From The Expected To The Surprises: Highlights Of SEC OCIE's 2020 Priorities

Author:Mr Richard S. Lincer, Robin M. Bergen and Zachary L. Baum
Profession:Cleary Gottlieb Steen & Hamilton LLP

On January 7, 2020, the U.S. Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released its 2020 Examination Priorities ("2020 Priorities"). While at first blush the themes appear consistent with and predictable from their 2019 priorities, on closer read OCIE has provided some new insights and some unexpected focus areas. The themes for the 2020 Priorities are: retail investors, information security, financial technology ("Fintech") and innovation (including digital assets and electronic investment advice), several areas covering registered investment advisers and investment companies, anti-money laundering, market infrastructure (clearing agencies, national securities exchanges, alternative trading systems, transfer agents), and oversight of the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board programs and policies. OCIE also stressed the challenges it faced in light of last year's government shutdown and resource constraints, as the Division of Enforcement did in its 2019 Annual Report (see our analysis here), and the challenges in examining non-U.S. advisers due to limits that foreign data protection and privacy laws may place on cross-border information transfers. In this post, we analyze the highlights in and our takeaways from the 2020 Priorities.

Examination "risk factors". OCIE takes a risk-based approach in selecting potential exam candidates and developing the scope of exams. The 2020 Priorities, for the first time, provide some insight into the criteria that OCIE considers in its risk assessment process. OCIE noted that it considers dozens of factors, but highlighted certain "high risk products", compensation and funding arrangements, prior examination observations and conduct, disciplinary history of associated individuals and affiliates, change in leadership or other personnel, and whether the adviser has custody of investor assets. We think "high risk products" are likely to include those implicating the industry's transition away from LIBOR, which OCIE referenced elsewhere in the 2020 Priorities, and advisers would be well-served to review their compliance with remediation following prior exam findings or disciplinary events in light of these factors. Resource Constraints and Non-U.S. Advisers. Exams of non-U.S. advisers are resource-intensive for OCIE and, similar functions performed by other SEC divisions, require coordination with other...

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