The SEC & FINRA released their priorities for 2016 examinations. Asset management firms need to review + update their policies, procedures and business activities to reflect both sets of priorities so they can strengthen business practices and prepare for potential exams.

1. SEC, FINRA release 2016 exam
priorities for asset managers
February 2016
Both the SEC and FINRA recently released their priorities for 2016 examinations and
continue to ramp up their oversight efforts with the goal of protecting investors. It is
important that asset management firms review and update their policies, procedures and
business activities to reflect both sets of priorities so they can strengthen business practices
and prepare for potential exams.
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2. 2 SEC, FINRA release 2016 exam priorities for asset managers
SEC priorities
In its Examination Priorities for 2016, the SEC’s Office of Compliance Inspections and
Examinations (OCIE) states that the “priorities reflect certain practices and products that
OCIE perceives to present potentially heightened risk to investors and/or the integrity of
the U.S. capital markets.1
” The OCIE release provides guidance to investment advisers,
broker-dealers, municipal advisers and transfer agents. It is designed to protect investors,
assess market-wide risks and collect information on illegal activities via data analytics to
identify signs of potential unlawful actions.
Protecting investors
Protecting retail investors and those saving for retirement continues as a priority in 2016, and the OCIE indicates this will likely continue
in the future.
OCIE focus areas Topics
Retirement accounts managed by SEC-registered
investment advisers and broker-dealers
• Reasonable basis for recommendations made to investors
• Conflicts of interest
• Supervision and compliance controls
• Marketing and disclosure practices
Exchange-traded funds (ETFs)
• Compliance with applicable exemptive relief and other regulatory requirements under federal securities
laws, as well as unit creation and redemption processes
• Sales strategies, trading practices and disclosures with a focus on excessive portfolio concentration;
primary and secondary market trading risks; adequacy of risk disclosure; and suitability, particularly in
niche or leveraged/inverse ETFs
Supervision of SEC-registered investment advisers
and broker-dealers in branch offices
• Potentially inappropriate trading through the use of data analytics
Fee selection and reverse churning by investment advisers
and dually-registered investment adviser/broker-dealers that
offer a variety of fee arrangements
• Recommendations on account types and whether they are in the client's best interests
• Fees charged
• Services provided
• Disclosure of fee arrangements
Variable annuity sales
• Suitability of sales
• Supervision of sales
• Adequacy of disclosures
Advisers to public pensions
• Pay-to-play
• Identification of undisclosed gifts and entertainment
• Other key risk areas
1
SEC Office of Compliance Inspections and Examinations. “Examination Priorities for 2016,” Jan. 11, 2016.
See https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf for details.

3. Market-wide risks
To maintain fair, orderly and efficient markets, the OCIE will look for structural risks and trends that may involve multiple firms or entire industries.
OCIE focus areas Topics
Cybersecurity • Implementation of cybersecurity procedures and controls
Regulation systems compliance and integrity
• Written policies and procedures reasonably designed to ensure the capacity, integrity, resiliency,
availability and security of any technology systems that relates to the U.S. securities market
Liquidity controls for advisers to mutual funds, ETFs, private
funds and broker-dealers that have exposure to potentially
illiquid fixed income securities
• Controls over market risk management, valuation, liquidity management, trading activity and
regulatory capital
Clearing agencies
• Regulatory compliance with provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act
Data analytics
The OCIE has steadily increased its use of data analytics to analyze asset management firms and identify areas of weakness or
illegal activity.
OCIE focus areas Topics
Recidivist representatives and the firms that
employ them
• Firms that employ individuals with a history of misconduct
• Compliance oversight and controls of firms after such individuals have been disciplined or barred from
a broker-dealer
Anti-money laundering programs
• Clearing practices and history
• Late or incomplete suspicious activity reports
• Whether the number of suspicious activity reports is consistent with the business model
Broker-dealers’ anti-money laundering programs
• Adequacy of the independent testing obligation
• Extent to which firms consider and adapt their programs to current money laundering and
terrorist financing risks
Microcap fraud and market manipulation
• Broker-dealers and transfer agents operations that may support market manipulation schemes
(e.g., pump and dump schemes)
• Broker-dealers' compliance with federal securities laws in publishing quotes for or trading securities in the
over-the-counter markets
Excessive trading • Firms and representatives engaged in excessive or otherwise inappropriate trading activities
Product promotion
• Potential suitability issues and breaches of fiduciary obligations arising from the use of new, complex and
high-risk products
Other exam initiatives
The OCIE expects to allocate examination resources to some priorities beyond those described above.
OCIE focus areas Topics
Newly-registered municipal advisers • Compliance with recently adopted SEC and Municipal Securities Rulemaking Board rules
Private placement offerings involving Regulation D of the
Securities Act of 1933 or the Immigrant Investor Program
• Legal requirements regarding due diligence, disclosure and suitability
Never-before-examined investment advisers and investment
company complexes
• Compliance programs
• Investment advisory contracts
• Advertising and distribution of fund shares
• Valuation of portfolio assets and NAV calculation
Advisers to private funds
• Fees and expenses
• Controls and disclosures associated with side-by-side management of performance-based and purely
asset-based fee accounts
Transfer agents, including examining transfer agents
providing paying-agent services for their issuers
• Timely turnaround of items and transfers, record keeping and record retention
• Safeguarding of funds and securities
• Paying-agent services, focusing on the safeguarding of security-holder funds

