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SEC Releases 2019 Regulatory and Examination Priorities

On December 20, 2018, the Office of Compliance Inspections and Examinations ("OCIE") of the United States Securities and Exchange Commission ("SEC") published its 2019 Examination Priorities. OCIE oversees investment advisers, mutual funds and exchange-traded funds, broker-dealers, transfer agents, clearing agencies, national securities exchanges, municipal advisors, the Financial Industry Regulatory Authority ("FINRA"), the Municipal Securities Rulemaking Board ("MSRB"), the Securities Investor Protection Corporation ("SIPC") and the Public Company Accounting Oversight Board ("PCAOB"). OCIE measures performance against the backdrop of four pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.

In 2019, OCIE will prioritize the examination of certain practices, products, and services that it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets, which include perennial risk areas and developing products. OCIE's 2019 examination priorities are focused on:

1. Retail investors, including seniors and those saving for retirement, which includes focusing on:

  • Fees and expenses – including proper disclosure of fees and costs of investments and ensuring that fees are assessed in accordance with client agreements;
  • Conflicts of interest – including the use of affiliated service providers and products, securities-backed non-purpose loans and lines of credit, and borrowing funds from clients;
  • Senior investors and retirement accounts – including services and products offered to senior investors and those saving for retirement;
  • Portfolio management and trading – including execution practices, fair allocation of investment opportunities among clients, consistency of investments with client objectives, disclosure of critical information to clients, and compliance with legal restrictions;
  • Newly registered investment advisers and investment advisers who have never been examined;
  • Mutual funds and exchange-traded funds;
  • Municipal advisors;
  • Broker-dealers that hold customer assets; and
  • Broker-dealers involved in selling microcap securities;

2. Compliance and risk in registrants responsible for critical market infrastructure, which includes focusing on clearing agencies, entities subject to Regulation Systems Compliance and Integrity ("Regulation SCI") (self-regulatory organizations, including stock and options exchanges, registered clearing agencies, FINRA, the MSRB, alternative trading systems, disseminators of consolidated market data and certain exempt clearing agencies), transfer agents, and national securities exchanges;

3. Select areas and programs of FINRA and the MSRB, which includes focusing on FINRA's operations and regulatory programs and the quality of its examinations of registered broker-dealers, and evaluating the effectiveness of the MSRB's policies, procedures and controls;

4. Digital Assets, such as cryptocurrencies, coins and tokens, which includes focusing on:

  • Continuing to monitor the offer and sale, trading and management of digital assets, and where the products are securities, examining for regulatory compliance;
  • Identifying market participants offering, selling, trading and managing these products or considering or actively seeking to offer these products and assessing the extent of their activities; and
  • For firms actively engaged in the digital asset market, conducting examinations focused on, among other things, portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.

5. Cybersecurity, which includes focusing on proper configuration of network storage devices, information security governance generally, and policies and procedures related to retail trading information security, and specifically with respect to investment advisers, will emphasize cybersecurity practices at investment advisers with multiple branch offices, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response; and

6.Anti-Money Laundering ("AML"), which includes focusing on whether broker-dealers are meeting their suspicious activity report ("SAR") filing obligations, implementing elements of their AML program, and robustly conducting independent tests of their AML program.

These priorities represent key areas where OCIE intends to focus its resources, but are not exhaustive and will not be the only issues OCIE addresses in its examinations, risk alerts, and investor and industry outreach. While the priorities drive many of OCIE's examinations, the scope of any examination is determined through a risk-based approach that includes analysis of the registrant's operations, products offered, and other factors. This risk-based approach often results in examinations that address key aspects of the SEC's regulatory oversight, such as the disclosure of services, fees, expenses, conflicts of interest for investment advisers, and trading and execution quality issues for broker-dealers.

OCIE's risk-based approach, both in selecting registered entities to examine and determining the scope of risk areas to examine, remains flexible in order to cover emerging and exigent risks to investors and the marketplace as they arise. OCIE is continually evaluating changes in market conditions, industry practices, and investor preferences to assess risks to both investors and the markets.

If you would like to read more about the OCIE's 2019 Examination Priorities, please click on the link below:

https://www.sec.gov/files/OCIE%202019%20Priorities.pdf

For more information, please contact:

Joe Tagliaferro III

jat@ckrlaw.com

Anthony Caldwell

acaldwell@ckrlaw.com

Barrett S. DiPaolo

bdipaolo@ckrlaw.com