SEC Announces 2014 Examination Priorities: Market-Wide Priorities Include Conflicts of Interest and Information Technology Controls
On January 9, 2014, the SEC’s National Examination Program (the “NEP”) released its examination priorities for 2014. Understanding the NEP’s priorities can help financial services institutions, including investment advisers, broker-dealers, clearing agencies, exchanges, hedge funds, private equity funds, transfer agents, and others to avoid pitfalls and to interact more effectively with the SEC in connection with exams and other inquiries.
Top among the NEP’s priorities are its market-wide initiatives, which include:
Fraud Detection and Prevention. Consistent with the 2013 addition of its Quantitative Analytics Unit and its previously announced Risk Analysis Examination initiative, the NEP plans to continue its push towards using quantitative and qualitative tools to “identify market participants engaged in fraudulent or unethical behavior.”
Corporate Governance, Conflicts of Interest, and Enterprise Risk Management. The NEP is focused on registrants’ identification and mitigation of conflicts of interests and other risks and will evaluate registrants’ “tone at the top” and approach to conflict and risk management.
Technology. In response to the continued growth in technological complexity and recent system-wide outages that it believes deteriorated trust in the marketplace, the NEP has prioritized the continued analysis of registrants’ “governance and supervision of formation technology protocols, controls, and security, with a focus on the ability to respond quickly to unanticipated outages and information systems failures.”
Dual Registrants. The NEP is focused on conflicts of interest and risks to investors presented by dual registrants – i.e., registrants that are both broker‑dealers and investment advisers. The NEP’s focus is on potential investor confusion and the risk that investors may be persuaded to invest in “an inappropriate account type that increases revenue to the firm and may not provide a corresponding benefit to the customer.”
In addition to its market-wide initiatives, the NEP outlined its program area-specific initiatives, which are broken down into “core risks, new and emerging risks, and policy topics.” The program area-specific initiatives include the (a) Investment Adviser/Investment Company Program; (b) Broker-Dealer Exam Program; (c) Market Oversight Program; and (d) Clearance and Settlement Exam Program.
The full NEP Examination Priorities for 2014 can be found at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.
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