Office of Compliance Inspections and Examinations

SEC OCIE Examinations Announces 2018 Examination Priorities

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On February 7, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its 2018 examination priorities. OCIE publishes its exam priorities annually “to improve compliance, prevent fraud, monitor risk, and inform policy.”

According to the Press Release publishing the examination priorities, “of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.”  Orrick believes that the focus on “developments in cryptocurrency, initial coin offerings, and secondary trading market” is significant. READ MORE →

SEC Office of Compliance Inspections and Examinations Issues Risk Alert on Whistleblower Rule Compliance

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On October 24, Staff in the Office of Compliance Inspections and Examinations (the “Staff”) issued a National Exam Program Risk Alert announcing that it is examining registered investment advisers and registered broker-dealers compliance with key whistleblower provisions arising out of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Commission recently has brought several enforcement actions charging violations of Rule 21F-17 of the Commission’s whistleblower regulations.

 

The Staff now is routinely reviewing, among other things, compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities law violations may raise concerns under Rule 21F-17.
Section 21F of the Securities Exchange Act of 1934 was added by the Dodd-Frank Act.  To implement Section 21F, among other things, the Commission adopted Rule 21F-173 thereunder which provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

 

The Staff highlighted that “Recent enforcement actions have identified certain provisions of confidentiality or other agreements required by employers as contributing to violations of Rule 21F-17 because they contained language that, by itself or under the circumstances in which the agreements were used, impeded employees and former employees from communicating with the Commission concerning possible securities law violations. This potential chilling effect can be especially pronounced when such documents (e.g., severance agreements) provide that an employee may forfeit all benefits if he or she violates any terms of the agreement.” Alert.

SEC Announces 2016 Examination Priorities

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On January 11, the SEC announced its Office of Compliance Inspections and Examinations’ (OCIE) 2016 priorities.  New areas of focus include liquidity controls, public pension advisers, product promotion, and two popular investment products – exchange-traded funds and variable annuities.  The priorities also reflect a continuing focus on protecting investors in ongoing risk areas such as cybersecurity, microcap fraud, fee selection, and reverse churning.

The 2016 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges.  Areas of examination include:

  • Retail Investors –  OCIE will continue several 2015 initiatives to assess risks to retail investors seeking information, advice, products, and services to help them plan for and live in retirement. It also will undertake examinations to review exchange-traded funds (ETFs) and ETF trading practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds.
  • Market-Wide Risks –  OCIE will continue its focus on cybersecurity controls at broker-dealers and investment advisers.  New initiatives for 2016 include an evaluation of broker-dealers’ and investment advisers’ liquidity risk management practices, and firms’ compliance with the SEC’s Regulation SCI, designed to strengthen the technology infrastructure of the U.S. securities markets.
  • Data Analytics – OCIE’s enhanced ability to analyze large amounts of data will assist examiners’ ongoing initiatives to assess anti-money laundering compliance, detect microcap fraud, and review for excessive trading.  Data analytics also will help examinations focused on promotion of new, complex, and high-risk products.

The published priorities for 2016 are not exhaustive and may be adjusted in light of market conditions, industry developments and ongoing risk assessment activities.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) Publishes Risk Alert On Addressing Cybersecurity Issues for Broker-Dealers and Investment Advisers

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On February 3, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a Risk Alert that contains observations based on examinations of more than 100 broker-dealers and investment advisers.  The examinations focused on how these firms:

  • Identify cybersecurity risks
  • Establish cybersecurity policies, procedures, and oversight processes
  • Protect their networks and information
  • Identify and address risks associated with remote access to client information, funds transfer requests, and third-party vendors
  • Detect unauthorized activity

A second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy (OIEA), provides core tips to help investors safeguard their online investment accounts, including:

  • Pick a “strong” password
  • Use two-step verification
  • Exercise caution when using public networks and wireless connections

Risk Alert.  Investor Bulletin.  Press Release.

Priorities Focus on Protecting Retail Investors, Assessing Market-Wide Risks and Using Data Analytics

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On January 13, the Securities and Exchange Commission announced its Office of Compliance Inspections and Examinations’ (OCIE) priorities for 2015 which focus on three areas: protecting retail investors, especially those saving for or in retirement; assessing market-wide risks; and using data analytics to identify signs of potential illegal activity.

The 2015 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges. Of particular interest are the following areas of examination:

Retail Investors – Retail investors are being offered products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products. Additionally, financial services firms are offering a broad array of information, advice, products, and services to help retail investors plan for and live in retirement.

Market-Wide Risks – OCIE will examine for structural risks and trends that involve multiple firms or entire industries, including: monitoring large broker-dealers and asset managers in coordination with the SEC’s policy divisions, conducting annual examinations of clearing agencies as required by the Dodd-Frank Act, assessing cybersecurity controls across a range of industry participants, and examining broker-dealers’ compliance with best execution duties in routing equity order flow.

Data Analytics – OCIE will use its enhanced analytic capabilities to focus on registrants and registered representatives that appear to be potentially engaged in illegal activity.  Press Release.  Full Report.

SEC Issues a Risk Alert on Investment Advisers’ Business Continuity and Disaster Recovery Planning

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On August 27, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert regarding business continuity and disaster recovery planning for investment advisers.  The alert was prompted by a review of responses to Hurricane Sandy, which caused widespread damage to Northeastern states and closed U.S. equity and options markets for two days in October 2012.  Risk Alert.