“Not Recently Examined” Firms a Focus for SEC in 2019

On December 20, 2018, the Office of Compliance Inspections and Examinations (“OCIE”) released its 2019 Examination Priorities Letter (the “Letter”). The release came on the heels of a flurry of last minute activity by the SEC before both the holiday season and the impending government shutdown. OCIE was late to issue its 2018 exam priorities letter, which was not released until February 2018. The earlier release this time is indicative of the criticism over the long wait for the 2018 Letter. The 2019 Letter was written in almost an identical style as in 2018 and includes many of the same topics for the asset management industry. As expected, 2019 exams will continue to focus on the retail side of the investment management space.

Highlights of OCIE’s 2019 focus areas for registered investment advisers are as follows:

  • Fees and Expenses – adequate disclosure of fees, types of expenses and how they are disclosed to clients; wrap fee accounts will continue to come under scrutiny for the various fees that can be applied to these accounts
  • Conflicts of Interest – use of affiliated service providers and products, lines of credit and securities-backed non-purpose loans (use of holdings as collateral), and borrowing from client accounts will be under scrutiny
  • Senior Investors – sales practice issues for broker-dealers and supervision of compliance programs at advisers that market to seniors; insurance company products were not named, but could very well fall under this topic
  • Portfolio Management and Trading – best execution, trade allocations, suitability of investment objectives, client disclosures, account restriction compliance, account level drift, and risk monitoring are all transaction level focus areas; robo-advisers will most likely fall into this category of exams
  • Never-Before or Not Recently Examined Investment Advisers – the change to this one from previous years is the “Not Recently” addition; those firms that have not been examined within the last 5 years should be on notice for a 2019 exam
  • Mutual Funds and ETFs – board oversight, use of custom indices, ETFs with little secondary trading, underperforming funds in relation to peers, side by side management of both private funds and RICs continue to be evaluated by examiners, as stated in previous NEP Risk Alerts
  • Digital Assets – advisers that participate in the digital asset markets will be examined if the products involved are determined to be securities; firms in this space should count on a visit in 2019
  • Cybersecurity – this area continues to be on the radar with 2019 exams focused on proper configuration of network storage devices, IT governance, retail trading security; advisers with multiple locations/branches or recent mergers are high on the list

Although the focus areas are similar to 2018, the Staff is taking deeper dives in certain areas where they have already uncovered weaknesses at firms. Also, with the reality of the current government shutdown and it potentially continuing into 2019, the SEC may shift towards conducting more “phone exams” (off-site exams). This will reduce spending and avoid having examiners out in the field if future shutdowns are announced.

View the OCIE “2019 Examination Priorities”