SEC Signals Investigators’ Priorities

The National Examination Program (the “NEP”) has published its examination priorities of areas perceived to have heightened risk in order to support the SEC’s market-wide regulation. While the examination priorities do not represent SEC regulations, they are reflective of SEC staff investigators’ priorities for the upcoming year based on registrants’ communications with regulators, market data, and other general information. The priorities focus on areas perceived to have heightened risk.

The NEP initially looked at market-wide priorities including fraud prevention, conflicts of interest, corporate governance and technology-related issues. On the technology front, the NEP emphasized the need to ensure that new technology helps maintain “transparent, stable markets” and “do[es] not give inappropriate advantages to some market participants over others.” The NEP indicated that it “may conduct examinations on governance and supervision of information technology systems for topics such as operational capability, market access, and information security, including risks of system outages, and data integrity compromises that may adversely affect investor confidence.”

The priorities then addressed four distinct program areas. First, the Investment Adviser-Investment Company (IA-IC) Exam Program will focus on the safety of assets, marketing and performance, conflicts of interest related to compensation arrangements and allocation of investment opportunities, and fund governance. The concentration on fund governance is “a key component in assessing risk during any investment examination” and will ensure that advisers are making accurate disclosures to fund boards and directors with their reviews “in connection with contract approvals, oversight of service providers, valuation of fund assets, and assessment of expenses or viability.” The policy topics for the IA-IC program will include money market funds, compliance with exemptive orders, and compliance with the pay to play rule.

The Broker-Deal (B-D) Exam Program takes into account the risks and activities associated with individual broker-dealers (or firms), including sales practices and fraud, trading risks, weak anti-money laundering programs, and capital risks. With capital risks, the program “intends to conduct exams of clearing firms with multiple correspondents engaging in high frequency/high volume trading” and will focus on “clearing firms internal controls for managing intraday liquidity risk, as well as assessing intraday net capital and other financial risks.” The B-D program will center on the policy topics of the JOBS act and other regulatory requirements.

The Market Oversight Exam Program, which examines SROs and other entities to verify their compliance with federal securities laws and rules, will focus on the risk assessment examinations of exchanges, FINRA oversight, and systems compliance, among other aspects. In its review of systems compliance, the Market Oversight Exam Program will “continue to review and examine systems outages, systems errors, and system integrity through SRO self-reporting” and also will “coordinate the interdisciplinary Market Event Response Team, which examines market events in real time.”

Lastly, the Clearance and Settlement Exam Program consists of two exam programs; the first is the Transfer Agent Program, which examines SEC and bank-registered transfer agents. This program will focus on the ongoing risks of transfer agents’ core activities. The Transfer Agent’s “size, volumes processed by, and experience… may indicate heightened risk. For example, a transfer agent with a staff of only one or two may have an enhanced risk profile caused by key person risk.” The risk potential may also increase as “transfer agents service more issuers or handle increased numbers of transfers.”