Broker-dealers and investment advisors are on notice, as they have been officially identified by the SEC as focus areas on its list of 2020 examination priorities.
In its annual guidelines, published Tuesday, the SEC’s Office of Compliance Inspections and Examinations has identified broker-dealers and investment advisors as focus areas that present potential risks to investors and the integrity of the U.S. capital markets.
“OCIE’s 2020 examination priorities identify key areas of risk, both existing and emerging, that we expect self-regulatory organizations (SROs), clearing firms, investment advisers and other market participants to identify and mitigate,” SEC Chairman Jay Clayton says in a statement.
“As markets evolve, so do risks and potential harm to investors. OCIE continually works to adjust its examination focus areas to target these risks and publishes its annual priorities to communicate where we see the potential for increased risk and related harm,” adds OCIE director Pete Driscoll.
Broker-dealer exams will focus on issues relating to the preparation for and implementation of recent rulemaking, including Regulation Best Interest, and trading practices. The SEC has set June 30 as the compliance deadline for the implementation of Reg BI and has said it believes that is “sufficient time” for firms to comply.
“OCIE recognizes that these new rules will require various market participants to make changes to their operations, including to required disclosures, marketing materials and compliance programs,” according to the 2020 exam priorities report.
To further assist broker-dealers before the compliance deadline for Reg BI and the Customer Relationship Summary, or Form CRS, the OCIE will check on their progress on implementing the new rules and answer any questions broker-dealers may have.
After the compliance deadline, OCIE says it plans to assess the implementation of Reg BI requirements, including policies and procedures regarding conflict disclosures, and the content and delivery of Form CRS for both broker-dealers and RIAs.
RIA exams will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. Exams will include RIAs advising retail investors as well as private funds.
“OCIE has a particular interest in the accuracy and adequacy of disclosures provided by RIAs offering clients new types of emerging investment strategies, such as strategies focused on sustainable and responsible investing, which incorporate environmental, social, and governance criteria,” the report states.
The SEC — which notes it is often the only regulator responsible for supervising RIAs — says the complexity, interconnectivity and dependency of advisory firms on a variety of market participants continues to grow.
That has led to an increase of RIA coverage for the OCIE, which includes more manpower devoted to this group, ongoing training and onboarding of experienced subject matter experts.
The SEC says more than 3,700 RIAs manage over $1 billion in assets; around 36% of RIAs manage a private fund; and more than 55% of RIAs have custody of client assets.
More than 60% of RIAs are affiliated with other financial industry firms, while around 12% of RIAs provide advisory services to a mutual fund, exchange-traded fund or other RIAs, the watchdog adds.
Meanwhile, investment company exams will focus on mutual funds and ETFs, the activities of their RIAs, and the oversight practices of their boards of directors.
And municipal advisor examinations will include a review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.
Other focus areas listed in the SEC’s 2020 exam priorities are retail investors, including seniors and those saving for retirement; market infrastructure; information security; anti-money laundering programs; financial technology and innovation, including digital assets and electronic investment advice; and Finra and the Municipal Securities Rulemaking Board.
The SEC publishes its exam priorities annually in line with transparency goals for its exam program and to provide insight into its risk-based approach.
A version of his article ran as breaking news January 7, 2020.