The recently issued Examination Priorities for 2016 reveals that the SEC’s priorities are organized around the same three thematic areas as last year: (i) retail investors, including retirement investments; (ii) market-wide risks; and (iii) the SEC’s increasing analysis of data to identify problematic activity.
With respect to market-wide risks, the 2016 Examination Priorities will focus on cybersecurity and Regulation Systems Compliance and Integrity (“Regulation SCI”). On cybersecurity, the SEC will examine broker-dealers’ and investment advisers’ cybersecurity compliance and controls, including testing and assessments of firms’ implementation of procedures and controls. With respect to entities subject to Regulation SCI, which include Alternative Trading Systems meeting certain volume requirements, the SEC will evaluate whether these entities have established and enforced written policies and procedures designed to ensure the capacity, integrity, resiliency, availability and security of their systems.
The 2016 Examination Priorities also reference the use of data analytics to identify signals of potentially illegal activity. For example, the SEC will continue to use its analytic capabilities to identify individuals with a track record of misconduct to assist in the examination of the firms that employ them. The SEC will also continue to analyze data obtained from clearing brokers to identify firms that appear to be engaged in excessive or otherwise potentially inappropriate trading. The SEC also will use data analysis to examine firms’ anti-money laundering programs, by focusing on those firms that have filed fewer suspicious activity reports (“SARs”) than expected for firms conducting similar business, or have filed incomplete or late SARs.
With regard to retail investors, the SEC will continue its multi-year initiative of retirement accounts, launched in 2015, examining the reasonable basis for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices. Other retail investor initiatives include, among others, the sales practices for variable annuities and exchange-traded funds (“ETFS”), particularly niche or leveraged ETFs as well as the adequacy of those products’ disclosures.
Other initiatives include: (i) examinations of newly-registered municipal advisors; (ii) review of private placements to evaluate due diligence, disclosure, and suitability; (iii) risk-based examinations of selected registered investment advisers; and (iv) examinations of private fund advisers and transfer agents.