In Fiscal Year 2018, the Office of Compliance Inspections and Examinations of the Securities and Exchange Commission examined nearly 17% of SEC-registered investment advisers. For the past several years, the number of examinations performed annually has steadily increased and shows no signs of slowing down in the years to come.
The reasons OCIE may select an adviser for examination are various and shifting, depending on commonly identified risk factors and changes in regulation. The SEC takes steps to be transparent about which conditions may cause an adviser to be selected for examination. Each year, OCIE examiners make recommendations on what to prioritize when evaluating adviser compliance; some are complied into the OCIE’s Examination Priorities list, for example.
Recently, Alicia Tate, of the Commission’s Chicago Regional Office, spoke to CCOs about six common incentives for OCIE to target advisers and firms for exams:
- The Commission receiving public comments or tips complaining of a firm’s potential non-compliance
- Firms with practices matching those on the Examination Priorities list; for 2019, risk areas for examination are organized under six major themes:
- Firms working with retail investors, especially senior citizen clients and those saving for retirement
- Clearing agencies, those subject to Regulation SCI, transfer agents, and national securities agencies
- Participants in certain FINRA and MSRB programs
- Firms managing digital assets like cryptocurrencies
- Those with heightened cybersecurity* risks, especially pertaining to firms with multiple branch offices or those which have merged with other advisers
- Broker-dealers’ compliance with anti-money laundering regulations and appropriate filing of suspicious activity reports
- Firms which were examined and issued a deficiency letter within the last year
- Firms which have never been examined
- The largest firms in a region and those with high AUM
- Any firm employing advisers with disclosures, or other disciplinary red flags
WHAT DOES THIS MEAN FOR ME?
Nearly 1 in 6 firms were examined by OCIE last fiscal year. Firms in the above circumstances, especially those in multiple areas of risk under the 2019 Examination Priorities, are potential targets for examination. Fairview is dedicated to assisting registered investment advisers in meeting regulatory requirements and upholding their fiduciary duty to clients. Contact us to find out how we can assist your firm throughout the examination process.
*Contact Fairview Cyber at firstname.lastname@example.org for information on cybersecurity and vendor management support.