Brexit developments in the Financial Services Sector

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Since the result of the EU Referendum, the City has been considering the best options for the financial services sector as Britain plans to leave the EU. There is continuing uncertainty as to what relationship the UK will have with the EU following its departure from the EU, but the importance of maintaining access to the single market for financial services has been stressed by the FCA. In Europe, some progress has been made on resolving the single market access issue in relation to the financial services sector.

Importance of access to the single market

The need to retain equivalent regulation which would allow access to the single market was emphasised by the FCA recently in a speech by Andrew Bailey, its new CEO. Confirming that the FCA will continue to implement EU legislation while the UK remains a member of the EU, Mr Bailey stressed the importance of cross-border trade in financial services, highlighting the need for “robust global standards of regulation” to support such trade. The standards, Mr Bailey believes, “can operate simultaneously at both EU and global level”. Signposting the FCA’s intention to maintain a high level of regulation equivalent to that of the EU, Mr Bailey specifically highlighted the FCA’s ability to deal with equivalence standards noting that “[U]nlike for trade in goods, we will not need to scour the world to find experts in a long forgotten skill – we are familiar with equivalence standards”. This indicates that the City should not expect any lessening or relaxation of regulatory standards in the financial services sector. In addition, Mr Bailey’s reference to equivalence standards could be read as an indication that the Regulator would support obtaining equivalent status as one possible route into the single market for financial services firms.

Industry bodies are also working closely with their members to develop the negotiation priorities for the financial services sector and how best to ensure that these priorities are understood and incorporated into the wider negotiation strategy for the UK.

EEA Agreement Developments

Interestingly, after several years in the long grass, progress has also been made on the incorporation of financial services legislation into the EEA Agreement. While in principle single market access for financial services is one of the benefits of EEA membership, this has been complicated by the fact that the EEA Agreement does not apply for European Supervisory Authorities (ESAs) and following the financial crisis of 2007/2008 much recent EU financial services legislation assigns significant roles to the ESAs. As a result certain EU financial services legislation (for example AIFMD) is yet to be incorporated into the EEA Agreement.

The European Commission has adopted a decision of the Council of the EU regarding the position to be taken by the EU in relation to the incorporation of the role of ESAs into the EEA Agreement. While the EEA Joint Committee (consisting of European Commission representatives and the three non-EU EEA members) need to adopt a joint committee decision on the amendments necessary to the EEA Agreement, this step by the European Commission is a positive development towards fully opening the single market in financial services across the EEA.

Next steps

With the prime minister confirming Article 50 is not going to be triggered until the UK has worked out its negotiating position, now is a good time to liaise with regulators and industry bodies to ensure that the financial services sector’s requirements are meet as fully as possibly in post Brexit Britain. We will continue to work closely with our clients and industry bodies to assist in raising these requirements in advance of the forthcoming negotiations.

MiFID 2: FCA gathers steam

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In line with the UK financial services regulators’ appeals to UK businesses to keep calm and carry on, FCA is pressing ahead with its planning for implementation of the revised Markets in Financial Instruments Directive (MiFID 2) and Regulation (MiFIR) package, due to be implemented and to apply from 3 January 2018.

Previously, FCA had published a discussion paper and a consultation paper. The consultation paper had focused on the markets aspects of the MiFID 2 package. The second paper focuses on other trading issues and high level organisational requirements.

Timing and outstanding issues

FCA confirms it is now working to the new implementation timetable, and acknowledges there are still several further changes it will need to make to its Handbook that it has not yet consulted on. The planned third consultation paper, for later this year, will include the main changes to the Conduct of Business Sourcebook, the rules on product governance and some changes to the Perimeter Guidance Manual.

FCA believes industry finds it helpful to receive staggered consultations, but notes that it has changed its original plan to feedback separately on its first consultation. It cannot yet provide this feedback as some final provisions will depend on decisions Treasury needs to make. As a result, FCA will now probably instead publish a single policy statement next year.

