In the annual exam priorities letter issued Tuesday by the SEC’s Office of Compliance Inspections and Examinations, the regulator said it will keep a close eye on the suitability of advisors' recommendations and sales practices around retiree's rollover accounts and IRAs in 2015.
“Rollovers are still a big deal,” said Duane Thompson, president of Potomac Strategies and Senior Policy Analyst at fi360. “This is the second year in a row they’ve talked about potential problems with rollovers.”
He predicted that at some point soon, both the SEC and FINRA—which also listed rollovers as a priority in 2015—will be collecting information and opening enforcement cases.
“I haven’t seen much in the way of enforcement actions yet in rollovers, but my guess is that’s going to be one of the next headlines in either a FINRA or SEC case,” he said.
The regulator also plans to continue to keep the examination of fees and reverse churning as a priority, particularly among those advisors who are dually registered and offer a variety of fee arrangements. “We will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships,” the letter noted.
The SEC also plans to assess risks in alternative investments, private funds and bonds ahead of an expected rise in interest rates.
“We will review whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading and that their investments and liquidity profiles are consistent with those disclosures,” the SEC said.
Not surprisingly, cybersecurity also made the list of exam priorities, with the SEC saying it will continue to examine broker-dealers’ and investment advisers’ compliance and controls in this area. Last summer the regulator sent out questionnaires to firms, particularly smaller firms, around cybersecurity policies and procedures.
"Cybersecurity remains a big focus for our clients in the private fund space as well as those on the retail side. When we see this type of industry-wide initiative, we know a large number of firms will be concerned with shoring up their policies and procedures, particularly in light of the never-before-examined initiative,” said Niel Armstrong of Gordian Compliance Solutions.
The SEC’s latest 5-page priorities letter is more concise than 2014’s 11-page update and did not address topics such as conflicts of interest and marketing, although Thompson said that doesn’t mean those issues are off the table.
“These are things that are, at the moment, what they’re looking at and probably will be top of mind when the examiner goes in, but they will certainly be looking at other things,” Thompson said. “After Madoff, really all bets are off.”
—Additional reporting by Ryan W. Neal.
