SEC Examination Priorities for 2021

High-PriorityOn March 3rd, the SEC released its examination priorities for 2021. Here’s what they called out:

Overall

  • Reg BI, Form CRS and fiduciary duties of care and loyalty
  • Information security and operational resiliency (particularly in light of growing physical risks associated with climate change)
  • Fintech and innovation, including digital assets
  • AML programs
  • LIBOR transition

Specific to RIAs

  • Compliance programs (particularly related to ESG-themed offerings)
  • Registered funds (especially mutual funds and ETFs that have not been examined recently or ever)
  • RIAs to private funds

Specific to Broker-Dealers

  • Customer Protection Rule and Net Capital Rule
  • Best Execution in a zero commission environment

What’s interesting to note is the specific acknowledgement they placed in two areas: 1) the impact of climate change on operations and 2) the increasing prevalence of ESG-themed investment strategies. Both of these have compliance ramifications that are worth reviewing.

Before commenting further on those, let’s quickly address a couple other expected areas of new compliance focus – Reg BI and Form CRS. As new regulations that went into effect last year, it should come as no surprise that the SEC will be looking closely at both this year. The good news is the SEC already noted back in October of 2020 that initial examinations were not highlighting any major problems. For Reg BI, the SEC mainly commented that firms need to ensure they aren’t simply stating the standard but also explaining how it will be implemented. For Form CRS, the SEC’s main admonition was for firms that didn’t file in time, and less so the actual substance of the filing itself.

One other mention by the SEC that caught our attention was the matter of mutual fund share classes and best execution. We have advised a number of clients that when it comes to mutual funds, meeting best execution requirements necessitates consideration of the expenses of the share classes. See our blog post on it for a more extensive explanation and keep in mind this is an area that many continue to get tripped up on.

Turning now to climate change, regardless of what you believe on this issue, the Biden administration has indicated that companies will be required to disclose climate risks; and Acting SEC Chair Lee has a history of calling for more climate-related reporting from industry. Thus, it isn’t surprising to see this issue being connected to greater regulatory emphasis on business continuity planning and information security. If Covid-19 didn’t already make clear the need for sound plans and procedures here, including work-from-home situations, its importance is now unquestionable.

Similarly, the SEC’s specific mention of ESG as an area of increased focus is an acknowledgment of the growing trend for ESG-based investment strategies. There has yet to be any clear guidance from the SEC on what their regulatory oversight will entail but we should expect this to be an area of compliance focus going forward. In fact, on March 4th the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement.

For more information, read the SEC’s full report on 2021 exam priorities.

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