SEC Announces 2013 Examination Priorities (with Lofchie Comment)

The SEC National Exam Program ("NEP") published its examination priorities for 2013. The NEP establishes certain general priorities, as well as specific priorities applicable to each of (i) investment advisers and investment companies, (ii) broker-dealers, (iii) clearing and transfer agents and (iv) "market oversight" (particularly the securities exchanges, FINRA and MSRB). The NEP also identifies a number of policy priorities (including rulemaking around the JOBS Act). NEP priorities include the following:

• The market-wide priorities are identified as (i) fraud detection and prevention, (ii) corporate governance and enterprise risk management, (iii) conflicts of interest particularly for large and complex financial institutions and (iv) technology issues includng risks of system outages and data integrity.
• For investment advisers and investment companies, the identified priority issues are (i) safety of assets, (ii) conflicts of interest as to compensation arrangements, (iii) marketing and performance advertising, including as to advertising permitted by the JOBS Act, (iv) conflicts of interest in investment allocation (favoring incentive accounts over straight fee accounts), (v) fund governance, (vi) oversight of new registrants, (vii) inspections of firms that are dually registered as broker-dealers, (viii) investments by private funds into public funds, (ix) whether funds provide hidden compensation in exchange for distribution services, (x) the calculation of NAV by money market funds, (xi) compliance with exemptive orders by ETFs and (xii) compliance with pay to play rules.
• For broker-dealers, the identified priority areas are (i) sales practices and fraud, (ii) high frequency and algo trading, (iii) management of capital risks, (iv) AML, (v) compliance with Rule 15c3-3, and (vi) various issues concerning trading in ETFs.
• For exchanges and the SROs, areas of examination will include the uses of technology and governance around order types.
• For transfer agent exams, the SEC will look at issues including timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets.
• For clearing agencies designated as systemically important, the SEC will now be conducting, in addition to its usual oversight, the annual examinations required by the Dodd-Frank Act.

Lofchie Comment: All SEC-regulated firms should review ALL aspects of the NEP, not only the sections that apply specifically to them, as there is overlap in the priority issues. For example, if advisers are being examined for how they allocate investment opportunities, or as to whether they make hidden payments in exchange for fund distribution, those issues also have compliance implications for broker-dealers. Conversely, as broker-dealers are being examined in regard to their internal controls around trading activities, that may also impact the funds for which they provide services.

See: Examination Priorities for 2013See also: Press Release