The Securities and Exchange Commission (SEC) wields many weapons in its related roles of protecting investors and overseeing the inspection of securities firms, brokers, investment advisors, and rating agencies. One such weapon is the National Examination Program (NEP), through which SEC examiners scrutinize broker-dealers, transfer agents, investment advisors, investment companies, the security exchanges, and other related organizations.
Each year the SEC publishes its examination priorities areas—areas the staff believe to have heightened risk. To select these areas, senior SEC staff members assess information from a variety of sources. As indicated in the 2014 announcement, these sources include:
- comments and tips received via hotlines, whistleblower complaints, or other sources;
- information reported in required SEC filings;
- information previously gathered through examinations;
- communications with other U.S. and international regulators;
- interactions with registrants, industry groups, and service providers;
- data maintained in third party databases; and
- industry and media publications.
The SEC has announced that its overarching priorities for the 2014 national examination program will be fraud detection and prevention; corporate governance, conflicts of interest, and enterprise risk management; technology; dual registrants; new laws and regulation; and retirement vehicles and rollovers. Some additional details are provided below.
The announcement states that firms subject to the NEP will find that the SEC’s computer science and mathematics specialists will employ sophisticated quantitative tools to evaluate risks in the algorithms, models, and software at investment houses and related organizations – part of the effort to detect and prevent fraud.
As part of its focus on governance, conflicts of interest, and enterprise risk management, NEP staff will take steps to evaluate the control environment and “tone at the top” of firms investigated, understand the firms’ approach to conflict and risk management, and discuss key risks and regulatory requirements.
Recognizing the increasing complexity, interconnectedness, and speed of technology, the NEP reports it will continue to examine governance and supervision of information technology systems, operational capability, market access, information security, and preparedness to respond to sudden malfunctions and system outages.
The influence of dual-registrants (e.g. broker-dealers who are also investment advisors), and the risks introduced by that influence, will continue to be examined by the NEP, as will general compliance with the Dodd-Frank Act and with the newly adopted Rule 506(c) of the Securities Act of 1933.
The final priority for 2014 will find SEC examiners scrutinizing the sales and marketing practices of broker-dealers and investment advisors who target retirement-age workers and their 401(k) and IRA plans.
The SEC’s attention to enterprise risk management is worth noting given reports that firms find it difficult to engage in enterprise-wide risk management activities, finding instead that many risk and compliance activities exist in organizational silos, disconnected from one another. See Ethical Advocate’s related January 22, 2014 blog post on ethics hotlines, risk, and compliance for more on this subject.
While the National Examination Program only applies to a narrowly defined set of organizations, many of its priorities this year—fraud, governance, risk management, technology threats, and employee/retiree welfare— are important for most organizations. Now is a good time to review related policies and practices.
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U.S. Securities and Exchange Commission. “National Exam Program: Examination Priorities for 2014”, January 9, 2014.