In its first-ever announcement of exam priorities for the coming year, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations said late last week it will increase its oversight of combined investment advisor and broker-dealer firms, as well as closely monitor newly registered hedge fund and private fund advisors.
The growth in dually registered firms is gaining increased attention by OCIE because of worries over conflicts of interest.
OCIE is responsible for examining 11,000 registered investment advisors and 800 registered investment company operations that manage $50 trillion for investors.
In a directive, OCIE said dually registered exams will review how professionals and firms meet suitability obligations when determining whether to recommend brokerage or advisory accounts, the financial incentives for making such recommendations, and whether all conflicts of interest are fully and accurately disclosed.
Additionally, the examiners will look to find if the businesses have guidelines for when a financial professional makes a securities recommendation to a customer with a broker-dealer account versus an investment advisor account.
In 2013, OCIE aims to establish a presence and a credibility with the 1,500 hedge fund and private fund advisors the unit now oversees as a result of the Dodd-Frank Act.
OCIE has completed exams of 30 of the funds, with 70 reviews being processed. The unit’s goal is to examine 25 percent of hedge funds and private funds in the first year-and-a-half.
Another focus this year for the SEC unit centers on payments made by advisors and funds to distributors and intermediaries to see if the boards are getting adequate disclosure and giving proper oversight.
“The staff will assess whether such payments are made in compliance with regulations, including Investment Company Act Rule 12b-1, or whether they are instead payments for distribution and preferential treatment,” OCIE’s 2013 priorities announcement said.
OCIE said it will also pay more attention to whether mutual funds are conducting mandatory stress testing and keying in on the factors used in the tests and the results.