On January 7, the Office of Compliance Inspections and Examinations released its 2020 exam priorities, revealing that the agency has already folded the Securities and Exchange Commission’s interpretation of an IA’s fiduciary duty into its exams.
While the 28-page release promises that examiners will continue to focus on “perennial risk areas,” such as cybersecurity, digital assets, robo-advisers, seniors and mutual fund share class allocation, the document adds some new topics. One is OCIE’s “particular interest” in how advisors disclose strategies, such as ESG and sustainable investing.
Other new items include how firms disclose and handle the transition from LIBOR, serve teacher and military clients, and risks tied to private placements in new and complex areas that carry “high fees and expenses.”
Much of the report touts OCIEs past successes. It also gives “hallmarks” of effective compliance programs detected by the agency over the years. These include “compliance’s active engagement in most facets of firm operations and early involvement in important business developments” and the presence of “a knowledgeable and empowered” CCO who has “full responsibility, authority and resources” to do the job.
Fiduciary duty
This year, OCIE examiners will be checking to see if advisors satisfy their fiduciary duty by providing “advice in the best interests of their clients,” according to the new report.
Broker-dealers can expect questions about their progress ahead of the June Reg BI implementation date. After June, examiners will look for corresponding new P&Ps and conflict disclosures.
Disclosures on new Form CRS and how firms deliver the document will be subjects of exams, OCIE states.
Expect that examiners’ inquiries into cybersecurity will probe “proper configuration of network storage devices, information security governance generally and retail trading information security.” Oversight of vendors and their cybersecurity will remain a hot topic.
Exam triggers
OCIE deploys “dozens of potential risk factors” when selecting an exam target. While the agency has never revealed these factors, the 2020 list gives some examples: “products and services offered, including certain products identified as higher risk; compensation and funding arrangements; prior examination observations and conduct; disciplinary history of associated individuals and affiliates of a registered firm; changes in firm leadership or other personnel;” and whether a firm has custody.
OCIE added 27 new staff in FY 2019. But the new report warns that the agency may “not keep pace” with the rising numbers of new RIAs to exam without additional money.
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