4. 4 SEC, FINRA release 2016 exam priorities for asset managers
FINRA priorities
FINRA also recently issued its 2016 Regulatory and Examination Priorities Letter.2
Similar to the OCIE’s priorities, key FINRA examination areas include culture, conflicts
of interest and ethics; supervisions, risk management and controls; liquidity; sales practices;
financial and operations controls; and market integrity.
Culture, conflicts of interest and ethics
FINRA describes culture as the “set of explicit and implicit norms, practices, and expected behaviors that influence how firm executives,
supervisors and employees make and implement decisions in the course of conducting a firm’s business.” Because of culture’s central role
in how business is conducted, FINRA is formalizing its assessment of firm culture to better understand how it affects a firm’s compliance
and risk management practices, while continuing to focus on conflicts of interest and ethics.
FINRA focus areas Topics
The frameworks that firms use to develop, communicate
and evaluate conformance with their culture
• Whether control functions are valued within the organization
• Whether policy or control breaches are tolerated
• Whether the organization proactively seeks to identify risk and compliance events
• Whether supervisors are effective role models of firm culture
• Whether subcultures (e.g., at a branch office, trading desk or an investment banking department)
conform to overall corporate culture
Conflicts of interest and the fair and ethical treatment
of customers
• Mitigation actions
2
Financial Industry Regulatory Authority. “2016 Regulatory and Examination Priorities Letter,” Jan. 5, 2016.
See http://www.finra.org/sites/default/files/2016-regulatory-and-examination-priorities-letter.pdf for details.

5. Supervisions, risk management and controls
Culture is closely aligned with supervision. FINRA will consider supervision generally and also how it specifically relates to conflicts
of interest.
FINRA focus areas Topics
Conflict of interest management
• Incentive structures
–– Incentive structures and conflicts of interest within member firms’ retail brokerage business
–– Conflict mitigation processes regarding compensation plans for registered representatives
–– Approaches to mitigating conflicts of interest that arise due to the sale of proprietary or affiliated
products or products for which a firm receives third-party payments
• Investment banking and research businesses
–– Whether firms’ research analysts have inappropriate involvement in their investment banking activities
–– Whether investment banking personnel have undue influence on analysts
• Information leakage and controls to identify, minimize and mitigate information leakage within or
outside a firm
• Supervision, control and validation of traders’ pricing of illiquid, Level 3 assets and whether positions are
fairly valued
Technology infrastructure
(including hardware, software and personnel)
• Cybersecurity
–– Cybersecurity risk management and assessment
–– Governance
–– Technical controls
–– Incident response
–– Vendor management
–– Data loss
–– Staff training
–– Confidentiality, integrity and availability of sensitive customer and other information
–– Ability of high-frequency and proprietary trading firms to protect their systems from
unauthorized access
• Technology management
–– Technology governance
–– Change management practices
• Data quality and governance
–– Data governance
–– Quality controls
–– Reporting practices
Outsourcing
• Due diligence and risk assessment of vendors
• Supervision of vendors
Anti-money laundering
• How a firm monitors suspicious activity
• High-risk microcap securities activity
Liquidity
Because liquidity management has been a contributor to firm failures and systemic crises, FINRA will continue to review the adequacy of
firms’ contingency funding plans in light of their business models.
FINRA focus area Topics
Liquidity
• Adequacy of firms’ contingency funding plans
• Adequacy of high-frequency trading firms’ liquidity planning and controls

