2018 examination priorities of the SEC’s OCIE announced: Evidence gathering for SEC enforcement actions

By: Steve Levine, Esq., Senior Vice President, Alliant

Examination priorities for the upcoming year were announced by the U.S. SEC Office of Compliance Inspections and Examinations (”OCIE”) in early February 2018.

The OCIE broke down their current priorities into five categories:

  • Compliance and Risks in Critical Market Infrastructure
  • Matter of Importance to Retail Investors*
  • FINRA and MSRB
  • Cybersecurity*
  • Anti-Money Laundering Programs

*The OCIE’s focus on retail investor issues and cybersecurity are “carryover” issues from 2017.

The OCIE conducts the SEC’s National Exam Program. The OCIE has examination responsibilities for over 28,000 registrants including, among others, investment advisers, mutual funds and ETF’s, broker-dealers, transfer agents, national securities exchanges and FINRA.

The OCIE’s role is to improve compliance, prevent fraud, monitor risk and inform policy. Examination results are used by the SEC to improve industry practices by identifying and monitoring risks as well as the pursuit of misconduct. The OCIE shares the results of its findings with the SEC Chairperson, Commissioners, and other SEC divisions, including the SEC Division of Enforcement. While the OCIE conducts examinations, it does not make policy nor conduct enforcement proceedings.

One of the “carryover” issues pertains to an examination of advisers and broker-dealers that offer investment advice to their retail investors through “robo-advisers” and other automated platforms.
With respect to cybersecurity, it is likely the OCIE will remain focused on such issues for the foreseeable future (highlighted by: risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response procedures).

Of the new priorities highlighted by the OCIE, the most interesting is the expected examination as to whether SEC-regulated entities are adapting Anti-Money Laundering (“AML”) programs in light of recent new rules promulgated by the U.S. Treasury Financial Crimes Enforcement Network. It is anticipated that examiners will review for compliance with AML requirements, including whether firms are in fact adapting their AML programs in accordance with regulatory requirements. While the AML rules and regulations are not issued by the SEC, it is against the law to do financial transactions with people and companies on the sanction list. The OCIE would, therefore, expect that at a minimum, advisers should be checking their investors and clients against such sanction lists.

The OCIE may add additional priorities as market conditions develop over the course of the year and as the OCIE identifies emerging risks.

D&O liability exposure and insurance trends and how to manage them

By: Fred T. Podolsky, Executive Vice President, Alliant

D&O exposures come from claims “fads” like IPO Laddering or credit crisis claims or disclosure only settlements driven by the plaintiff’s bar, but these fads are usually short lived. Some liability trends, however, such as securities class actions and whistleblower claims, appear to be a continuing and growing source of liability and with no end in sight. Below is a sampling of current D&O liability triggers:

Shareholder Merger Objection Claims
All types of companies, in all industry sectors in the United States and across the globe, engage in substantial mergers and acquisitions activity. For public companies, this is an invitation for a lawsuit, and the invitation is almost always accepted by shareholders who object to the deal, sometimes on both sides of the transaction.

Jumpstart Our Business Startups Act (JOBS Act)
The JOBS Act was passed to make it easier for smaller businesses to access the capital markets through a streamlined IPO process. Emerging growth companies with less than $1 billion in sales are eligible for a JOBS Act filing and can take advantage of the reduced filing requirements, including relief from certain disclosure and accounting standards for a period of time.

SEC Enforcement Activity
While securities class actions continue to represent the highest financial risk exposure to public companies and their directors and officers, the threat of SEC enforcement activity is on the rise. The costs of resolving such enforcement actions can be substantial. According to a report entitled “SEC Enforcement Activity against Public Companies and Their Subsidiaries Midyear FY 2016,” one trend to watch is the increasing use by the SEC of administrative proceedings rather than civil proceedings to bring enforcement actions.

Sarbanes-Oxley Act of 2002 (SOX) and Claw-back Provisions
To ensure the accountability of the CEO and the CFO, and to align their financial interests with accurate reporting, the Act includes a payback, or claw-back, provision requiring that, in the event of a financial restatement due to misconduct of the issuer, the CEO and CFO would be required to repay any bonuses, incentives, and equity-based compensation and any profits from stock sales within the immediately prior 12 months.