3:55:24 PM

2017 SEC RIA Regulatory Exam Priorities

Today, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations ("OCIE") released its annual top exam priorities for the 2017 calendar year. The OCIE is the SEC division which conducts examinations of registered investment adviser ("RIA") firms and this priority list can help investment advisers be better properly prepared for a regulatory examination. In general, the list of priorities for 2017 closely mirrors the agency's past 2015 and 2016 examination priority lists as well as recently issued risk alerts. Similar to past years, the OCIE is focused on three categories: important retail investor issues, risks specific to elderly and retiring investors, and assessing general market-wide risks.

 

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The OCIE states that within the areas of emphasis, the agency will be particularly focused on these common RIA regulatory compliance issues:

  • Electronic Investment Advice: "Robo-advisers" will be a focus in 2017 with a particular emphasis on the "registrants’ compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures relating to conflicts of interest." In addition, the staff notes that it will "review firms’ compliance practices for overseeing algorithms that generate recommendations." 
  • Wrap Fee Progams: This is a long-standing regulatory focus area and continues to be in 2017. In particular, the staff states they "will likely review whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients." In addition, auditors will explore suitability, disclosures, conflicts of interest, and brokerage practices related to wrap free programs.
  • Never-Before Examined Investment Advisers: Similar to last year, the staff remains focused on its Never-Before Examined Adviser initiative. However, this year, the staff notes that it will expand the program to "include focused, risk-based examinations of newly registered advisers as well as of selected advisers that have been registered for a longer period but have never been examined by OCIE." Thus, it's fair to say that all SEC-registered investment advisers that have never before been audited should be prepared for an audit in the near future.
  • Multi-Branch Advisers: This has been a priority listed on the recent 2015 and 2016 lists as well. Just last month, on December 26, 2016, the SEC announced a new multi-branch office examination initiative. In particular, the staff will be focused on the "design and implementation of a compliance program and the oversight of advisory services provided at branch offices." It's important to remember that before a firm establishes its first branch office, a number of new policies and procedures need to be implemented to ensure proper supervision.
  • Share Class Selection: This is a focus area that SEC staff has previously highlighted in its 2014, 2015, and 2016 list of examination priorities. In particular, hybrid RIA firms need to continue to ensure that they are proper mitigating potential conflicts of interest and that full and proper disclosures are being made. 
  • Recidivist Representatives and their Employers: This was listed as a focus area in 2015 and 2016 and once again returns to the list in 2017. In addition, on September 12, 2016, the SEC announced a new examination initiative focused on RIA firms that employ advisers with past disciplinary issues. In particular, the staff notes that it will "assess the compliance oversight and controls of investment advisers that have employed such individuals."
  • Cybersecurity: While not as prominently featured as in last year's priority list, the staff notes that they will continue to be focused on reviewing cybersecurity compliance procedures, controls, and testing.

As RIA compliance consultants, we strongly recommend that the principals and Chief Compliance Officer of all investment advisory firms registered with the SEC, regardless if the firm has been examined before or not, review the contents of the SEC 2017 exam priority document. Furthermore, past exam priority lists released in prior years should also be reviewed. Links to these past investment adviser audit priority lists are here:

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Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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