6. 6 SEC, FINRA release 2016 exam priorities for asset managers
Sales practices
Sales practices for specific types of investments or investors may be examined closely.
FINRA focus areas Topics
Suitability and concentration
• Policies and processes that govern monitoring for excessive concentrations
• Suitability determinations for recommended transactions or investment strategies
Seniors and vulnerable investors
• Suitability and concentration issues
• Recommendations regarding high-cost products
Sales charge discounts and waivers
• Volume discounts or sales charge waivers for products such as mutual funds, unit investment trusts,
nontraded real estate investment trusts (REITs) and business development companies (BDCs)
• Sales charge waivers
529 College Savings Plans
• Recommendation of specific share types
• Fee and expense structures
Private placements, the JOBS Act and public offers
• Private placement suitability, disclosure and due diligence
• Public offering clearance by FINRA
• Nontraded entities (e.g., REITs, BDCs and direct participation programs)
• Prices for new bond sales and secondary market trading
• Procedures for reviewing outside business activities
Financial and operations controls
FINRA wants to ensure controls are in place to lessen certain risks.
FINRA focus areas Topics
Market-maker net capital exemptions
• Exemptions from the SEC’s net capital requirements for broker-dealers
• Whether the firm has consistently complied with the SEC’s net capital requirements for broker-dealers
• Whether firms are engaged in bona fide market making and permissible hedging transitions under the
Net Capital Rule
Exchange-traded funds
• Processes used to measure and monitor the impact of overnight counterparty risk
• Accuracy of net capital computations
Fixed income prime brokerage
• Settlement practices for fixed income trades
• Practices used to disaffirm trades, including the legal documentation that supports the
settlement process
• Financing practices for fixed income when extensive leverage is offered
Internal audit
• Processes for identifying and prioritizing risks
• Interactions between the audit committee and the board
• Involvement of internal audit in committees and major projects
• Audit plan execution
• How issues are tracked through resolution
• Whether internal audit deficiencies are incorporated into business risks
Client onboarding
• Credit worthiness and the impact of trading strategy on credit worthiness
• Projected liquidity usage arising from client trading practices
• Estimated margin lending requirements
Transmittal of customer funds
• Controls used to review and monitor transmittals from customer accounts to:
–– Third-party accounts that would result in a change of beneficial ownership
–– Outside entities
–– Locations other than a customer’s primary residence
–– Firms’ registered representatives

7. Market integrity
FINRA continues to focus on maintaining the integrity of financial markets.
FINRA focus areas Topics
Vendor Display Rule • Firm’s use of the Vendor Display Rule when providing quotation information to customers
Market access
• How firms identify and address potential misconduct using information in new monthly FINRA equity
manipulation compliance report cards
Fixed income
• Fixed income order handling, markups and related controls
• Wash sales
• Marking the close
• Trading ahead
• Alternative trading systems
Regulation SHO
• Supervisory processes that ensure compliance with the net-flat or net long position requirements of Rule
204 of Regulation SHO
• Adequacy of authorized participant controls on exchange-traded product redemption orders
Cross-market and cross-product manipulation
• Coordinated equity and options market activity designed to create momentary artificial prices intended to
affect the settlement prices of related products
Audit trail integrity
• Potential audit trail issues not typically detected through routine compliance sweeps, including late
reporting of Trade Reporting and Compliance Engine-eligible and municipal securities and errors in the
equity audit trail
Contacts
Michael C. Patanella
Audit Partner and US Asset
Management Sector Leader
T +1 212 624 5258
E michael.patanella@us.gt.com
Kristina Vieni
Leader, Special Attestation
Reporting Solution Group
Metro New York/
New England Market Territory
T +1 212 542 9612
E kristina.vieni@us.gt.com
Conclusion
Regulatory scrutiny is increasing, so now is the time to get your house in order, especially if you have not been
through an examination. The SEC and FINRA examination priorities should serve as important building blocks to
conduct your annual review of policies, procedures and business activities. Self-identifying and correcting deficiencies
will be extremely useful in avoiding an investigation, examination or enforcement action. If you have any questions,
please contact one of the Grant Thornton LLP professionals listed here.

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