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SEC Releases Examination Priorities for 2016

hands-writing [1]The Securities and Exchange Commission [2]’s changes to liquidity risk-management programs [3] were released this week, as expected, and aim squarely at improved compliance and on protecting investors in ongoing risk areas such as cybersecurity, microcap fraud, fee selection, and reverse churning.

At the core, the SEC is trying to smooth out what it sees as inconsistencies in the liquidity of the asset class. Many loan funds claim that their holdings are indeed liquid and comply with SEC liquidity guidelines, but the commission has expressed doubts that all institutions have met regulations that open-end funds should invest no more than 15 percent in non-liquid assets.

The newly released priorities for examination of such monies comes about four months after the SEC announced it would set tighter rules to focus on liquidity controls, public pension advisers, product promotion, and two popular investment products, exchange-traded funds (ETFs) and variable annuities.

The new examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges.

More specifically, the rules look at protections for retail investors, including those investing for retirement; market-wide risks, particularly as they concern cybersecurity controls at broker-dealers and investment advisers through evaluation of broker-dealers’ and investment advisers’ liquidity risk management practices, and firms’ compliance with regulations designed to strengthen the technology infrastructure of the U.S. securities markets; and data analytics. The focus here is on cutting through the immense amounts of data out there in an effort to bolster anti-money laundering compliance, detect microcap fraud, and keep an eye on excessive trading.

“These new areas of focus are extremely important to investors and financial institutions across the spectrum,” said SEC Chair Mary Jo White. “Through information sharing and conducting comprehensive examinations, OCIE (SEC’s Office of Compliance Inspections and Examinations) continues to promote compliance with the federal securities laws to better protect investors and our markets.”

According to Marc Wyatt, director of the OCIE, says his office’s transparency and information sharing have helped inform the industry over the past four years. “We hope that registrants will use this information to inform the evaluation of their own compliance programs in these key areas,” he said.