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SEC’s 2018 Examination Priorities List Compliance Issues to Avoid for Financial Advisory Firms

The SEC’s Office of Compliance Inspections and Examination (“OCIE”) published its 2018 Examination Priorities, identifying areas where it has determined there is increased risk of potential harm to investors. OCIE will target these areas during its examination of registered investment advisers this year. 

Michael P. Shaw recently joined Niles, Barton & Wilmer, LLP’s Corporate Department where, in addition to advising businesses on general corporate matters, he is focused on expanding his securities practice to serve the legal, compliance and enforcement defense needs of registered investment advisers, broker-dealers, hedge funds, and private equity firms (collectively, “Financial Advisory Firms” or “Firms”).  Mr. Shaw offers an overview of the potential regulatory impact of OCIE’s examination priorities on current and prospective clients.

Financial Advisory Firms are regulated by the SEC, one or more state regulators, or any number of private, self-regulatory entities such as the Financial Industry Regulatory Authority (“FINRA”). Following a recent analysis of its examination of Financial Advisory Firms, the SEC determined that its top three most frequently cited violations of federal securities laws and regulations were for insufficient compliance policies and procedures, failure to disclose or misrepresentation of the fees charged to clients, and incomplete/untimely regulatory filings. 

Based on Mr. Shaw’s experience providing legal advice to clients nationally on compliance matters, the common compliance failures identified by the SEC are attributable to:

• Firms purchasing “off-the-shelf” template policies and procedures, and not taking the time to tailor them to reflect the Firm’s actual investment strategies, types of clients, fees, and other aspects of the Firm’s business. 
• Firms not complying with the SEC requirement to conduct an annual review of the Firm’s policies and procedures, or conducting an annual review but not correcting problems identified during the annual review. 
• Firms having policies and procedures that, while they accurately reflect the Firm’s business, are not followed, most often with respect to marketing, expenses and employee behavior.

In addition to continuing to its focus on these common compliance failures, the SEC has announced that in 2018 it will devote particular attention to the following additional areas of concern:

Risks to retail investors brought on by the ever-widening choices where investors can invest their savings. Here, the SEC is paying close attention to the emergence of electronic investment advice, i.e., Robo-advisors, offered by many Firms.

Risks to retirement accounts of public employees, and the conflicts of interest sometimes associated with these accounts, such as pay-to-play, undisclosed gifts, and entertainment practices. Related to this initiative is the SEC’s focus on senior investors, as history has shown that senior investors are particularly susceptible to manipulation and fraud.  In an effort to prevent such abuses, the SEC will examine Firms’ services directed at seniors and assess the processes Firms have implemented to prevent the financial exploitation of seniors. 

Market-wide risks. The SEC has a mandate to not only protect investors but to protect the fair, orderly and efficient operation of the markets.   Here, the SEC will focus in 2018, as it did in 2017, on a review of a Firm’s policies and procedures to prevent a cyber-attack, and if the Firm is the victim of a cyber-attack, how the Firm would respond.

Past compliance failures of Firms, and the SEC’s stated examination priorities presents an opportunity for Niles, Barton & Wilmer, LLP to engage with clients proactively to avoid omissions in Firm compliance programs.  We can advise Firms how to avoid violations of federal and state securities laws by conducting a top to bottom review of the Firm’s compliance program to ensure compliance.  Should a Firm become the subject of an investigation by the SEC or a state securities regulator, we have the experience to vigorously defend the Firm before the regulator and to advocate for an outcome that is in the best interest of our client.

For additional information about how the 2018 SEC Examination Priorities may impact your firm operations, please contact Michael P. Shaw.

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