The Office of Compliance Inspections and Examinations of the US SEC recently published its examination priorities for 2016. These centre around three key areas:
- Examining matters of importance to retail investors, including investors saving for retirement. There will be a particular focus on the basis for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices; issues relating to ETFs’ unit creation and redemption process, sales strategies, trading practices, and disclosures involving ETFs, including excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability; and on adviser/dealer fee arrangements and disclosure thereof.
- Assessing issues related to market-wide risks with a particular focus on cyber security and liquidity controls.
- Analyzing data to identify and examine registrants that may be engaged in illegal activity.
James Shipton, Executive Director for Licensing and Intermediaries Supervision at the SFC in Hong Kong, recently gave an update at an industry conference on the areas of priority for SFC inspections of asset managers in 2016:
- he endorsed the SEC’s examination priorities referred to above and said the SFC had a similar focus
- he said the priorities from last year remain – see below. In relation to conflicts of interest, he also noted a focus on disclosure of fees and expenses
- he indicated the SFC would be looking at liquidity and valuation issues as part of its revamp of the Fund Manager Code of Conduct
- he emphasised senior management responsibility for licensed corporations, including senior managers who are not licensed persons, and also emphasised the responsibility of the board of directors as the ultimate controlling body of the licensed corporation
The SFC’s inspection priorities for asset managers in 2015 included:
- compliance with electronic trading rules and controls around electronic trading
- cyber-security risks
- AML – even if outsourced (e.g. to a fund administrator) the SFC expects managers to “own” the responsibility for AML
- managing conflicts of interest, in particular:
- review and oversight of trade allocations, particularly between funds and managed accounts
- use and disclosure of cash rebates and soft dollars
- disclosure of information to investors, particularly in relation to side letters and material terms agreed with individual investors
- outsourcing – managers retain responsibility; is there appropriate oversight and governance and what are the licensed entity’s controls around outsourcing?
- use of expert networks and business analysts
- safe custody
It is clear that the SFC views managers as responsible from a regulatory perspective to exercise due diligence/control over the outsourced activities of the funds that they manage.