Wednesday, February 27, 2013

SEC Examination Priorities 2013

By Tim Dulaney, PhD and Tim Husson, PhD

Last week, the Securities and Exchange Commission announced their examination priorities (PDF) for 2013 "to communicate with investors and registrants about areas that are perceived by the staff to have heightened risk, and to support the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

For those that are unfamiliar, SEC staff conducts examinations of SEC registrants through their regional offices and headquarters
to determine whether the [registrant] is: conducting its activities in accordance with the federal securities laws and rules adopted under these laws (including, where applicable, the rules of self-regulatory organizations subject to the SEC’s oversight); adhering to the disclosures it has made to investors; and implementing supervisory systems and/or compliance policies and procedures that are reasonably designed to ensure that the [registrant] s operations are in compliance with the law.  
Examinations may or may not be announced and the reason for the examination is considered non-public and remains undisclosed.  Examinations are usually completed within 120 days.  If you'd like to read more about the examination process, see here (PDF), and the 2012 priorities can be found here (PDF).

The examination priorities for 2013 reflect a rapidly changing regulatory environment.  For example, the SEC will soon see the first-time registration of thousands of investment advisers as a result of the Dodd Frank Act of 2010 (PDF).  This massive inflow of advisers that "have never been registered, regulated, or examined by the SEC" will force the SEC to prioritize examinations based upon perceived risk.  The SEC also sees the the "convergence in the investment adviser and broker-dealer industry" as a potential breeding ground for conflicts of interest.  Perhaps most interestingly is the SEC's concern over the use of alternative investment strategies--those previously only found in hedge funds, for example--in ETFs and variable annuities.

One of the policy priorities for 2013 is the development of rules implementing the JOBS Act, which includes both crowdfunding and private placement provisions.  The crowdfunding provisions in particular will require the SEC "to conduct reviews of entities participating in the crowd funding business, as appropriate."  As many crowdfunding firms are small online startups rather than established brokerage firms, the SEC's review of these firms could be more complex or challenging. The SEC also "will continue to review the suitability of recommendations of leveraged or inverse ETFs to retail investors."

2013 is shaping up to be a very interesting year for the SEC, as the changing nature of the investment industry is leading to new approaches to regulation and review of registrants.

No comments:

Post a Comment

Please keep comments appropriate. Malicious comments or solicitations will be removed.