14 January 2014

SEC and FINRA Examination Priorities for 2014

Each year, the U.S Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) release priorities for the SEC’s examinations of investment advisers and investment companies and FINRA’s examinations of broker-dealers. On 9 January, the SEC released its list of examination priorities for 2014, which include, among others:

  • investment advisers that have never been examined before;
  • wrap fee programs that investment advisers recommend to their clients;
  • investment advisers’ use of quantitative trading models;
  • investment advisers’ payments to distributors and intermediaries;
  • investment advisers’ compliance with rules governing the custody of client assets;
  • the effectiveness of investment advisers’ advertising policies and the accuracy of performance advertising; and
  • management of conflicts of interests in connection with advisory fees, including undisclosed compensation arrangements and their potential effects on investment recommendations.

FINRA, in an extensive list of examination priorities released on 2 January 2014, highlighted the following areas of focus, among others:

  • the suitability of recommendations to retail investors for complex products that may be difficult to understand;
  • recidivist brokers with a history of complaints or disclosures of bad sales practices;
  • management of conflicts of interest (such as favoring proprietary products or products for which a broker will receive a share of revenue);
  • cyber security policies with respect to protecting sensitive customer data;
  • accuracy in the marketing of individual retirement accounts for rollovers from employer-sponsored defined contribution plans; and
  • abuses in the allocation of new issues with respect to initial public offerings.

Although some of FINRA’s areas of focus are new for 2014, many of them have been priorities for several years.

The examination priorities of both the SEC and FINRA indicate that U.S. regulators harbour continuing concern over conflicts of interest and, more generally, adequate disclosure of information that may be relevant to investors. However, although such priority lists may help investment advisers, investment companies and broker-dealers determine which issues merit particular attention within their organizations, once an examination is undertaken; scrutiny can encompass compliance with any and all applicable rules.


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