SEC’s 2021 Examination Priorities Reveal Few Surprises
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  • SEC’s 2021 Examination Priorities Reveal Few Surprises

    On March 3, 2021, the Securities and Exchange Commission’s Division of Examinations announced its examination priorities for this year.  Each year, the SEC publishes its list of examination priorities to identify areas that it believes present potential risks to investors and the integrity of the U.S. capital markets, and this year’s list is largely as expected.  It reflects an intent to focus on conflicts of interest and questions of whether investment advisors are fulfilling their fiduciary duties, information security and business continuity (something that took on particular importance in the last year as firms were forced to adapt to the pandemic), and various other perennial topics of interest.  The only “new” priority is one that dovetails with other recent announcements from the Commission—an addition of “enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change.”
    A complete list of the priorities is below:
    • Retail Investors, Including Seniors and Those Saving for Retirement, Through Regulation Best Interest and Fiduciary Duty Compliance.  A focus on conflicts of interest for brokers (Regulation Best Interest) and investment advisors (fiduciary duties of care and loyalty);
    • Information Security and Operational Resiliency.  A continued focus on reviewing business continuity and disaster recovery plans of firms but will also include new focus on whether such plans account for the risk of climate change;
    • Financial Technology and Innovation, Including Digital Assets.  A focus on whether registrants in the Financial Technology industry are operating consistently with their representations, handling orders consistent with instructions, and their compliance around mobile application trade recommendations;
    • Anti-Money Laundering Programs.  A continued focus on reviewing compliance with applicable anti-money laundering requirements, including evaluating whether broker-dealers and registered investment companies have adequate internal controls;
    • The London Inter-Bank Offered Rate (LIBOR) Transition.  A continued engagement with registrants through examinations to assess their understanding of any exposure to LIBOR and their preparation for the transition to an alternative reference rate;
    • Focus Areas Relating to Investment Advisers and Investment Companies, including:
      • Compliance Programs.  A continued review of whether compliance programs are reasonably designed, implemented, and maintained;
      • Registered Funds, Including Mutual Funds and ETFs.  A prioritization of mutual funds or ETFs that have not previously been examined or examined recently with a focus on fund compliance programs and financial conditions, especially where such funds have instituted advisory fee waivers; and
      • RIAs to Private Funds.  A continued focus on advisers to private funds and advisers to private funds that have a higher concentration of structured products, such as collateralized loan obligations and mortgage backed securities;
    • Focus Areas Involving Broker-Dealers and Municipal Advisors.  A continued focus on broker-dealers and municipal advisors for compliance with the Consumer Protection Rule and Net Capital Rule; and
    • Market Infrastructure, including:
      • Clearing Agencies.  A focus on clearing agencies and their governance, legal, compliance and risk management frameworks by reviewing efforts to escalate deficiencies that have been identified by the SEC and internal auditors;
      • National Securities Exchanges.  A focus on exchange operations to monitor, investigate, and enforce compliance with all applicable exchange rules and federal securities laws;
      • Regulation Systems Compliance and Integrity (SCI).  Continued evaluation of whether SCI entities have established and enforced written policies and procedures in IT governance, IT asset management, cyber threat management, business continuity planning, and third-party vendor management;
      • Transfer Agents.  A continued examination of timely turnaround and transfers, recordkeeping and record retention, and safeguarding of funds and securities; and
      • FINRA and MSRB.  Continued oversight of FINRA by examining its operations and regulatory programs.
    Although the list of examination priorities is by no means exhaustive, the SEC’s announcement gives an early insight into the new administration.  These examination priorities indicate that the SEC under President Biden appears ready to monitor risks related to climate change, financial technology, and conflicts of interests for brokers and investment advisers.  These priorities serve as a reminder to firms to review and update their compliance policies and internal controls to avoid expensive inquiries.
    CATEGORIES: Enforcement ActionsSEC