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Asset Managers: Are You Ready for Your Exam? Steps You Should Take Now

Posted by Joel S. Telpner on Mar 17, 2017 10:49:35 AM
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Last week we told you about the five biggest pet peeves of the SEC’s Office of Compliance Inspections and Examinations (OCIE) when examining investment advisers (see "The Top Five ‘Gotcha’ Deficiencies Plaguing Asset Managers and How to Avoid Them"). This week, we want to get you ready for your exam.  Here are the OCIE’s examination priorities for 2017 for registered investment advisers and affiliated broker-dealers.1 This year, when conducting examinations of registered investment advisers, the OCIE’s focus will revolve around three themes:

  • Matters That are Important to Retail Investors
  • Risks Faced by Elderly and Retiring Investors
  • Market-Wide Risk Assessment

Retail Investor Issues

  • Electronic Investment Advice: Automated and digital platforms that can be used by customers to access investment advice make the OCIE uncomfortable. Advisers should assure that their compliance programs with respect to marketing and making investment recommendations, conflicts disclosure and data protection are all up to date. Expect particular focus on "robo-adviser" activities.
  • Wrap Fee Programs: If you charge customers a single bundled fee for advisory and brokerage services, take time now to make sure you are doing so in a manner consistent with the terms of your customer agreements and your general fiduciary duties. Again, conflicts disclosures are important.
  • ETFs: The level of regulatory nervousness surrounding ETFs continues to grow. If you offer ETFs, it would be wise to review your sales practices, particularly with respect to suitability recommendations, and, repeating a common theme, disclosures.
  • Problem Children: Hopefully you don’t have a large number of employees with a history of prior misconduct. If you do, it is critical to make sure you have robust compliance procedures and controls to minimize the likelihood of repeat offenders.
  • Multi-Branch Advisers: If you have multiple locations thorough which you provide advisory services, be sure your compliance program is designed to effectively operate, as necessary, at the branch level.
  • Share Class Recommendations: The OCIE believes that, particularly in the case of mutual funds, conflicts of interest are impacting adviser recommendations as a result of favoring share classes with higher loads or distribution fees.
  • Newbies: If you’ve never before been examined by the OCIE, congratulations. However, the OCIE is putting you on notice that you should expect to receive an aggressive, risk-based examination in 2017.

Elderly and Retiree Investor Issues

  • ReTIRE: If you’re not already, it is important that you familiarize yourself with the OCIE’s ReTIRE initiative (See, OCIE Risk Alert, "Retirement-Targeted Industry Reviews and Examinations Initiative," June 22, 2015). You would be wise to review your policies relating to products offered with respect to retirement accounts, particularly with respect to target date funds and variable insurance products.
  • Public Pension Plans: If you are fortunate enough to provide investment advice to state, municipal or other government pension plans, you already know that you are subject to heightened scrutiny. However, the OCIE intends to turn up the heat even more this year, particularly with respect to assessing how advisers are fulfilling their fiduciary duties and managing conflicts of interest. Don’t forget to carefully manage your policies relating to gifts and entertainment practices.
  • Senior Clients: It may be paternalistic, but the OCIE intends to carefully scrutinize how advisers interact with elderly clients to be sure that inappropriate exploitation is not occurring.

Market-Wide Risk Issues

  • Money Market Funds: In October 2016, a number of amendments to the rules governing money market funds became effective. This will be the first year the OCIE will aggressively examine compliance with these new rules. Compliance policies and procedures regarding stress testing and periodic reporting will warrant particular focus.
  • Payment Order Flow: It should not come as a surprise that the OCIE will continue to scrutinize the extent to which broker-dealers and market makers are complying with best execution requirements.
  • Cybersecurity: This is another area that not surprisingly will receive enhanced examination. The OCIE will likely focus on how well procedures and controls are being implemented.
  • AML: Anti-money laundering is another “hot button” for the OCIE.  Broker-dealers must assure that their AML programs are tailored to the specific risks faced by the broker-dealer.


1 Private fund advisers, you aren’t off the hook.  The OCIE has noted that they will continue to examine private fund advisers as well with respect to conflicts of interests and disclosure of such conflicts.


In order to assure that the OCIE is successful in achieving its examination priorities, the OCIE intends to utilize data analytics in order to identify registrants that may have elevated risk profiles.  What this means is not clear but being an outlier with respect to how you prepare, implement and monitor your compliance policies and procedures is not necessarily a good thing.  The OCIE also intends to step up oversight of FINRA. The OCIE intends to pressure FINRA to increase the quality of their broker-dealer examinations.

If you would like help staying outside of the OCIE’s penalty box, please feel free to contact Joel Telpner in New York ([email protected], 212.660.3015) or John Hunt in Boston ([email protected], 617.338.2961).

Topics: OCIE, investment management, retail investors, elderly and retiring investors

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