Articles & Alerts

The Securities and Exchange Commission’s Division of Examinations (formerly known as the Office of Compliance Inspections and Examinations or OCIE) announced its 2021 examination priorities. This report is published annually to provide insight into what the Division will prioritize for the coming year. The report includes the areas believed to be potential risks to the integrity of the U.S. capital markets and to investors.

The main priorities for the Division in 2021 include:

• A greater focus on climate-related risks
• Focus on conflicts of interest for brokers (Regulation Best Interest) and investment advisers (fiduciary duty)
• Attendant risks relating to FinTech, including Digital Assets in its initiatives and examinations

Below is an overview of the Division’s 2021 examination priorities:

1 – Retail Investors, Including Seniors and Those Saving for Retirement, Through Regulation Best Interest (Reg.BI) and Fiduciary Duty Compliance

The Division will focus on whether firms are reducing conflicts of interest and providing disclosure of conflicts of interest that are sufficient to enable informed consent by retail investors. Additionally, they will be looking to see that the advisor’s recommendations have a reasonable basis to be in the customer’s best interest. They will also prioritize retail targeted investments for proper disclosures including mutual funds, exchange-traded funds (ETFs), municipal and other fixed income securities, variable annuities, private placements, and microcap securities. 

2 – Information Security and Operational Resiliency

The Division will continue to review business continuity and disaster recovery plans of firms but will shift its focus to firms deemed systematically important registrants and examine whether they are accounting for the growing risks of climate change. They will review whether firms are considering effective practices during climate-related events, which are becoming more frequent. The Division will also prioritize reviewing whether registrants have taken appropriate measures to safe-guard customer accounts, provide for incident response and prevent account intrusions as well as additional risks associated with a remote working environment.

3 – Financial Technology (Fintech) and Innovation, Including Digital Assets

Some firms (new and existing) are providing financial services to clients or customers in innovative and evolving ways, such as providing advice to clients through automated investment tools and platforms (often referred to as “robo-advisers”) or offering automated asset allocation, fractional share purchases, customized portfolios, and mobile applications. The Division will focus on evaluating whether registrants are operating consistently within their representations such as handling orders as per customer instructions and reviewing compliance around trade recommendations made in mobile applications. The examinations will assess participants who are engaged in digital assets and whether the investments are in the best interest of investors, the safety of client funds and assets, as well as pricing and valuation.

4 –  Anti-Money Laundering Programs

Review for compliance with anti-money laundering (AML) requirements, including adequate policies and procedures to enable identification of suspicious activities and illegal money-laundering activities will continue.

5 – The London Inter-Bank Offered Rate (LIBOR) Transition

The Division will examine registrants to evaluate their understanding of any exposure to the London Inter-Bank Offered Rate (LIBOR), their preparedness for the discontinuation of the rate and their plans for a transition to an alternative reference rate for their own financial matters and those of their clients and customers.

Focus Areas Relating to Registered Investment Advisers and Investment Companies

RIA Compliance Programs

The Division will continue their review of compliance programs to assess whether their programs, polices, and procedures are reasonably designed, implemented, and maintained for the registered investment advisers (RIA). They will continue to focus on products offered including open-end funds and ETFs, as well as qualified opportunity funds (QOFs). The Division will review disclosures provided to clients based on offered investment strategies including those increasingly popular strategies that focus on ESG.

Registered Funds, Including Mutual Funds and ETFs 

Examinations of registered funds will focus on disclosures to investors, valuation policies and liquidity issues, filings with the Commission, personal trading activities, contracts, agreements, fund governance practices and compliance programs as well as disclosures and practices related to securities lending. The Division will concentrate on examinations for mutual funds or ETFs that have not previously been examined or have not been examined recently. There will be a focus on fund compliance programs, financial condition and exemptive relief.

RIAs to Private Funds  

The Division’s examination will include reviewing for preferential treatment provided to certain investors regarding conflicts around liquidity, including imposing gates or suspensions on fund withdrawals, portfolio valuations and their impact on management fees, and adequacy of disclosures. Additionally, the Division will focus on advisers who have a higher concentration of structured products such as collateralized loan obligations and mortgage-backed securities, and will assess compliance risks.

Focus Areas Involving Broker-Dealers and Municipal Advisors

The examinations of broker dealers will focus on compliance with the Customer Protection Rule and the Net Capital Rule including the adequacy of internal processes, procedures, and controls. The exams also include review of compliance with best execution in a zero-commission environment. The Division will examine the COVID-19 impact on municipal advisors and their adjusted practices, and whether they have met their fiduciary duty obligations to their clients.

Investment advisers and broker-dealers should make compliance in these categories a priority as they were specifically identified in the Division’s 2021 release. Advisers would be well served to evaluate and update their policies and procedures in light of the Division’s guidance. A copy of the complete report is available here.

For more information on navigating the SEC’s Division of Examination priorities for 2021, please contact Jeffrey Rosenthal, Ed Thorp or your Anchin Relationship Partner.