The SEC Division of Examinations (the "Division") 2021 examination priorities include an enhanced focus on climate and environmental, social and governance ("ESG") related risks, conflicts of interest for brokers and investment advisers, and FinTech-related attendant risks.
In its annual report, the Division stated that it will focus on, among other things:
- the compliance by the registered investment advisers of retail investors, including seniors, with Regulation Best Interest and fiduciary duties of care and loyalty;
- the operational resilience and information security of a firm, taking into account emerging risks associated with climate change;
- the consistency of registrants' operations with their representations related to FinTech, including digital assets;
- the adequacy of broker-dealers' and registered investment companies' AML policies and procedures;
- registrants' understanding of LIBOR exposure and their preparations for the discontinuation of LIBOR;
- the effectiveness of the compliance programs of registered investment advisers ("RIAs"), particularly the consistency and adequacy of disclosures related to investment strategies focused on ESG factors;
- the disclosures of registered funds, including mutual funds and exchange-traded funds (or "ETFs"), to investors and their (i) valuation, (ii) SEC filings, (iii) personal trading activities, contracts and agreements, and (iv) fund governance practices and compliance programs;
- the liquidity, and investment risks and conflicts of interests disclosures, of RIAs to private funds;
- broker-dealer and municipal advisor compliance with SEA Rules 15c3-3 ("Customer Protection - Reserves and Custody of Securities") and 15c3-1 ("Net Capital Requirements for Brokers or Dealers") and Regulation NMS Rule 606 ("Disclosure of Order Routing Information");
- settlement and operations resilience, liquidity risk management and the impact of the LIBOR transition on clearing agencies;
- the operations of national securities exchanges and their ability to monitor, investigate and enforce the compliance of members and listed companies with applicable exchange regulations and federal securities laws;
- the required systems compliance and integrity (or "SCI") entity policies involving (i) information technology governance and asset management, (ii) the management of cyber threats, (iii) business continuity planning and (iv) the management of third-party vendors, such as the use of cloud services;
- transfer agents' timely turnaround of items and transfers, recordkeeping, and the protection of funds and securities; and
- the quality and effectiveness of FINRA's broker-dealer and municipal advisor examinations and the MSRB's policies, procedures and controls.
Commentary - Steven Lofchie
All registered firms should review all parts of the report thoroughly, not just the parts specific to their registration status, as many of the themes cut across regulated entities. See also FINRA's recent list of its regulation priorities.
Many of the numerous priorities are familiar; e.g., treatment of retail investors, adviser conflicts of interest, and custody. A number of the priorities are at least partially in response to the GameStop run-up and related focus on retail investment; e.g., payment for order flow.
Notably, some of the priorities are not tied directly to a rule; e.g., the focus on "climate," or liquidity requirements for broker-dealers. This means that firms must consider whether their compliance programs are sufficient to satisfy regulatory concerns, even where the concern is not expressly tied to an express statutory or regulatory requirement.
Commentary - Kyle DeYoung
The Division's report is required reading for any compliance professional at a broker-dealer, investment adviser or investment company. While many of the priorities set out in the report are consistent with previous years, the increased focus on climate and ESG-related risks is a significant shift in priorities indicative of broader policy changes at the Commission.
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