Approach to branches of third-country firms

FCA is using this paper also to expand upon its approach to regulating UK branches of third-country firms. MiFID 2 allows (but does not require) member states to keep their national regimes that govern third-country firms, provided those firms do not receive more favourable regulatory treatment than MiFID firms can have. FCA has already consulted on how it can apply provisions from directly applicable legislation made under MiFID 2 to such firms. To date, it has used what it calls a modular approach to applying rules to these firms. Broadly, this means it has tended to apply as rules the provisions of the Handbook that focus on conduct, but either to switch off, or just apply as guidance, those with a prudential focus. So far as possible, FCA plans to continue this approach with the new or changed rules that MiFID 2 introduces.

Approach to article 3 firms

MiFID 2 allows firms with specific business (domestic businesses that do not hold client money or assets and which receive and transmit orders only in transferable securities or collective investment scheme units to authorised firms and provide related advice) to remain outside the scope of MiFID 2, but requires that national regulators subject these firms to “at least analogous” requirements to MiFID 2. Under the current MiFID, the UK has permitted article 3 firms, if they wish, to “opt in” to MiFID, and so has up to now imposed rules which are of MiFID standard. It now can choose whether to apply the new MiFID 2 requirements that fall outside the specified “analogous” provisions. FCA notes that there are, in the UK, more article 3 investment firms than there are MiFID investment firms. Within each relevant section of its paper it addresses any specific effects of the MiFID 2 changes on how it applies its rules to article 3 firms.

Commodity derivatives

FCA plans to introduce a new section in the Market Conduct Sourcebook (MAR) – MAR 10 – setting out guidance and directions on the rules on position limits, position management and position reporting for commodity derivatives contracts. Next year, it will set position limits that will take effect on 3 January 2018. The new chapter will address:

  • Application: this will include guidance on the territorial scope of position limits, clarifying that the limits will not apply where two persons outside the EEA with no link to the UK trade OTC contracts that are economically equivalent to contracts traded on UK trading venues
  • Position limit requirements: this will give guidance on FCA’s obligation to set and apply limits and also explain when FCA may consider granting an exemption to non-financial firms that may otherwise exceed the position limit.
  • Position management controls: this will include rules for investment firms and branches of non-EEA investment firms operating an MTF or OTF that mirror the rules FCA has already proposed for regulated markets.
  • Position reporting: again, this includes the requirements for relevant MTF and OTF operators to mirror those for regulated markets. This part also sets out draft directions on reporting positions in economically equivalent OTC contracts
  • Other reporting, notification and information requirements.

Supervision Manual

FCA proposes changes to SUP relating to breach reporting, and to take account of the provisions of MiFIR and implementing Regulations not made under FSMA. Specifically, SUP will require firms to notify FCA of a breach of directly applicable regulations under MiFID 2 or Treasury regulations. FCA also needs to make changes to introduce transitional provisions to address the obligations of firms to report breaches under the current MiFID implementing Regulation, which will be revoked when MiFID 2 takes effect. Further changes will update passporting requirements. FCA has already proposed signposts to the relevant ESMA technical standards, but now proposes new forms to address cancellation of passports.

Prudential standards

FCA needs to make changes to prudential sourcebooks to cater for the introduction of the new regulated activity of operating an OTF and the abolition of the current exemption from MiFID for local firms. FCA plans to update its prudential classifications to reflect the new OTF operator status and to include these firms within the IFPRU 730K firm classification. To deal with the abolition of the “local” exemption, FCA will in the main merely delete relevant references, mainly in IPRU(INV). It notes that it has assumed a traded options market maker is a type of local.

Senior management arrangements, systems and controls

FCA plans significant changes to SYSC to reflect the requirements of MiFID 2 and to take account of the directly applicable EU regulations. It is also consulting on its approach to applying organisational requirements to branches of non-EU firms and to firms that benefit from the article 3 exemption. It needs to ensure these firms comply with rules “at least analogous” to the MiFID requirements, but believes few changes are required to the current SYSC structure to achieve this. It needs to make changes to implement parts of articles 9, 23 and 16 of the MiFID 2 directive. It will need to do this by making changes to chapters 4-10 of SYSC. Its general approach will comprise:

