Eccleston Law: For Investors. For Advisors
About
Who We Are
Testimonials
Disclaimers
Attorneys
For Advisors
Broker Transition
Transition Negotiations
Employment Matters
State Registration Problems & Discipline
FINRA Matters
Promissory Note Matters
Team/Parnership Disputes
CFP Board Matters
FINRA Enforcement Matters
State Registration Problems & Discipline
Transition Negotiations
Broker Litigation & Arbitration
Employment Matters
Regulatory Matters
Strategic Consulting
Whistleblower Law
Promissory Note Matters
Compliance Protection
Lawyer Referral Network
Expungement of CRD/BrokerCheck Disclosures
For Investors
Securities Fraud
Breach of Fiduciary Duty
Negligent Investment Management
Unauthorized Trading
Lawyer Referral Network
News & Articles
News
Articles
Financial Counsel Blog
Videos
Newsletter Signup
Contact
Site Menu
About
Who We Are
Testimonials
Disclaimers
Attorneys
For Advisors
For Advisors: Overview
Broker Transition
Broker Transition Overview
Transition Negotiations
Employment Matters
State Registration Problems & Discipline
FINRA Matters
Promissory Note Matters
Team/Parnership Disputes
CFP Board Matters
FINRA Enforcement Matters
State Registration Problems & Discipline
Transition Negotiations
Broker Litigation & Arbitration
Employment Matters
Regulatory Matters
Strategic Consulting
Whistleblower Law
Promissory Note Matters
Compliance Protection
Lawyer Referral Network
Expungement of CRD/BrokerCheck Disclosures
For Investors
For Investors: Overview
Securities Fraud
Breach of Fiduciary Duty
Negligent Investment Management
Unauthorized Trading
Lawyer Referral Network
News & Articles
News
Articles
Financial Counsel Blog
Videos
Newsletter Signup
Contact

SEC Examination Priorities Announced for 2013; A Lot on the Plate!

Posted on February 26th, 2013 at 10:07 AM

Annually, the Securities and Exchange Commission (SEC) determines and communicates to investors and SEC registrants the examination priorities that best will protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.  This year’s priorities include several new and emerging issues, as well as some ongoing risks, which I discuss below.

                Preliminarily, the SEC’s examination priorities are published and effectuated through the National Examination Program (“NEP”).  NEP covers four distinct program areas: investment advisers and investment companies; broker-dealers; clearing and transfer agents; and market oversight.  NEP-wide initiatives, which apply to all registrants, include fraud detection and prevention and conflicts of interest.  Regarding fraud detection and prevention, NEP has adopted a risk-based approach to targeting registrants, and utilizes both quantitative and qualitative tools to identify fraudulent and unethical behavior.  The SEC, and NEP in particular, also encourages tips, complaints and referrals.  Likewise, with respect to conflicts of interest, NEP reviews all registrants to ensure that if not eliminated, conflicts are properly mitigated and managed.  NEP also reviews the sufficiency of disclosures regarding conflicts of interest made to investors.

                Moving on to the examination program for investment advisers and investment companies (like mutual funds), NEP has identified five areas of ongoing risks.  They are: safety of assets; conflicts of interest related to compensation arrangements; marketing and performance advertising; conflicts of interest related to allocation of investment opportunities; and fund governance.  In terms of new and emerging issues for investment advisers and investment companies, NEP identifies several worth noting.  One is the focus upon the growing use of alternative and hedge fund strategies in open-end (mutual) funds, exchange-traded funds (ETFs) and variable annuity structures.  In particular, the SEC staff “will assess whether: (i) leverage, liquidity and valuation policies and practices comply with regulations; (ii) boards, compliance personnel, and back-offices are staffed, funded, and empowered to handle the new strategies; and (iii) the funds are being marketed to investors in compliance with regulations.”

                Another major, new and emerging initiative relates to dually registered investment advisers and brokerage firms.  There has been a “continued convergence”, and the SEC is concerned about “multiple conflicts” that this business model presents.  The publication states, “Among other things, the staff will review how financial professionals and firms satisfy their suitability obligations when determining whether to recommend brokerage or advisory accounts, the financial incentives for making such recommendations, and whether all conflicts of interest are fully and accurately disclosed.” 

