SEC Examination Priorities for 2016


SEC Examination Priorities for 2016


Earlier this week, the SEC issued its Office of Compliance Inspections and Examinations National Exam Program Examination Priorities for 2016.  Like FINRA, the SEC is repeating areas of concern from prior years. Its focus for 2016 will be on practices and productions which it “perceives to present potentially heightened risk to investors and/or the integrity of the U. S. capital markets.  The areas of concern are:

  1. Retail investors including retirement investing
  2. Market-wide risks
  3. Surveillance and analysis of data to examine and identify illegal activities

These priorities are the same from last year.

Protecting Retail Investors and Investors Saving for Retirement

The plethora of complex investment products puts retail investing in the spotlight for the SEC. Investors are more dependent upon their own savings for a secured retirement.  The SEC will focus on this area to assess risks to retail investors in light of this trend.

Continuing an initiative started in 2015, SEC will examine registered Investment Advisers and Broker-Dealers programs and practices on retirement investing, including reviews for suitability, conflicts of interest, supervision, compliance controls, marketing and disclosure practices.

It will review Exchange Traded Funds unit creation and redemption processes as well as their compliance with registration requirements or registration exemptions. Sales strategies, trading practices, disclosure, concentration, primary and secondary trading risks and suitability will be a focus.

Data analytics will be used to identify investment advisers and registered representatives who may appear to be engaging in illegal activities.

Fee-based investing will be reviewed focusing on the investment adviser’s and broker-dealer’s programs related to the best interest of the retail investor, including suitability of the arrangements, fees charged in light of services provided and disclosure of fee based practices.

Suitability, disclosure and supervision of variable annuities remains an area of concern. Pay-to-play, conflicts of interest and other risks related to those who give advice to municipalities and other government entities that run public pension programs.

Assessing Market-Wide Risks

Citing its obligation to maintain fair, orderly and efficient markets, SEC will examine the industry for structural risks and trends that adversely impact the U. S. capital markets.

It plans to complete the initiative started in 2015 related to the examination of broker-dealers and investment advisers Cybersecurity practices, compliance and controls.

Recently adopted Regulation SCI will be a focus for examinations to insure those SCI entities have established, invoked and enforced their policies and procedures. Additional scrutiny will be on areas of resiliency, primary and back-up data centers, geographical diversity and security as it relates to the entity and its business models.

Systemically important entities such as clearing agencies will be reviewed through a risk-based approach with the assistance from the Division of Trading and Markets and other regulators.

Data Analytics

Using data and intelligence from its own examinations and other regulatory sources, the SEC will use the data to identify entities with elevated risk profiles.  The areas of focus are:

  1. Investment advisory firms who employ individuals with a history of misconduct or have been barred from a broker-dealer;
  2. Firms that have not filed, or file late Suspicious Activity Reports (SARS) for assessment of AML compliance programs with a focus on robust programs and adaptability of those programs to new and evolving terrorist financing risks;
  3. Operations of broker-dealers and transfer agents related to microcap securities fraud, registration compliance and market manipulation;
  4. Suitability, promotion, sales practices and fiduciary obligations related to new, complex and high risk products.

SEC states that data analytics capabilities will be an ongoing initiative with the Division of Economic and Risk Analysis, and will continue to be enhanced.

Other Initiatives

Examination resources will be allocated to certain other SEC priorities.  It plans to assess compliance with the new SEC and MSRB rules related to municipal advisors with industry outreach and education programs. Due diligence, disclosure and suitability in the area of private placements will be a focus. It will exam private fund advisers and never-before examined investment advisers and investment adviser companies. Finally, transfer agent activities will be reviewed.


The SEC indicates that the areas of concern covered in its letter are not exhaustive. Resources will allocated to emerging issues and other matters during 2016.