If you haven’t had the chance to read through the full 2020 Examination Priorities from the Office of Compliance Inspections and Examinations (OCIE), we’ve pulled the compliance highlights that may matter most to your investment firm.
What’s clear from the 22-page document in regards to advertising review are:
- Many advisers and firms will need to adapt their operations to include required disclosures, marketing materials, and compliance programs.
- The OCIE will focus on RIAs that provide automated investment tools and platforms. One of the focus areas for the OCIE will be on marketing practices.
- In its oversight of FINRA, the OCIE recognizes the need to continue reviewing broker-dealer advertisements.
2019 Priorities & Examinations
Significant regulatory changes over the past year have shaken up the exam priorities of the OCIE. Regulation Best Interest, Form CRS Relations Summary, and multiple new interpretations under the Adviser’s Act will shape the landscape for years to come. It’s imperative to inform yourself of these changes actively and are prepared to meet these new obligations.
Despite a 35-day gap due to a lapse in appropriations last year, the OCIE was able to examine nearly as many firms in 2019 as they were in 2018, highlighting their increased efficiency. With this momentum going into 2020, we should take a look at what they will be focusing on in this year’s upcoming audits.
Protecting Vulnerable Investors
As in 2019, the OCIE will prioritize the protection of vulnerable and frequently abused retail investors such as seniors, retirees, teachers, and military personnel. The OCIE has stated that they intend to focus on high-risk products, such as private placements and securities of issues in new and emerging areas. As usual, they will want to make sure that firms adequately disclose and supervise outside business activities and conflicts of interest. Both investment advisers and broker-dealers should continue to ensure that they have robust anti-money laundering programs in place.
Continued Reg BI Compliance
In 2020 the OCIE will ensure that firms comply with the standards of care set out in the recently-adopted Regulation Best Interest (Reg BI) and Form CRS. Reg BI requires broker-dealers to act in the best interest of retail customers when making a recommendation without placing their financial needs ahead of the interest of the customer. Please note that the “Best Interest” requirement of Reg BI will not supersede an investment adviser’s existing fiduciary duty.
The ever-changing technological landscape has garnered the attention of the OCIE. They have endeavored to focus more heavily on the risks surrounding digital assets and the increasing number for automated investment platforms known as “robo-advisers.” With the rising number of cyber-attacks in the financial services space, it’s only a matter of when and how frequently you will be attacked, not “if.” In response, the OCIE will focus on assessing an RIA’s security vulnerabilities to include:
1) Governance and risk management
2) Access controls
3) Data loss prevention
4) Vendor management
6) Incident response and resiliency
Advisers and Broker-Dealer Focus
Advisers not yet examined may be in for a surprise, as the OCIE has stated that it will use its increased efficiency to target never-before and not recently-examined advisers. Broker-dealers should focus on the safety of customer cash and securities, risk management, trading activity, best execution, payment for order flow arrangements, and the effects of evolving commissions and other cost structures.
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