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(Article from Registered Funds Alert, February 2016)

For more information, please visit the Registered Funds Alert Resource Center.

In its Examination Priorities for 2016, the SEC’s Office of Compliance, Inspections and Examinations (“OCIE”) organized its priorities within the same three “thematic areas” as its 2015 Priorities. As discussed in a prior Alert, these three thematic areas are: (i) matters involving retail investors; (ii) assessment of market-wide risks; and (iii) using data to identify and examine registrants engaged in illegal activity, such as excessive trading.

Below is a summary of OCIE’s priorities as they relate to registered funds and registered advisers:

• In connection with its multi-year examination initiative launched in June 2015, ReTIRE, OCIE will focus on registered advisers and broker-dealers that offer services or products to investors with retirement accounts. Specifically, OCIE will look at the suitability of recommendations made to such investors, conflicts of interest, supervision and compliance controls and marketing and disclosure practices.
• With respect to ETFs, OCIE will examine for compliance with granted exemptive relief and other regulatory requirements and will review ETFs’ unit creation and redemption processes. OCIE will focus on, among other things, sales strategies, trading practices and disclosures involving ETFs, with specific emphasis on niche and leveraged/inverse ETFs.
• OCIE will continue to examine advisers that offer retail investors a variety of fee arrangements, with emphasis on whether account type recommendations are in the best interest of the retail investor at the inception of the arrangement and thereafter.
• OCIE will also continue focusing on cybersecurity compliance and controls in its examinations of advisers, and will expand its examination efforts to include testing and assessments of firms’ implementation of procedures and controls.
• Noting the recent hikes in interest rates and other changes in the fixed-income markets, OCIE will prioritize examinations of advisers to funds that have exposure to potentially illiquid fixed-income securities. Such examinations will include, among other things, a review of controls over market risk management, valuations, liquidity managements and trading activity.
• OCIE will continue its “Never-Before-Examined Registered Investment Company Initiative,” which is intended to conduct focused, risk-based examinations of advisers and investment companies that have never been examined.

As many of OCIE’s priorities echo its 2015 (and earlier) priorities, we expect OCIE to dig deeper on these topics during 2016 examinations. For example, OCIE began a second round of cybersecurity sweep examinations in late 2015. We are aware that many of the firms that were examined in the first cybersecurity sweep have reported that OCIE is asking for much more nuanced and in-depth information from affiliates who are being examined in the second sweep.