SEC Announces National Exam Program Priorities

by Dorsey & Whitney LLP
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The SEC National Examination Program announced its 2012 examination priorities. Those priorities are selected by senior staff from the National Exam Program’s offices along with senior SEC staff from the various Divisions and offices. Many of those priorities tie to areas of focus for the Enforcement Division. The priorities are divided into two groups: 1) NEP wide initiatives which cut across the entire program; and 2) Program area specific initiatives which tie to select areas.

NEP Wide Initiatives

Six program wide initiatives were identified as the most specific:

Fraud detection and prevention — an initiative that focuses on employing qualitative and qualitative tools and techniques to identify fraudulent or unethical behavior

Corporate governance, conflicts of interest and enterprise risk management — an initiative that centers on meeting with senior management and boards of registrants to review how the firm handles conflicts of interest and legal, compliance, financial and operational risks

Technology — an initiative that centers on examining questions regarding interconnectedness, the speed used by market participants and regulators and systems related to the markets, access and information security

Dual registrants – is a facet of the program that focuses on issues relating to dual registration by broker-dealers and investment advisers and

New laws and regulations – will focus on general solicitation practices and the verification of accredited investor status under recently adopted Rules; and

Retirement vehicles and rollovers — an initiative that considers advisers who target retirement age workers to roll over plans and how marketing to this group is done by market professionals

Program Area-Specific Initiatives

The initiatives under this area center on the investment adviser/investment company program, the broker-dealer exam program, the market oversight exam program and the clearing and settlement exam program.

Investment Adviser/investment company program

Core risks

Ø Safety of assets and custody — focuses on issues such as the Custody Rule

Ø Conflicts of interest in certain adviser business models — concerns unaddressed conflicts of interest and

Ø Marketing/performance — centers on the accuracy and completeness of claims by advisers regarding their investment objectives and performance

New and emerging issues and initiatives

Ø Never-before examined advisers — an initiative to review those who have not been examined

Ø Wrap fee programs — monitors these programs, recommendations about them and their implementation

Ø Quantitative trading models — examines if advisers with substantial reliance on quantitative portfolio approaches have adopted and implemented necessary compliance policies and procedures

Ø Presence exams — continues an initiative from last year to examine a significant percentage of advisers registered since the effective date of Section 402 of Dodd-Frank

Ø Payments for distribution in guise — examines a variety of payments made by advisers and funds to distributors and intermediaries in relation to the disclosures about these items and supervision and

Ø Fixed income investment companies — monitors the risks and disclosures with a changing interest rate environment

Policy topics

Ø Money market funds — examines funds that exhibit, to some extent, outlier behavior

Ø Alternative investment companies — focuses on funds with alternative investment strategies, considering issues such as staffing, compliance and the suitability of recommendations and

Ø Securities lending arrangements — examines these arrangements and their compliance with excemptive orders and no-action letters

Broker-dealer exam program

Core risks

Ø Sales practices/fraud – focuses on issues such as affinity fraud targeting seniors and others, micro-cap fraud, suitability and unregistered entities or other unusual capital raising activities

Ø Supervision — concerns the supervision by the broker dealer of independent contracts, representatives with significant disciplinary histories and private securities transactions

Ø Trading — concerns with issues such as market access, erroneous order, high speed trading, market leakage, market manipulation, cyber security and similar issues

Ø Internal controls assesses the effectiveness of key control functions

Ø Financial responsibility — concerns with the customer protection and net capital rules and

Ø AML — focuses on introducing firms to assess anti-money laundering programs

New and emerging issues and initiatives

Ø Exchange Act Rule 15c3-5 — concerns the application of the market access rule

Ø Suitability of variable annuity buybacks — will focus on the suitability of offers by firms to repurchase products and the requirement that a new variable product be purchased and

Ø Fixed income market — centers on a number of issues including market structure and its impact on the quality of executions and similar issues

Market oversight exam program

Ø Oversight of FINRA — reviews examination areas outlined in Dodd-Frank, Section 964

Ø Exchange examinations — conducts risk targeted exams focused on identifying perceived control weaknesses

Ø New registrants – focuses on pre-launch reviews of new areas and

Ø Section 31 fee examinations — an annual review of controls, policies and procedures to ensure accuracy

Clearance and settlement exam program

Clearing agencies

Ø Annual exams — those mandated by Dodd-Frank is conducted

Ø Other exams – conducted using a risk based approach and

Ø New registrants — examines pre-launch entities

Transfer agents

Ø Core activities — examines for compliance with the pertinent rules

Ø Other areas — includes agents that service microcap securities and private offerings and policies and procedures for handling and transferring certain certificates

Ø Direct registration system — assesses the policies and procedures of the firm in this new area and

Ø Business continuity and disaster recovery plans — reviews the adequacy of the plans in this area.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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