  1. Keeping its current “common platform” framework and the 5 year record retention requirement;
  2. Transposing into SYSC relevant MiFID 2 directive provisions and signposting the supplementing provisions from the MiFID 2 implementing Regulation. The key changes concern:
    • Conflicts of interest – while MiFID 2 does not make major changes to the current situation, FCA will amend SYSC 10 to align it with the new requirements. It has also decided to apply the requirements of the MiFID 2 implementing Regulation to all firms, but some provisions will still apply only as guidance to firms which are not common platform or article 3 firms;
    • Management bodies – FCA proposes changes to SYSC 4.3.A which will apply to common platform firms, and will apply as rules to article 3 firms, and will include the extended obligations MiFID 2 introduces. For third-country branches, FCA is keen to keep any current equivalence approach, but will in some cases mandate a firm follows the SYSC provisions as rules.
  3. extending the application of several provisions in the MiFID 2 implementing Regulation to the entire business of a UK MiFID investment firm, whether or not the specific business in question falls within MiFID.

FCA also notes the changes will affect UCITS investment firms and AIFM investment firms in respect of their MiFID business, and proposes tables showing how the SYSC rules will apply to these firms.

Remuneration requirements for sales staff

FCA plans to introduce a new section in SYSC to address this, but does not intend to cross-cut standards for firms that are regulated under other EU directives. FCA has already sought views on how it should address MiFID 2’s remuneration requirements, given it already has detailed remuneration codes and rules for specific types of firm, some stemming from other EU legislation. It now proposes to apply MiFID 2 remuneration standards for sales staff and advisers only to common platform firms, article 3 firms and branches of third-country firms in respect of activities they carry on from a UK establishment. It proposes a new chapter SYSC 19.F and also to require article 3 firms and third-country firms to comply with a requirement similar to that in Article 27 of the MiFID 2 implementing Regulation.


FCA is planning to consolidate within one chapter in SYSC the MiFID 2 and domestic provisions on whistleblowing and provide signposts to rules that implement the provisions of other EU legislation. FCA does not think it can create a “common platform” of whistleblowing requirements across all relevant legislation as to try to do so would involve gold-plating some standards and under-delivering on others. FCA thinks it best to bring together a new chapter in SYSC (SYSC 18.6) to pull together all the requirements.

Client assets

FCA plans changes to CASS necessary to implement MiFID 2 and, in line with its current approach, will apply the changes to all designated investment business. Again, it does not need to make fundamental changes but plans to use “intelligent copy out” to include within CASS any requirements MiFID 2 introduces which are not already in its rules. There will be no change to the ability of professional clients to opt out of the client money rules, but FCA will need to amend its rules on total title collateral arrangements to reflect MiFID 2’s ban on these for retail clients. Minor adjustments are also needed to the custody rules and rules on depositing client money in a group bank, where MiFID 2 reaffirms current standards and includes specific possible exemptions. Since several parts of CASS will change, the consultation paper includes a table outlining the new requirements. Finally, FCA says it intends to keep the CASS rules in relation to which it had made “article 4” notifications to the Commission under the current MiFID.

Complaints handling

FCA plans a new section in DISP that will cover the wider application of the complaints rules that MiFID 2 requires. FCA’s general belief is that the same rules should apply to complaints handling regardless of the subject matter, but DISP already caters for specific requirements in EU sectoral legislation. FCA proposes to amend DISP now to implement MiFID 2’s requirements, including by introducing a definition of “MiFID complaint” and a new DISP 1.1A.


FCA needs to update the fees manual to account of initial and ongoing fees for those who apply to operate OTFs (or MTFs), and the on-boarding fees of firms that connect to FCA’s Market Data Processor. Discussion on periodic fees can come later.

Implementation guide

FCA has also provided a guide intended to help firms to navigate SYSC.

Draft new rules

The draft new rules included in the consultation comprise amendments to:

  • ŸThe Glossary: this includes many new definitions, including some that have been amended from the previous consultation version, and many amendments to existing defined terms
  • SYSC, including significant changes to the application of various provisions to certain types of firm as well as changes to chapters 4-10, 18 and parts of 19
  • Ÿ FEES, including a few changes to parts not affecting the new regulated activities or DRSPs
  • CASS, which has significant changes discussed above
  • MAR to introduce MAR 10 on commodity derivatives
  • SUP to make changes to various chapters, including 13 15 and 16
  • DISP, including the new DISP 1.1A and amended application provisions
  • New forms
  • A SYSC navigation guide.

