Archive for February 2013

SEC Examination Priority: Dually Registered Firms

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has recently communicated its examination priorities for 2013.  These priorities reflect ongoing, as well as, emerging issues which the SEC perceives as presenting heightened risk for investors and other market participants.

The SEC bases its selections on information it gathers from many sources including ongoing issues discovered during its examination programs; information gathered from its review of filings made by regulated entities; complaints received from investors; interactions with other domestic and international regulatory bodies; as well as, information circulating via industry and media publications.

One of the areas of focus for the SEC this year will be examinations of dually registered investment advisers and broker-dealers.  The SEC has focused on these firms in the past, and continues to review these firms on an ongoing basis.  During these examinations, the SEC will be coordinating its investment adviser inspection teams with members of the broker-dealer inspection staff (“joint exams”) in order to thoroughly review firms’ compliance programs under the rules and requirements addressing each aspect of the firm’s business.

Because of the ‘dual’ nature of a financial professional conducting both investment advisory and broker-dealer business (“IA/RR”), the SEC will focus its review on determining whether both the investment advisory firm and the broker-dealer have strong internal controls, policies and procedures addressing the review and approval of activities conducted by its financial professionals.

The SEC will pay particular attention to how a firm monitors and controls the IA/RR’s activities.  Therefore, firms with IA/RR’s need to establish and maintain written policies and procedures to address the oversight of its securities business on “each side” of the business.  Firms need to have in place a process to conduct ongoing suitability reviews for recommendations made by the IA/RR to their advisory clients as well as trading and suitability reviews of brokerage client accounts.  The firm should ensure that it has a methodology to review for, and determine the appropriateness of, fees and commissions as well as other conflicts of interest which may arise because of this ‘dual’ relationship with each customer’s account.