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The Securities and Exchange Commission’s (SEC) Division of Examinations (Division) recently announced its 2021 examination priorities, which will continue to prioritize the examination of certain practices, products, and services that the SEC believes present heightened risks to investors or the integrity of the U.S. capital markets. Although the Division’s examination schedule remains flexible to address any emerging or imminent risks to investors, its priorities center around:

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Retail Investors, Including Seniors and Those Saving for Retirement, Through Reg. BI and Fiduciary Duty Compliance

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The Division will maintain its focus on protecting retail investors by expanding the scope of examinations to focus on assessing whether broker-dealers are making recommendations that they have a reasonable basis to believe are in customers’ best interests and evaluating broker-dealer processes for compliance and alterations made to product offerings.

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The SEC will also conduct enhanced transaction testing as part of these examinations, and will evaluate whether a firm’s policies and procedures are designed to address:

The Division will continue to incorporate Reg. BI into its examination program for Registered Investment Advisers (RIAs) by examining RIAs to assess whether, as fiduciaries, they have fulfilled their duty of care and duty of loyalty. This will include assessing, among other things, whether RIAs provide advice, including whether account or program types continue to be, in the best interests of their clients, based on their clients’ objectives, and eliminate or make full and fair disclosure of all conflicts of interest which might incline RIAs—consciously or unconsciously—to render advice which is not disinterested such that their clients can provide informed consent to the conflict. The Division will focus on risks associated with fees and expenses, complex products, best execution, and undisclosed or inadequately disclosed, compensation arrangements. Finally, the Division will prioritize examinations of broker-dealers and RIAs to assess compliance with Form CRS.

The Division noted the importance of the role broker-dealers, investment companies, and RIAs with respect to disclosures to investors required by federal securities laws, including those relating to fees and expenses and conflicts of interest. Based on the importance of these disclosures, the Division’s examinations will focus on the appropriateness of recommendations and advice provided to retail investors, with a particular emphasis on: (1) seniors, including recommendations and advice made by entities and individuals targeting retirement communities; (2) teachers; (3) military personnel; and (4) individuals saving for retirement. Specifically, the Division will:

The Division also recognizes that certain products pose elevated risks when marketed or sold to retail investors. The Division will prioritize examinations of issues regarding these products given their importance to retail investors. Specifically, the Division will focus on:

Information Security and Operational Resiliency

With increased remote operations in response to the pandemic, the Division will review whether firms have taken appropriate measures to:

Recognizing the rapid growth of and related risks presented by the digital asset market, including cryptocurrency, the Division is steady in its efforts to examine SEC-registered market participants engaged in such market. The Division’s examinations will assess:

Additionally, examinations will focus on evaluating whether registrants are operating consistently with their representations, whether firms are handling customer orders in accordance with their instructions, and review compliance around trade recommendations made in mobile applications.

The Division will continue to prioritize examinations of broker-dealers and registered investment companies for compliance with their AML obligations in order to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs.

London Inter-Bank Offered Rate (LIBOR) Transition

The Division intends to engage with registrants through examinations to assess their understanding of any exposure to LIBOR, their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate, in connection with registrants’ own financial matters and those of their clients and customers.

The Division will continue to prioritize its examination of RIA compliance programs. The Division will conduct risk-based examinations of RIAs that have never been examined, including new RIAs and RIAs registered for several years. For RIAs that have not been examined for several years, the focus will be to evaluate whether their compliance programs have been updated in the event of substantial changes in the business model. Additionally, the Division will particularly focus on products and services marketed as sustainable, socially responsible, impact and ESG conscious, as a result of increased investor demand for such products.

As climate-related events become more frequent and more intense, the Division intends to review and assess whether firms are considering effective practices to help improve market response to large-scale events. The scope of these examinations will include a review of business continuity and disaster recovery plans similar to the work performed post-Hurricane Sandy, with a heightened focus on the improvements to these plans over the intervening years.

The 2021 examination priorities reflect the Division’s assessment of issues, risks and policy matters stemming from developments in the markets and regulation of those markets. While the 2021 priorities will steer the Division’s examination, the list is not exhaustive. The Division can and will look at other areas as well.

If you have any questions regarding the 2021 exam priorities, need assistance in preparing for a regulatory exam, or would like to discuss your firm's compliance and supervisory policies and procedures, please contact one of the authors.

Andrew J. Davalla 614.469.3353 <a href="mailto:Andrew.Davalla@ThompsonHine.com">Andrew.Davalla@ThompsonHine.com</a>

Brian Doyle-Wenger 614.469.3294 <a href="mailto:Brian.Doyle-Wenger@ThompsonHine.com">Brian.Doyle-Wenger@ThompsonHine.com</a>

Tashia Love 614.469.3284 <a href="mailto:Latashia.Love@ThompsonHine.com">Latashia.Love@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/Investment_Management_Update_-_SEC_Announces_2021_Exam_Priorities.pdf

SEC Announces 2021 Exam Priorities

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