SEC Announces 2017 Exam Priorities

SEC Announces 2017 Exam Priorities

For the first time, the Securities and Exchange Commission has included “electronic investment advice,” or advice offered through so-called robo-advisers, to its annual list of examination priorities, highlighting regulators’ concerns about investor risk as digital investment platforms continue to surge in popularity.

The SEC said it would examine registered investment advisers and broker-dealers that offer robo-advice services, putting automated advice first on its list of 2017 exam priorities, released Thursday.

“These priorities make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice,” outgoing SEC Chairwoman Mary Jo White said.

Robo-advice services under scrutiny include those primarily interacting with investors online, such as Betterment, and those combining automation with access to financial professionals, so-calledhybrids such as Vanguard Group‘s Personal Advisor Services.

“Examinations will likely focus on registrants’ compliance programs, marketing, formulation of investment recommendations, data protection and disclosures relating to conflicts of interest,” according to the SEC. “We will also review firms’ compliance practices for overseeing algorithms that generate recommendations.”

“There’s been a lot of attention on robo-advisers this past year,” said Susan Krawczyk, partner at Sutherland Asbill & Brennan.

Ms. Krawczyk pointed to William Galvin, the Massachusetts securities regulator, who last year questioned the authenticityof robo-advisers marketing themselves as fiduciaries.

It’s an attractive area for regulators because it’s a “hot topic, current, technology-based and retail,” according to Amy Lynch, president and founder of FrontLine Compliance. “Really, for today’s regulator, those are the key bullet points.”

Jeremiah Williams, counsel at Ropes & Gray, said the SEC has a history of ramping up oversight when there’s innovation in the financial services industry.

Overall, there were 21 areas of focus in the SEC’s priorities list, which, according to Ms. Krawczyk, is largely similar to last year’s.

Other priorities for 2017 include: money market funds, recidivist representatives and their employers (or, those with prior records of misconduct), wrap-fee programs, exchange-traded funds, multibranch advisers, and senior investors.

One caveat to this list is that the SEC’s exam priorities are those of an administration that’s on its way out — the SEC under a Trump administration may prioritize different items, Ms. Lynch said.

However, she believes robo-advice would continue to be a priority in the new administration “based on the growth of the industry and the direction of the industry, especially as baby boomers continue to retire and more people are in need of advice.”

In addition to electronic investment advice, the SEC noted it would enhance its oversight of the Financial Industry Regulatory Authority Inc. It’s a new addition from last year’s exam priorities.

However, it’s something the SEC periodically notes in its priorities, and means the SEC will likely increase the number of its oversight examinations, according to Ms. Lynch.

“Broker-dealers should perhaps expect to see SEC examiners this year either in addition to or instead of Finra examiners, depending on what their exam schedule is,” she said.

“At a minimum, they’re trying to remind people of that oversight responsibility” of Finra, Mr. Willams said.

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