Locke Lord QuickStudy: SEC Opens Registration for National Compliance Outreach Seminar Following the Release of the SEC Office of Compliance Inspections and Examinations National Exam Program Examination Priorities for 2018

FUNDamentals™ Series
Locke Lord LLP
February 13, 2018

On Tuesday, February 13, 2018 the Securities and Exchange Commission (“SEC”) announced the opening of registration for its compliance outreach program’s national seminar for investment companies and investment advisers, which is to be held on April 12, 2018 at the SEC’s Washington D.C. headquarters. The compliance outreach program is jointly sponsored by the Office of Compliance Inspections and Examinations (the “OCIE”), the Division of Investment, and the Asset Management Unit of the Division of Enforcement. The agenda for this program includes discussion of the themes identified in the OCIE’s 2018 National Exam Program Examination Priorities release. In particular, the program will include focused sessions on fees and expenses impacting retail investors and cybersecurity.

The OCIE released its 2018 National Exam Program Examination Priorities on February 7, 2018 identifying the areas it will prioritize when conducting examinations this year. This year examiners will focus in particular on protecting retail investors by conducting examinations that look into instances where retail investors have been harmed, and assessing whether financial services professionals met their legal obligations in those instances. There will also be an increased focus on rapidly developing technologies and the new risks they pose to investors.

The OCIE has organized its priorities around five broad themes: (i) matters of importance to retail investors, including seniors and those saving for retirement; (ii) compliance and risks in critical market infrastructure; (iii) Financial Industry Regulatory Authority (“FINRA”) and Municipal Securities Rulemaking Board (“MSRB”); (iv) cybersecurity; and (v) anti-money laundering programs. While the items covered by these five themes are not exhaustive, they provide guidance as to what the OCIE will be focusing on this year. Each of these themes is summarized below:

Matters of importance to retail investors, including seniors and those saving for retirement

Clearly, the Department of Labor Fiduciary Rule has had an impact on the Securities and Exchange Commission (“SEC”). In addition to working on their own fiduciary rule, the SEC has focused the OCIE on issues relating to retirement investors.

The OCIE has indicated that it will focus on whether proper disclosure has been made surrounding the costs of investing. This includes not only the management fee paid directly by the investor to her adviser, but also requires the disclosure of any conflicts of interest that might provide incentives for the adviser to recommend certain products or services to investors.  Examiners will review the fees that are charged to advisory accounts, and in particular will assess whether assets are valued in accordance with the underlying investor agreements, disclosures made to investors, and the adviser’s policies and procedures. In particular, the OCIE has noted that compensating advisory personnel for recommending that investors invest in particular shares of mutual funds (which may have high sales loads or distribution fees) or changing the fee structure from a commission based model to a percentage of assets under management model may create increased risks that investors will pay inadequately disclosed fees, expenses, or other charges.

The OCIE will continue its focus on advisers that offer investment advice primarily through automated or digital platforms, including “robo-advisers,” and advisers participating in wrap fee programs. With regard to advisers offering electronic investment advice, the OCIE will pay particular attention to how their compliance programs address oversight of computer program algorithms which generate recommendations, marketing materials, investor data protection, and disclosure of relevant conflicts of interest. The OCIE will also review whether advisers participating in wrap fee programs are making proper disclosure regarding conflicts of interest and whether the investment advisers are obtaining best execution and properly disclosing costs associated with trade execution.

Lastly, the OCIE acknowledged the relatively high percentage of investment advisers that are either newly registered or have not been examined in some time. It therefore will continue to conduct exams using risk based assessments to target those advisers with an elevated risk profile. Included in this assessment will be a focus on reaching advisers that offer services and products to retirement accounts, including 403(b) and 457 plans, and advisers engaged in municipal advisory activities.

Compliance and risks in critical market infrastructure

The OCIE will continue its practice of conducting annual examinations of clearing agencies designated by the Financial Stability Oversight Council as systemically important. It will further continue to monitor entities subject to Regulation Systems Compliance and Integrity which was adopted to strengthen the technology infrastructure of the U.S. securities markets. 

FINRA and the MSRB

The OCIE’s examinations of FINRA will focus on the quality of FINRA’s examination of broker-dealers and municipal advisors that are duly registered as broker-dealers. The OCIE’s examination of the MSRB will focus on the effectiveness of its internal policies, procedures, and controls.


The OCIE will work with firms to identify and manage cybersecurity risks and to encourage market participants to manage these risks as well. Cybersecurity will continue to be a focus of examinations, especially with regards to governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response. This focus will build on the OCIE’s guidance previously provided regarding cybersecurity issues. That particular guidance can be found here

Anti-Money Laundering Programs

The OCIE examinations will have a focus on determining whether advisers have implemented appropriate anti-money laundering (“AML”) programs. These reviews will cover, among other things, whether the adviser conducts sufficient customer due diligence and whether the AML program includes reasonable steps to understand the nature of customer relationships, and to properly address any risks. Examinations will also assess whether advisers are timely filing complete and accurate Suspicious Activity Reports if required. The examination will also consider whether advisers are conducting robust and regular independent tests of their AML programs.

The full text of the SEC Release announcing the opening of registration for the National Compliance Outreach Seminar can be found here.

The full text of the OCIE 2018 Exam Priorities can be found here.

Although these areas are designated by the OCIE as particularly important areas of focus, examiners may select additional items to review during the course of the examination and as the year progresses.

As we have in the past, we will continue to monitor these issues and will provide future client updates. This QuickStudy is for guidance only and is not intended to be a substitute for specific legal advice. If you would like more information on the matters discussed here, please contact the authors.