Bates Research - 02-20-15

2015 Examination Priorities

Both FINRA and the SEC have now released their examination priorities for 2015. There are a number of areas of overlap between the two agencies’ priorities for this year, as can be expected.

In their discussion of particular products, both regulators confirmed they will be targeting fixed income investments and alternative mutual funds. The potential for rising interest rates has both parties concerned about the negative impact on retail investors who may have large concentrations in interest-rate sensitive securities. Both agencies will be reviewing the suitability of those positions and the adequacy of disclosures related to those investments made to investors. The rapid growth of assets managed by alternative mutual funds has both agencies concerned that advisors and investors alike may not fully understand the risks of the products they are buying, or that those funds may not have been adequately vetted by the selling firm.

Both regulators point to excessive trading as a priority, as well as Anti Money Laundering. Targeting both of these will rely on new programs that allow them to monitor and review trade data to detect suspicious patterns. High risk and recidivist brokers will also be targeted, and those with a track record of misconduct will require specific supervision guidelines at any firms choosing to employ them. New requirements related to Municipal Advisor Registration and the subsequent monitoring of newly registered advisors will also be a priority for the two agencies.

Both firms will be devoting resources to cybersecurity concerns, as well as to monitoring overall market integrity through the use of data analysis. Both agencies cite the need to ensure fair and orderly markets as one of the paramount missions of all market regulators.

Although not named by the SEC, a large focus for FINRA will be specific training and supervision for brokers who are working with elderly clients that may require special care (we have blogged about this topic previously). The SEC will be looking into reverse churning, wherein investors are shifted from commission-based to fee-based accounts which are then infrequently traded. This issue impacts firms which are both broker-dealers and investment advisors, who may have an incentive to "double-dip" by moving brokerage clients into fee-based accounts after they have earned substantial commissions on the brokerage activity. Though it is not specifically named in its priorities, FINRA will also be looking into this issue.

Both regulators have a clear retail focus for this year, with an emphasis on putting client interests first. We will continue to track these regulatory focal points throughout the year, as more enforcement activity develops.

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