New Year, New Priorities for the SEC’s Office of Compliance Inspections and Examinations

On January 11, 2016, the SEC announced its Office of Compliance Inspections and Examinations (OCIE) priorities for the year .   The announcement included several new areas of focus, including liquidity controls, public pension advisers, exchange-traded funds (ETFs), product promotion, and variable annuities.   Hedge fund and mutual fund managers, private equity firms, and broker-dealers – in particular those that deal with retirement investments – would be wise to take note of these new areas of interest.  As in past years, enforcement actions in these areas are likely to follow.

At the top of the list: a continued emphasis on protecting retail investors, including continuing several 2015 initiatives designed to assess risks to retail investors seeking information, advice, products, and services in the retirement-planning space.  Indeed, the OCIE specifically identified the 2015 Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative, which focuses on SEC-registered investment advisers and broker-dealers and the services they offer to retail investors who invest in retirement vehicles, as a program that would continue into the new year.

The detailed letter also identified Exchange-Traded Funds (ETFs) as products that will face increased scrutiny in the coming year.  ETFs have become increasingly popular alternatives to mutual funds, holding more than $2.13 trillion in assets under management at the end of 2015.  Several ETFs were part of the “flash crash” on August 24, 2015 and some SEC Commissioners have previously identified the ETF industry as one in need of reform.

In addition to the focus on ETFs, the SEC is contemplating new initiatives intended to assess market-wide risks by evaluating broker-dealers’ and investment advisers’ liquidity risks management practices, and firms’ compliance with SEC Regulation Systems Compliance and Integrity (SCI), which seeks to strengthen U.S. securities markets’ technology infrastructure.  SCI entities will be evaluated on “whether they have established, maintained, and enforced written policies and procedures reasonably designed to ensure the capacity, integrity, resiliency, availability, and security of their SCI systems.”

SEC Chair Mary Jo White said the new priorities reflect areas that “are extremely important to investors and financial institutions across the spectrum.”  The OCIE Director, Marc Wyatt, also observed that the public announcement of OCIE enforcement initiatives is designed to help SEC registrants proactively improve their own internal compliance surrounding the identified topics.