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  • March 23, 2018
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    SEC FY2018 Examination Priorities!

    March 8, 2018

    On Feb. 7, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) released the much anticipated FY2018 National Exam Program Examination Priorities. Unlike prior years, when the release was five pages, the FY2018 release is ten pages, and includes a message from OCIE’s leadership describing the process used to select the examination priorities.
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    February 8, 2018

    2018 Examination Priorities?
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    Out With The Old, In With The New

    January 4, 2018

    Happy Holidays to everyone.

    There are a few things that have piqued my interest these last few weeks: (1) the SEC has five Commissioners for the first time in over two years; (2) FINRA has released a consolidated report of findings on recent exams (maybe the first time ever); (3) the interesting case involving Forum Financial Management; and, (4) another interesting case involving a state-registered adviser, Broidy Wealth Advisors.
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    December 7, 2017

    SEC Update

    Two things I want to talk about, the Nov. 15 Division of Enforcement Annual Report for FY 2017 (“Report”), and the speech that Peter Driscoll, director of the SEC Office of Compliance Inspections and Examinations (“OCIE”) gave at the GIPS® Standards Annual Conference on Sept. 14.

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    November 2, 2017

    SEC, DOL & Increasing Examinations

    I want to address three topics this month, all involving the U.S. Securities and Exchange Commission. First, the structure of the top tier of the SEC; second, the SEC and the DOL Fiduciary Rule; and third, Chairman Clayton’s goal of increasing the number of investment adviser examinations conducted annually.

    Top Tier at the SEC

    The SEC has five commissioners who are appointed by the president of the United States with the advice and consent of the Senate. Their terms last five years and are staggered so that one commissioner’s term ends on June 5 of each year. The chairman and commissioners may continue to serve approximately 18 months after their terms expire if they are not replaced before then. To ensure that the commission remains non-partisan, no more than three commissioners may belong to the same political party. The president also designates one of the commissioners as chairman, the SEC’s top executive. There are currently two vacancies on the commission and have been since 2015.

    The Commissioners: Jay Clayton: chairman since 2017, his term expires 2021 (R); Kara M. Stein: commissioner since 2013, her term expires 2017 (D); Michael S. Piwowar: commissioner since 2013, his term expires 2018 (R).

    The Nominees: Hester Peirce (R); Robert L. Jackson (D)

    Peirce, (R) a senior fellow at the conservative Mercatus Center at George Mason University, has criticized the DOL regulation as believing that investors are not capable of choosing investments by themselves, and says the SEC should take the lead on a fiduciary duty rule.

    Mr. Jackson, (D) a law professor at Columbia University, specializes in corporate disclosures. His bio on the school’s website says he chaired an effort to petition the SEC to require public companies to reveal their spending on political campaigns.

    Confirmation hearings with the Senate Banking Committee started on Oct. 24.

    The DOL Fiduciary Rule

    The Department of Labor (“DOL”) issued a rule regarding the practices of those selling products and services to retirement plans and the participants in those plans. The SEC has jurisdiction over the firms and individuals who not only sell products and services to those retirement plans and participants, but also sell products and services to those not involved in retirement plans. Portions of the DOL Rule have been delayed pending additional review by the DOL, now under new management. There are those in the financial services industry who believe that the SEC should be the regulator issuing rules pertaining to the conduct of business among providers registered with the SEC.

    There have been indications from SEC staff that individuals at the SEC are working on a fiduciary rule, but that the process is complex since players involved include not only the SEC, FINRA (overseen by the SEC), the DOL, and the states (some of which have already started working on fiduciary rules for state registered financial service entities).

    A report on the Senate Banking Committee’s confirmation hearings for the two SEC commissioner nominees, indicated that the nominees considered an SEC fiduciary rule to be a priority, but not the top priority, stating that executive compensation, cybersecurity, and oversight of FINRA would be ahead of the fiduciary rule.

    An article from Financial Advisor IQ stated that, “Some legislators and regulators argue a uniform fiduciary standard is the best approach to investor protection because it would be the most easily understood solution. Others disagree because of the challenges of coming up with an all-encompassing, uniform fiduciary standard. Yet others object because they believe the compromises required to reach uniformity would result in a weak and ultimately ineffective fiduciary standard.”

    Increased Number of Examinations

    There are a number of articles discussing the intent of the SEC to increase the number of investment adviser examinations, from the roughly 11% in FY2016 to 20% over the next few years, so that every adviser will be examined on a five year cycle. An estimated 13% of all registered investment advisers (“RIAs”) were examined in FY2017 (final numbers have not been disclosed yet), which would be a 20% increase over the number of exams in FY2016. Yet, when we look at the numbers, we see how complex the situation is.

    At the beginning of FY2016, which started on Oct. 1, 2015, there were 11,986 RIAs, so 11% would be equal 1,318 exams conducted in FY2016.

    At the beginning of FY2017, on Oct. 3, 2016, there were 12,201 RIAs, so that examining 13% of them would be equal 1,586 RIAs examined, a 20% increase.

    At the beginning of FY2018, on Oct. 2, there were 12,616 RIAs, so that examining 18% (the additional 5%) of them would be equal 2,271, a 43% increase in the number of exams, which seems an almost impossible goal.

    My Perspective

    First, Congress needs to confirm the SEC nominees and let them get to work. The SEC can conduct more business with a full complement of commissioners, and politics can be set aside for a goal of protecting investors (part of which would be examining more registrants) and the market to help get the economy flowing.

    Second, the SEC and DOL need to set up a working group or task force, and beat out a fiduciary rule that will increase investor protection without forcing firms out of the market place because of increased costs.

    Third, the SEC has to continue to innovate with the exam process, more risk -based exams, more desk reviews, more use of data to target firms who say low-risk but the data identifies as outliers.



    Tim Simons is a senior managing member of FOCUS I Associates, a provider of regulatory compliance services, responsible for assisting clients with updating policies and procedures, assisting with regulatory filings, designing and  reviewing marketing materials and conducting mock SEC examinations. Prior to joining FOCUS 1, Tim was a Chief
    Compliance Examiner in the SEC’s Philadelphia Office where he also supervised a branch of Investment Adviser/Investment Company Examiners and participated in over 200 examinations between 1998 and 2000.

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    Déjà Vu All Over Again, Version 2.0

    October 5, 2017

    Déjà Vu All Over Again, Version 2.0

    On Sept. 14, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert, “The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers.” I have read many deficiency letters from most of the SEC Regional Offices, and I think that in this Risk Alert, the SEC did identify the most common advertising deficiencies, probably over the last 30 years. Some of us remember when the SEC Division of Investment Management (“IM”), issued a no-action letter publicly available on Oct. 28, 1986 to Clover Capital Management.
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