SEC Enforcement Priorities
According to the SEC, the 2017 examination priorities of the Office of Compliance Inspections and Examinations (OCIE) revolve around three key themes: (1) examining matters of importance to retail investors; (2) focusing on risks specific to elderly and retiring investors; and (3) assessing market-wide risks.
New issues on the SEC’s radar include electronic investment advice and money market funds’ compliance with new rules that took effect in 2016. The agency also plans to expand its focus on senior investors and individuals investing for retirement to specifically include registrants’ interactions with senior investors, including the identification of financial exploitation of seniors.
As for cybersecurity, the priorities state that the OCIE will continue its ongoing “initiative to examine for, including testing the implementation of those procedures and controls” at broker-dealers and investment advisers.
SEC Chair Mary Jo White announced the priorities earlier this month. It is unclear what changes the Trump Administration will make, if any.
FINRA Enforcement Priorities
In its 2017 Regulatory and Examination Priorities Letter, FINRA characterized cybersecurity as “one of the most significant risks many firms face.” Accordingly, it will “continue to assess firms’ programs to mitigate those risks.”
FINRA highlighted two areas in which it has “observed repeated shortcomings in controls.” The first compliance concern is weak cybersecurity controls at branch offices, particularly independent contractor branch offices. “We have observed poor controls related to the use of passwords, encryption of data, use of portable storage devices, implementation of patches and virus protection, and the physical security of assets and data,” FINRA stated.
FINRA also noted multiple instances in which firms have failed to fulfill one or more of their obligations under Securities Exchange Act (SEA) Rule 17a-4(f). The rule requires firms to, among other things, preserve certain records in a non-rewriteable, non-erasable format, commonly known as "write once read many" (WORM) format. FINRA has recently undertaken actions against 12 firms for failure to preserve required records in WORM format.
FINRA also plans to increase scrutiny of another emerging high-tech issue. According to the priorities letter, FINRA will review firms’ compliance with their supervisory and record-retention obligations with respect to social media and other electronic communications “in light of the increasingly important role they play in the securities business.” As firms should be aware, SEC and FINRA rules mandate that regulated entities ensure the capture of business-related communications regardless of the devices or networks used, so that such communications can be reviewed by the entity for improper business conduct.
FINRA also announced in its 2017 Regulatory and Examination Priorities Letter that it plans to commence electronic, off-site reviews to supplement its traditional on-site cycle examinations. According to FINRA, the new program “will enable FINRA to review selected areas, typically those covered in this letter, without going on site to the firm. Instead, FINRA will make targeted and limited information requests to firms and then analyze responses off site.”
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Robert Marsico, at 201-806-3364.