Monday, January 13, 2014

SEC Examiniation Priorities 2014

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

The Securities and Exchange Commission (SEC) senior staff recently announced their 2014 examination priorities (PDF).   The national examination program will be focusing on fraud detection and prevention, corporate governance, and registrants that serve as both a broker-dealer and investment adviser.

SEC staff also plans to undertake initiatives that examine the rollover of retirement vehicles during employment transitions or near retirement.  In particular, the staff is concerned about misleading or improper sales practices that encourage retirement-age workers to rollover "employer-sponsored 401(k) plan into higher cost investments."  Investors near, or in, retirement have much to lose and are often the most vulnerable investors in the market. We've done a lot of work on high cost investments aimed at retirees, and we think the SEC staff is on track with these initiatives.*

In addition, SEC staff intends to "examine governance and supervision of information technology systems." This priority is consistent with the priorities announced by FINRA earlier this month and shows that regulators are increasingly focusing on technological issues plaguing the financial markets.  They are also investigating investment advisers who rely on quantitative trading models to ensure proper compliance and to prevent market manipulation.

The SEC will also look into 'alternative' funds, a broad category of investments that includes many of the products we discuss frequently on this blog such as leveraged and inverse ETFs, non-traded REITs, volatility derivatives, and others.  Broker-dealers continue to sell large amounts of these risky products, and new products appear every year.

Given the types of issues we see on a daily basis, we think the SEC's staff is on the right track.  Stay tuned to our blog throughout the year for more updates and analysis about these and other current issues.
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*See, for example, our paper (PDF) on a new kind of variable annuities that was recently accepted to the Journal of Retirement. 

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