When does consultation end?

FCA asks for comments by 28 October.

What next?

All firms that carry on any MiFID business, whether they derive their authorisation from MiFID or other EU sectoral legislation, whether they are an article 3 firm or a third-country firm, should read this paper carefully. While in many areas MiFID 2 does not require significant changes to UK regulation, there are some areas which require FCA to introduce new requirements or substantially amend existing ones. There are also some changes which may appear minor but may nevertheless have a significant effect on some firms’ policies, procedures and business practices. Even with the extension to the MiFID 2 application date, there is unlikely to be time for any meaningful further discussions with FCA, so firms must be sure to communicate any concerns or confusion sooner rather than later.

Unlocking MiFID II: Best execution – a tightening-up of expectations on firms

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The comprehensive revisions to the Markets in Financial Instruments Directive (MiFiD) in response to the financial crisis have had a troubled gestation.

Investment firms executing (or arranging for the execution of) trades on behalf of clients must take all reasonable steps to obtain the best possible result for their clients when executing orders (known as “best execution”). Firms will already have policies in place to ensure that they can meet this obligation. However, MiFID II (the Markets in Financial Instruments Directive, 2014/65/EU) will impose a number of new and enhanced obligations on firms when it comes into force in January 2018.

What are the changes?

MiFID II builds upon the existing requirements in MiFID I in a number of ways, including:

  • Firms are expressly required to explain their execution policies in sufficient detail to allow clients easily to understand how orders will be executed;
  • Requiring firms to disclose the top five execution venues used;
  • Disclose on at least an annual basis the quality of execution;
  • Prohibiting the use of payments for order flow; and
  • Upgrading the obligation to achieve the best result from an obligation to use “all reasonable steps” to a requirement to take “all sufficient steps”.

As part of its consultation process in 2014 for the implementation of MiFID II, ESMA expressed frustration at the perceived failure of the best execution regime set out in MiFID I to help investors differentiate between services provided by investment firms. ESMA’s technical advice, published in December 2014, therefore included a number of provisions seeking to clarify, but also tighten up on, equivalent provisions in MiFID I and its implementing directive. This has been confirmed in the draft implementing regulations for MiFID II that were published by the European Commission in late April2016.

Will MiFID II significantly change existing regulation of best execution in the UK?

The best execution requirements in MiFID II represent a significant step-up from the obligations that firms were under when the original Directive took effect in 2007. Certainly UK firms will need to look carefully at their policies and procedures to ensure that they are updated to comply with these more stringent requirements.

However, it is worth remembering that the FSA (the predecessor conduct regulator to the FCA) had already made it clear to firms that it expected them to go above and beyond what was required by the letter of MiFID I. In January 2009, the FSA, published a report on wholesale firms’ implementation of MiFID I which was critical of their efforts on execution best execution, expressing concern that firms were doing little more than reciting the rules in policies that were high level and vague.

Furthermore, UK firms had already been warned not to engage in accepting payments for order flows in FSA guidance that was adopted in 2012.

Nonetheless, there are still a number of changes that will require even the most compliant of firms to look again at their policies and procedures. The obligation to publish details of the five top executionvenues may give rise to concerns amongst brokers that they are having to reveal trade secrets and give more information to clients than they would be comfortable doing. Similarly, the requirement for providing clear and detailed execution policies that can be “easily understood by clients” may result in longer and more specific documents being produced. Greater care will also need to be taken to consider whether policies need to be revisited following changes within the firm (whilst this obligation is not new, as with much in MiFID II, it is expected to be more rigorously applied).


Global FX Code Released

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On May 26, 2016, the Bank for International Settlements published the Phase 1 materials for a global Code for the FX market. The Code is a set of principles providing common guidelines to promote the integrity and effectiveness of the global wholesale FX markets and has been prepared as a result of the recent spate of misconduct cases in the FX markets. The Code covers governance, risk management and compliance, ethics, information sharing, execution and confirmation and settlement processes. The final Code is expected to be published in May 2017. In the meantime, the authors hope that market participants will begin to embed the Code into their day-to-day activities. The Code does not impose any legal or regulatory obligations on market participants and is intended to supplement local laws, rules and regulations by identifying global good practices and processes.

