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.


Return to Archive



If the regulators are after you, and are trying to make a case against you, and you are going to contest their allegations against you, make sure you have the best securities industry defense lawyers, Eccleston Law Firm. My case was spun into a combination of penalties including fines, cash settlements, CE courses and suspension. They were the best I have seen in action. When all was said and done, they had done their magic, my situation was negotiated and settled with a simple "letter of caution" and a case closed without action. It is the most important legal business decision you will ever make, make it Eccleston Law.

Rick R.


June 23, 2022
Former Credit Suisse Advisor Prevails in Deferred Compensation Claim

A former Credit Suisse advisor has prevailed on a $2.2 million arbitration claim after alleging that the firm improperly withheld his deferred compensation when it discontinued its U.S. brokerage business in 2015. 

June 23, 2022
Eccleston Law LLC Investigates Recovery Options for NRIA Investors

Headquartered in Secaucus, NJ, National Realty Investment Advisors (NRIA) recently declared bankruptcy amid investor redemption requests, federal and state investigations, and unsustainable debt.

June 22, 2022
SEC Charges Three Additional Advisors for Recommending Horizon Ponzi Scheme to Investors

The Securities and Exchange Commission (SEC) has filed suit against Michael Mooney, Britt Wright, and Penny Flippen pertaining to their engagement with a Ponzi scheme, which raised at least $110 million from nearly 400 investors.