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If your firm has been in business for at least five years, odds are you have already experienced a SEC examination; if you haven’t, don’t breathe a sigh of relief just yet—it’s only a matter of time before they contact you to learn what policies, procedures, compliance oversights and risk assessments you have in place.
Since the examination is inevitable, you want to get your firm as compliant as possible in a general sense, but you also want to know, specifically, what the SEC is prioritizing on any given year. Some of our Beacon leaders recently attended a SEC compliance outreach program, and during this workshop, we learned the three major priorities the SEC and its “eyes and ears,” the Office of Compliance Inspections and Examinations (OCIE) have in place, for 2017. Those priorities are organized around three thematic areas: retail investors, elderly and retiring investors and market-wide risks. Let’s take a look at each category in more detail:
1. Retail investors
With so much information, so many products and so many types of advice available to retail investors, the SEC has created initiatives to assess potential risks in key areas of concern, including: electronic investment advice, wrap fee programs and multi-branch advisors.
Electronic investment advice: We learned that robo-advisers will face increased attention with examinations focusing on compliance, marketing, data protection and the nature of the algorithms that generate recommendations.
- Wrap fee programs. The bundled nature of most wrap programs cuts down on transaction costs to the end investor—with those costs being shouldered by the investment firm instead. As a result, the SEC will be mindful of firms who offer wrap programs that pay per transaction, reviewing for evidence of potential conflicts of interest, such as generating fewer trades than their non-wrap accounts with the purpose of avoiding paying the wrap fee transaction costs.
- Multi-branch advisors. For firms with multiple offices, the SEC will determine if you’re maintaining the same rigorous oversight at your branch offices as you are back at headquarters.
2. Senior Investors and Retirement Investments. With the millions of baby boomers hitting retirement age as well as the swelling number of aging Americans, the SEC has zoned in on protecting those investors and their retirement income. In this category, the SEC lumps together various forms of retirement accounts, pension plans and senior investors.
- Retirement accounts. Examinations will focus on advisor recommendations as well as the sales and management of target date funds.
- Pension plans. Pay-to-play and undisclosed gifts top the ledger for pension transactions.
- Senior investors. The SEC says they will evaluate how firms manage their senior investors, including firm’s ability to identify the financial exploitation of elderly clients.
3. Assessing Market-wide Risks
In 2017, the SEC will take a close look at how you are executing trades for your clients. Let’s say you have a large block order. Whether it’s a stock, an ETF or a mutual fund, the SEC wants to know the steps you’re going through to ensure you have policies and procedures in place to show you’re delivering the best execution possible. For instance, are you working the trades through an institutional trade desk and touching various market makers to see which one is offering the best bid, or are you simply throwing them all out at the market?
Final Thoughts
In short, what you need to know with SEC examinations is this: It’s not a matter of if you’re going to be examined, but when. At Beacon, we are committed to helping you stay compliant and developing the processes necessary to meet those goals. As an example, note that an amended version of Form ADV will be required to be used effective Oct. 1 this year. If you need assistance in answering those questions or how you can prepare your firm and advisors for SEC examinations, contact your wholesaler today!
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