The FX Code is available at:

and the Update on Adherence to the Code is available at:

ESMA Publishes Advice on Potential Extension of AIFMD Marketing Passport

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On July 19, the European Securities and Markets Authority (ESMA) published its long-delayed and much anticipated advice to the European Commission (Commission) in relation to the extension of the Alternative Investment Fund Managers Directive (AIFMD) marketing passport to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs). In it, ESMA gives broadly positive advice in relation to 12 countries: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland, and the United States—with some reservations, as noted below.

Currently, non-EU AIFMs and AIFs must comply with each EU country’s national private placement rules when they market funds in that country, whereas under AIFMD, EU AIFMs managing an EU AIF have the benefit of a marketing passport so that those AIFs can be marketed throughout the European Union.

A year ago, in July 2015 (see the Corporate & Financial Weekly Digest edition for July 31, 2015), ESMA published its first advice on the application of the passport to six non-EU countries (Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States). At that time, ESMA deemed Jersey, Guernsey and Switzerland as being “equivalent,” but ESMA could not recommend equivalence for the United States because of competition concerns. In response to the July 2015 advice, the Commission elected to wait for ESMA to approve more countries as being “of equivalence” before endorsing these decisions. ESMA has now reassessed the initial list of jurisdictions and several others, looking at how equivalent their competition rules, market disruption, regulatory enforcement, market access, investor protection and the monitoring of systemic risk are to the rules in the European Union.

In the new advice ESMA comments that:

  • United States: There were no significant obstacles regarding investor protection and the monitoring of systemic risk that would impede the application of the AIFMD passport to US AIFMs or AIFs. With respect to the competition and market-disruption criteria, while ESMA considers there to be no significant obstacle for AIFs that are privately placed, it does consider that for AIFs marketed by way of a public offering that there is an “un-level playing field” between EU and non-EU AIFMs as market access conditions, which would apply to these US funds in the European Union under an AIFMD passport would be less onerous than the market access conditions applicable to EU funds in the United States. ESMA suggests, therefore, that the European Union consider options to mitigate this risk.
  • Canada, Guernsey, Japan, Jersey and Switzerland: There are no significant obstacles impeding the application of the AIFMD passport to these countries.
  • Hong Kong and Singapore: If ESMA considers the assessment only in relation to AIFs, there are no significant obstacles impeding the application of the AIFMD passport to AIFs in Hong Kong and Singapore. However, ESMA notes that both Hong Kong and Singapore operate regimes that facilitate the access of Undertakings for Collective Investment in Transferable Securities (UCITS) from only certain EU Member States to retail investors in their territories.
  • Australia: There would be no significant obstacles regarding market disruption and obstacles to competition impeding the application of the AIFMD passport to Australian entities, as long as the Australian regulator extends to all EU Member States the “class order relief,” currently available only to some EU Member States.
  • Bermuda and the Cayman Islands: ESMA cannot give definitive advice with respect to the criteria on investor protection and effectiveness of enforcement since both countries are in the process of implementing new regulatory regimes and the assessment will need to take into account the final rules in place.
  • Isle of Man: ESMA finds that the absence of an AIFMD-like regime makes it difficult to assess whether the investor protection criterion is met.

The possible extension of the passport to such countries (which remains subject to sign-off by each of the Commission, Parliament and Council) bodes well for the UK, which voted last month to leave the European Union. Post-“Brexit,” as a non-EU jurisdiction that has EU law in effect, the UK also should be approved by ESMA with a positive “equivalence” determination, meaning that UK AIFMs and AIFs would be treated broadly as they are today—allowing UK firms to retain their “passporting” access to the single market, as at present.

A copy of the ESMA advice is available here.

FCA Staff Comments on Best Execution Duties for FX Spot and Derivative Transactions

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The PRA published the minutes of a meeting of the Foreign Exchange Joint Standing Committee on 22 April 2016, that include a summary of a presentation by Edwin Schooling Latter, FCA Head of Markets Policy, on the FCA’s views on the application of best execution to FX derivative and spot transactions.

