SEC Reveals Its 2014 Exam and Enforcement Priorities

Investment Management: Fiduciary Duty, Insider Trading

Champ noted the significant movement by dually registered advisors and broker-dealers of client accounts from brokerage to advisory accounts. "We get why this is going on … because with advisory accounts you get an [ongoing] advisory fee, and that is good for revenue." However, Champ warned compliance officers to think about "where the advisor's fiduciary duty occurs" when "recommending to move a client from a brokerage account that costs nothing to an advisory account that can cost 1% per year."

With insider trading having "been a big deal" in the fund industry, Champ urged firms to make sure they have procedures to prevent the misuse of nonpublic information. "Think about what you are doing to prevent this," he said, "and talk to us about a violation before we find it. If you detect a violation, it's important that you talk to us."

Champ also noted that guidance updates on various issues that began in 2013 will continue this year. Fourteen such updates "on areas where we've seen an issue" were issued last year, he said. The most recent one, released in January, looks at changes in the bond markets in which "dealers—the big wirehouses—are holding less inventory in bonds, 20% less," Champ said, "so there are much fewer people out there making markets in bonds." Look for more of these guidance updates this year, he said, as well as further guidance on Rule 506(c) private offerings.

Grim added the division is also looking at rulemakings this year around ETF registration and target-date funds.

Enforcement Division

Andrew Ceresney, who became sole director of the SEC's Enforcement Division in January following the departure of co-director George Canellos, spoke of the cases the agency brought last year related to firms' failure to correct deficiencies. "We had nine such cases last year, with more in the queue," he said. "We worry that those [unaddressed] issues will lead to bigger issues."

Noting the "critical" importance of the commission to enforce the custody rule, as the SEC "brought a number of cases" in this area last year, Ceresney noted "areas of unique development in 2013," such as the portfolio manager who violated the rule that prohibits "obstructing or lying" to a CCO.

"I wasn't even aware of the rule," Rule 38a-1(c) of the Investment Company Act, which was enforced in that case, Ceresney admitted, but promised "we will be [enforcing] it extensively going forward."

Yet another unique case was in the BD area, with the failure to disclose mark ups and mark downs, he said.

Not unique, however, will be the division's continuing effort to enforce failures to supervise, he said.

Other issues of focus this year, he said, are conflicts of interest at funds, including side-by-side management of conflicts, which includes the related issue of principal transactions. "We brought a number of cases" on this last year, "and we will continue to bring cases here in 2014," according to Ceresney.

Others focus areas include cherry picking, the practice of allocating more profitable trades to favored clients, as well as private equity and valuation in that realm, and disclosure of fees in this area.

In the private equity area, there will also be a focus on "zombie funds," he said, which result when private equity holdings are not designed for quick liquidity, and "zombie managers" are unable to raise new capital.