                Moving on to the examination program for brokerage firms, the sheer size of the broker-dealer program is noted: 4,600 registered broker-dealers, approximately 111 million customer accounts, over 160,000 branch offices, and over 630,000 registered representatives!  Examinations thus are focused upon issues and practices that present the highest risk to investors and to the integrity of the market.  Beyond that, though, NEP identifies several ongoing risks that will be a focus for 2013 brokerage firm examinations.  They are: sales practices and fraud; trading risks; capital and other financial risks; and anti-money laundering (“AML”).  Regarding sales practices and fraud, the publication notes that an examination “frequently finds fraud” in connection with some of the following: affinity fraud or fraud targeting seniors; unsuitable recommendations of higher yield products such as municipal or corporate bonds; outside business activities; failure to mitigate or disclose conflicts of interest; and a focus on firms identified as recidivists or high risk for potential misconduct.

                There are two new and emerging issues related to broker-dealer examination priorities.  One concerns ETFs.  The examination program will continue to examine the suitability of leveraged and inverse ETFs.

                The second new and emerging issue relates to the Market Access Rule.  The issue has several sub-parts, including requirements for accounting, technology systems and supervision.  But the most immediately relevant for investors is the relationship between master accounts and sub-accounts.  Examinations will focus on the master account / sub-account model, because its structure “lends itself to potential issues related to money laundering activity, market manipulation, unregistered broker-dealers, excessive margin, and inadequate minimum activity for pattern day traders.”

                The balance of the publication relates to examination priorities with regard to the SEC’s Market Oversight Exam Program (review of self-regulatory organizations such as FINRA), and the clearance and settlement examination program involving transfer agents and clearing agencies. 

Noteworthy is one new and emerging risk relating to transfer agents.  Specifically, microcap securities and private offerings are a focus of the 2013 examination program -- both for transfer agent examinations and for broker-dealer examination programs.  The reason for their inclusion in transfer agent exams is that, “Transfer agents that service microcap securities, especially those involved in private offerings, may be used to facilitate the unregistered offering of restricted securities by allowing securities transfers that could circumvent existing rules or enable fraudulent schemes.”  To counter that, SEC staff will review for effectively implemented formal written policies and procedures, and be on guard for conflicts of interest.

                As one can see, there are many important examination priorities set for 2013.  While not exhaustive, and while subject to change, investors should be pleased at the breadth and scope of the SEC’s / NEP’s examination program for 2013.

Tags:

Share

Return to Archive

Latest Articles
Purshe Kaplan to Pay $1.6 Million Settlement
April 14th, 2021 at 10:06 AM
Cambridge to Pay $3.5 Million In Restitution To Settle FINRA Mutual Fund Case
April 13th, 2021 at 9:22 AM
Read More »
Latest News
Just Saying “No” to Firm-Provided and Conflicted Legal Counsel in Your Transition may avoid problems later
April 14th, 2021 at 3:55 PM
Affidavit of Merit Received in Eccleston Law’s $25 Million Legal Malpractice Action
April 1st, 2021 at 9:36 AM
Read More »
Share

Request a Free Consultation

Attorneys are standing by during regular business hours. Call us now for immediate service, or complete the form below and we will contact you as soon as possible.

Your E-mail Address:
 
Chicago
55 West Monroe St.
Suite 610
Chicago, Illinois 60603
(312) 332-0000
(312) 332-0003
New York City
One Liberty Plaza
165 Broadway, 23rd Floor
New York, New York 10006
(312) 332-0000
(312) 332-0003
Boca Raton
2255 Glades Road
Suite 324A
Boca Raton, Florida 33431
(312) 332-0000
(312) 332-0003
2021 © Eccleston Law, LLC.
All Rights Reserved.
The law is continuously changing. Please do not rely on information found on this site without consulting a lawyer to determine if any recent changes in the law may have an impact.