On January 7, 2020, the Office of Compliance Inspections and Examinations (“OCIE”) released its 2020 Examination Priorities Report (the “Report”). The 2020 Report was released later than expected after the previous year’s early release in December 2018 (for the 2019 Report). It appears that the SEC is still playing “catch up” on its 2019 agenda, which is likely attributed to the Federal government shut down in early 2019. Just 15 percent of registered investment advisers were examined in 2019 compared to 17 percent in 2018. However, the SEC’s expanded focus on mutual fund activity led to a 12 percent increase of investment company examinations in 2019.
Overall, the 2020 Report is very similar to the 2019 Report. The SEC’s limited resources plus furloughed staff and reduction in work hours caused by the government shut down are the likely reasons for the continuation of prior focus areas. OCIE literally lost two months of its 2019 fiscal year and is still working on the 2019 agenda.
So, what do you need to be aware of in 2020? If your firm is examined in 2020, the SEC could be looking for information (data gathering) or have concerns regarding:
- Misconduct in relation to sales practices or conflicts of interest regarding retirement accounts for seniors
- Mutual fund incentive programs that are intended to increase shelf space for funds
- How firms have implemented and prepared for Reg BI
- Issues and risks surrounding data security (cybersecurity)
- Private fund managers that have side-by-side management with SMAs or registered funds
- Robo-advisers with weak compliance programs
- Firms offering and managing digital assets for retail customers
- Advisers that rely heavily upon third-party asset managers
- Managers operating within the ESG space
- Advisers that utilize a third-party “turn-key” platform provider for mutual funds they manage
- AML programs that provide little due diligence or testing that is inadequate
- Transfer agents that serve as paying agents or utilize blockchain technology or work with microcap, crowdfund, or digital asset providers
Of course, never before examined or not recently examined firms are again on the list for 2020. So, if it’s been over 5 years since your last exam, you should be prepared for “the call.”