RIA Compliance and Practice Management Blog

SEC's Examination Priorities for 2015

Posted by RIA in a Box

Jan 16, 2015 11:00:00 AM

Earlier this week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its annual top exam priorities for the 2015 calendar year. The OCIE is the SEC division which conducts examinations of registered investment adviser (RIA) firms and this list can help investment advisers be better prepared when the time comes for their firm to be examined. The priorities this year focus on issues with investment advisers, broker-dealers, and transfer agents. This year, the OCIE broke down its areas of focus into three categories; protecting retail investors and investors saving for retirement, assessing market-wide risks, and using dating analytics to identify signals of potential illegal activity.

As retail investors decide where to invest their money for retirement, an array of alternative products and yield-seeking investment options are being made available to them unlike ever before. This trend coupled with the reality that now more than ever current and future retirees are more directly managing retirement assets themselves, is leading the OCIE to place increased emphasis on protecting investors saving for retirement. The OCIE notes that within this area of emphasis, it will be particularly focused on:

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  • Fee selection and reverse churning: This has been an issue the SEC has publicly discussed on a number of occasions as of late and also addressed in its 2014 list of examination priorities. RIA firms need to continue to ensure that they are always acting in the best interest of their clients when it comes to choosing the right services offered and fees charged. In particular, hybrid investment advisers need to take extra caution that clients are being placed in the right types of commission or fee-based accounts.
  • Sales practices: The SEC notes it will be closely watching recommendations that advisers make to move client’s assets out of employer-sponsored defined contribution plans.
  • Suitability: The SEC is making it very clear that it is concerned that retail investors are being placed in complex, yield-seeking products which may not be suitable or for which the full risks and fees have not been fully disclosed. RIA firms utilizing such products need to immediately review all current policies and procedures in place to ensure that the proper diligence and disclosure is taking place. As RIA compliance consultants, we generally recommend that investment advisers avoid the use of such complex products.
  • Branch offices: This is a new area of focus that the SEC has not previously noted so it’s important that RIA firms with multiple offices take note. This is particularly relevant to a new breed of investment advisory firms that have grown rapidly by establishing remote offices with investment adviser representatives scattered regionally or nationally. It is vital that the proper technology and policies and procedures are in place to ensure sufficient monitoring and supervision of all branch offices.

Another area of focus that traditional RIA firms should take note of is that once again the OCIE has also highlighted cybersecurity as an area of concern. Last week, the director of the OCIE division, Andrew Bowden, made news when he announced that the SEC may soon release a summary on last year’s cybersecurity sweep conducted at 100 financial institutions.

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 this SEC 2015 exam priority document. Furthermore, past exam priority lists released in 2013 and 2014 should also be reviewed as it is likely that the SEC will continue to emphasize past area of focus during upcoming investment adviser audits.

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Topics: RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does 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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