Compliance FAQ: SEC Announces RIA Examination Priorities for 2016

This month, Lexington Compliance looks at the SEC’s examination priorities for RIAs in 2016.

On Jan. 11, 2016, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) released its annual exam priorities for the 2016 calendar year. The OCIE is the SEC division which conducts examinations of registered investment advisor (RIA) firms. This annual list can help investment advisors be better prepared when the time comes for their firm to be examined. In general, the list of audit priorities for 2016 closely mirrors the agency's 2015 registered investment advisor (RIA) examination priorities. Similar to the prior year, the OCIE is focused on three categories: protecting retail investors and investors saving for retirement, assessing market-wide risks, and using data analytics to identify signals of potential illegal activity.

The OCIE states that within these continued areas of emphasis, the agency will be particularly focused on:

  • Branch Offices: This is a relatively new area of focus which was also noted by the SEC in the 2015 list of examination priorities. The agency notes it will be particularly focused on inappropriate trading taking place in branch offices due to a lack of proper supervision.
  • Fee Selection and Reverse Churning: This has been an issue the SEC has publicly discussed on a number of occasions as of late and also addressed in its 2014 and 2015 list of examination priorities. RIA firms need to continue to ensure that they are always acting in the best interest of their clients and that proper disclosures are being made. 
  • Cybersecurity: The agency notes that in September 2015 it launched its second round of cybersecurity-focused examinations. In particular, the agency notes that it will focus on the testing and assessment of a firm's policies and controls as they relate to information security. 
  • Recidivist Representatives and their Employers: This was listed as a focus area in 2015, but it appears that the agency may focus even more on this issue in 2016. In particular, the agency notes that it "will assess the compliance oversight and controls of investment advisors that have employed such individuals after they have been disciplined or barred from a broker-dealer." In other words, the agency is putting RIA firms on notice that they need to have the proper policies and procedures in place in order to conduct the necessary diligence before inviting a prospective investment advisor representative (IAR) to join the firm.

It's also important to note that the SEC OCIE makes clear that it will continue to focus on auditing never-before-examined investment advisory firms as part of its continued National Exam Program (NEP) efforts.

As RIA compliance consultants, we strongly recommend that the principals and Chief Compliance Officer of all investment advisory firms registered with the SEC, regardless if the firm has been examined before or not, review the contents of the SEC 2016 exam priority document. Furthermore, previous-year exam priority lists should also be reviewed. Links to these past investment advisor audit priority lists published by the SEC are here:

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