Mr Schooling Latter stated that all FX derivative transactions and those FX spot transactions that are ancillary to transactions in MiFID financial instruments are within the scope of the best execution requirements set out in the Markets in Financial Instruments Directive (MiFID). He noted that best execution would still apply when the firm was dealing as principal, including where dealing with a professional counterparty, where the counterparty was placing legitimate reliance on the firm.

For other FX spot transactions, he said the FCA considered that the obligations arising would vary according to the nature of the relationship between market participants:

  • Acting as agent. This scenario relates to a firm that acts on behalf of a client and executes transactions in line with their mandate, with a responsibility to use the firm’s efforts to secure an optimal outcome. In this case, best execution would be an appropriate benchmark, even if, for transactions not within the scope of MiFID, there was not a MiFID best execution requirement.
  • Acting as principal. This scenario involves a firm acting on its own behalf, providing two-way quotes to clients with no obligation to execute the order until both parties are in agreement, where the client has the flexibility to seek other quotes. In this scenario, the principal has no best execution requirements.
  • Acting as principal with some discretion. This scenario relates to circumstances where a client could be considered to have placed some legitimate reliance on the principal. In this scenario, the principal has obligations to try and achieve an optimal outcome for the client, for example when managing stop-loss orders.

MAR: AIM revises rules

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The London Stock Exchange has confirmed changes to the AIM Rules for Companies and consequential changes to the AIM Rules for Nominated Advisers and AIM Note for Investing Companies to reflect the application of MAR. The new version of the rules will come into force on 3 July 2016. AIM Regulation will monitor how the rules work in practice following the implementation of MAR. It will also monitor any changes in the Level 2 and Guidelines related to MAR which may require further changes to the rules.

First Phase of Global FX Code Released

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On May 26, 2016, the Bank for International Settlements published the Phase 1 materials for a global Codefor the FX market. The Code is a set of principles providing common guidelines to promote the integrity and effectiveness of the global wholesale FX markets and has been prepared as a result of the recent spate of misconduct cases in the FX markets. The Code covers governance, risk management and compliance, ethics, information sharing, execution and confirmation and settlement processes. The finalCode is expected to be published in May 2017. In the meantime, the authors hope that market participants will begin to embed the Code into their day-to-day activities. The Code does not impose any legal or regulatory obligations on market participants and is intended to supplement local laws, rules and regulations by identifying global good practices and processes.

The FX Code is available at:

and the Update on Adherence to the Code is available at:

US Office of the Comptroller of the Currency Releases Mid-Cycle Status Report

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On May 11, 2016, the US Office of the Comptroller of the Currency released a mid-cycle status report on key actions that it has taken to date pursuant to its Committee on Bank Supervision’s annual operating plan for the fiscal year that commenced on October 1, 2015. The plan sets forth the agency’s broad supervision priorities and objectives and is used to develop individual bank supervisory strategies and make related resource allocation decisions. Key actions completed in the first half of fiscal year 2016include issuing various supervisory communications, including 557 reports of examination, conducting workshops, issuing guidance and reports surveying best practices and ongoing outreach meetings and presentations to industry members. The OCC’s supervisory priorities for the duration of the 2016 fiscal year include compliance, operational resiliency, credit risk management, stress testing, strategic planning and execution, corporate governance and interest rate risk.

Revised code of best practice for the FX market

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On January 11, 2016, the US Securities and Exchange Commission issued its Office of Compliance Inspections and Examinations’ 2016 priorities. Areas of focus for this year include liquidity controls, public pension advisers, product promotion, and two investment products – exchange-traded funds and variable annuities. The priorities also provide for continuing emphasis on protecting investors in ongoing risk areas such as cybersecurity, microcap fraud, fee selection, and reverse churning. The examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges. The priorities may be adjusted in light of market conditions, industry developments and ongoing risk assessment activities. OCIE selected the priorities in consultation with certain SEC policy divisions and regional offices, the SEC’s Investor Advocate, and other regulators.

The SEC press release is available at: and the Examination Priorities for 2016 are available at: