The Securities Exchange Commission's 2020 Examination Priorities
February 6th | 2020
On January 7, 2020, the Securities Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its 2020 Examination Priorities, which are intended to show market participants what risk areas to identify, evaluate, and improve in their compliance programs, and which risk areas the SEC will focus their resources on, summarized below:
The SEC’s 2020 Examination Priorities
Retail-Targeted Investments: The SEC will continue to prioritize examinations of issues focused on retail investors, most prominently those related to mutual funds and ETFs, municipal securities and other fixed income securities, and microcap securities.
Retail Investors, including Seniors, Those Saving for Retirement, Teachers, and Military Personnel: The SEC will continue to prioritize retail investors and those intermediaries who interact with retail investors. There will be a continued focus on disclosures of fees, expenses, and conflicts of interest.
Market Infrastructure: The SEC will continue to focus on the system security and resiliency of entities whose services are critical to the functioning of our capital markets. Among these, the SEC emphasizes clearing agencies, national securities exchanges, alternative trading systems, and transfer agents.
Information Security: The SEC will continue its focus on cyber security and information security risks among all entity types. Examinations will include proper configuration of network storage devices, information security governance generally, and retail trading information security. To assess protection of client’s personal financial information, particular focus areas will include: (1) governance and risk management, (2) access controls, (3) data loss prevention, (4) vendor management, (5) training, and (6) incident response and resiliency.
Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisers: The SEC will take a risk-based approach to each type of registered entity. To determine the risk level of a given entity OCIE will consider products and services offered, compensation and funding arrangements, prior examination observations and conduct, disciplinary history of associated individuals and affiliates of a registered firm, changes in firm leadership or personnel, and whether a firm has access to investor assets.
Over recent years, OCIE has increased its examination coverage of RIAs from 10% in 2014 to 17% in 2018. The SEC will prioritize examinations of registered investment advisers (“RIAs”) who have never been examined, including both RIAs who are new and those who have been registered for longer periods of time but never examined. Both RIAs who advise retail investors and private funds will be included in this focus.
For broker-dealers, the SEC will prioritize issues relating to trading practices and the preparation for and implementation of recent rules. In addition, prior to the June 30, 2020 compliance date for Regulation Best Interest and Form CRS, OCIE will engage with broker-dealers during exams on implementing the new rules and questions they may have regarding the new rules.
Anti-Money Laundering Programs: The SEC will continue to focus on firms’ compliance with applicable anti-money laundering rules and regulations and their particular obligations therein.
Financial Technology (Fintech) and Innovation, Including Digital Assets and electronic Investment Advice: The SEC will continue to focus on advancements in financial technologies and methods of capital formation and market structures. As registered firms use new sources of data, engage in the digital asset space, and provide services to clients through automated investment tools and platforms (i.e. “robo advisers”), the SEC will continue to provide ongoing attention and review.
FINRA and MSRB: OCIE will continue to oversee the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”). OCIE will focus its FINRA examinations on FINRA’s operations, regulatory programs, and quality of examinations of broker-dealers and municipal advisers. OCIE will focus on MSRB’s effectiveness in operating, and creating internal policies, procedures, and controls.
The SEC examination priorities described above are not exhaustive. Depending on the risk factors and history of a given entity, OCIE may focus on other areas in its examinations. Likewise, the SEC’s industry outreach and risk alerts will not be limited to the scope of the 2020 examination priorities.