SEC lays out 2020 exam priorities, giving more scrutiny to AML programs, crypto-related firms, how firms protect seniors from fraudsters
The country’s top securities watchdog has laid out its exam priorities for 2020, echoing many of the focal points of prior years, including fraud against seniors, crypto-related assets and supposed investments, cybersecurity and financial crime compliance programs, among others.
The Securities Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) will again focus on many of the riskier, emerging and more exotic areas of trading, while also putting more pressure on trading firms, individual brokers and any entity in the stock supply chain to strengthen anti-money laundering (AML) compliance, counter fraud and identify and report on potentially risky behavior.
Here are some snapshots:
Countering fraud against retail investors, particularly seniors
OCIE’s analytic efforts and examinations remain firmly grounded in its four pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.
Examinations will focus on recommendations and advice given to retail investors, with a particular focus on: (1) seniors, including recommendations and advice made by entities and individuals targeting retirement communities; and (2) teachers and military personnel.
Additionally, OCIE will focus on higher risk products—including private placements and securities of issuers in new and emerging risk areas—such as those that: (1) are complex or non-transparent; (2) have high fees and expenses; or (3) where an issuer is affiliated with or related to the registered firm making the recommendation.
Examiners will also give more attention to firms tied to penny stock trades, an area that has been ripe for fraudsters related to a range of pump-and-dump and other low-priced securities schemes.
Firms will also have to bolster cybersecurity programs to counter infiltration from external fraudsters along with accidentally being duped into being part of stock scams from hackers gaining knowledge about non-public information that can be used in insider trader schemes.
Digital assets will again garner extra exam time
The OCIE in 2020 will renew its focus on crypto-related securities, noting that the nascent but burgeoning digital assets market presents new challenges to retail investors who aren’t clear related to how these virtual assets differ from traditional securities backed by brick-and-mortar assets.
“Due to these risks, OCIE will continue to identify and examine SEC-registered market participants engaged in this space. Examinations will assess the following: (1) investment suitability, (2) portfolio management and trading practices, (3) safety of client funds and assets, (4) pricing and valuation, (5) effectiveness of compliance programs and controls, and (6) supervision of employee outside business activities,” the report noted.
The SEC first announced an intention to expand oversight of crypto-related securities in 2018, crypto focus and more clearly stated its plan to monitor market participants in terms of portfolio management, trading practices, safety of client funds, pricing, compliance, and internal controls.
This year, the agency reiterated its 2019 objectives while adding an assessment goal regarding the “supervision of employee outside business activities.”
Enhanced focus on AML compliance to continue
The OCIE will “continue to prioritize examining broker-dealers and investment companies for compliance with their AML obligations.”
Examiners will be reviewing key program areas, including:
- Whether firms have established appropriate customer identification programs
- Whether they are satisfying their suspicious activity report (SAR) filing obligations,
- Conducting due diligence on customers
- Complying with beneficial ownership requirements
- Conducting robust and timely independent tests of their AML programs.
“The goal of these examinations is to ensure that broker-dealers and investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money-laundering activities,” according to the SEC.
The OCIE also detailed what it considers some of the “hallmarks” of an “effective compliance program,” including adequate training, expertise and authority and active support from the executive and board levels.
“In the course of conducting thousands of examinations of many different types of firms, the hallmarks of effective compliance become apparent,” according to the SEC. “One such hallmark includes compliance’s active engagement in most facets of firm operations and early involvement in important business developments, such as product innovation and new services.”
Another hallmark is a “knowledgeable and empowered chief compliance officer with full responsibility, authority, and resources to develop and enforce policies and procedures of the firm.”
But those must be paired with a “tone from the top,” something echoed loudly in federal regulatory circles and a line mentioned in many high-profile penalties in the banking and securities sectors.
“And perhaps most importantly, a commitment to compliance from C-level and similar executives to set a tone from the top that compliance is integral to the organization’s success and that there is tangible support for compliance at all levels of an organization,” according to the SEC’s enforcement team, (via the SEC).
Monroe’s Musings: The SEC focusing on these areas is not surprising, in fact, it’s expected.
Crypto has been rising in terms of focus by regulators and watchdogs around the world and there is a major securities component as, in some cases, government bodies have dubbed them securities.
As well, many fraudsters have been trying to engage in classic Ponzi and pyramid schemes, with a crypto twist, in faux initial coin offerings that are just scams to steal money and disappear.
But while the SEC publicly stating it has updated its overarching “priorities” will surely get the trading sector’s attention, the real proof of enforcement, and potentially nudging operations into compliance with dissuasive actions, will be in the number and size of penalties for flouting these rules.
One that issue, stronger enforcement for large and longstanding compliance failures is something that has been rising in recent years from the SEC and its AML exam partner, the Financial Industry Regulatory Authority – a trend firms should well heed when deciding the depth of training, resources and expertise devoted to compliance programs.