What’s the SEC looking for this year?

Poor supervisory procedures cost LPL Financial LLC $6.5M
March 4, 2021
Can you commit financial fraud by Tweet?
March 18, 2021
Show all

What’s the SEC looking for this year?

In announcing its 2021 Examination Priorities, the Securities and Exchange Commission’s (SEC) Division of Examinations says it will be focusing on climate-related risks in addition to the financial services sector. In particular, the Division will look at conflicts of interest for brokers (Regulation Best Interest) and investment advisers (fiduciary duty), as well as attendant risks relating to FinTech in its initiatives and examinations.

“This year,” says Acting Chair Allison Herren Lee, “the Division is 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.

“Through these and other efforts,” she continues, “we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”

Her sentiments were echoed by Division Director Pete Driscoll, who added that the SEC’s Division of Examination’s “priorities reflect the complicated, diverse, and evolving nature of the risks to investors and the markets, including climate and ESG.”

What is the SEC looking at this year?


  1. BI and Fiduciary Duty Compliance are SEC targets. In 2021, the Division intends to focus on compliance with Regulation Best Interest, Form CRS, and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty. Regulators will examine whether firms are appropriately mitigating conflicts of interest and, where necessary, providing disclosure of conflicts sufficient to enable informed consent by retail investors.  Priorities will be investments heavily used by retail investors or those that may present elevated risks, including mutual funds, exchange-traded funds (ETFs), municipal securities and other fixed-income securities, variable annuities, private placements, and microcap securities.


  1. Business Information Security and Operational Resiliency. Compliance professionals can count on the SEC’s ongoing review of business continuity and disaster recovery plans. However, the focus will shift to whether firms’ plans, particularly those of systemically important registrants, are accounting for the growing physical and other relevant risks associated with climate change. This is in regards to climate-related events, which are becoming more frequent and more intense. The Division will review whether firms consider effective practices to help improve responses to large-scale events, safeguard customer accounts, and prevent account intrusions. This includes verifying an investor’s identity to prevent unauthorized account access;  oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions. The SEC will also review responses to incidents, including those related to ransomware attacks, and manage operational risk due to dispersed employees in a work-from-home environment.


  1. Financial Technology (Fintech) and Innovation, Including Digital Assets – This year, the SEC will be watching whether you are operating consistently with your representations. Is your firm handling customer orders per their instructions? The SEC also will review compliance around trade recommendations made in mobile applications.


Specifically, the SEC will be looking at market participants engaged with digital assets to assess the following:


  1. Anti-Money Laundering Programs – This year, the Division will evaluate whether broker-dealers and registered investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money-laundering activities.


  1. The London Inter-Bank Offered Rate (LIBOR) Transition – The Division will assess registrant’s 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’ financial matters and those of their clients and customers.


What will the SEC look at for investment advisers and investment companies in 2021? 


  1. Compliance Programs – The Division will review the compliance programs of registered investment advisers (RIAs), including whether those programs and their policies and procedures are reasonably designed, implemented, and maintained.  As the SEC finds that RIAs increasingly offer investment strategies that focus on ESG factors, it will focus on products in these areas that are widely available to investors, including open-end funds and ETFs, as well as those offered to accredited investors such as qualified opportunity funds. The Division will review the consistency and adequacy of the disclosures RIAs and fund complexes provide to clients regarding these strategies, determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.
  2. Registered Funds, Including Mutual Funds and ETFs – The SEC’s examinations of registered funds will focus on disclosures to investors, valuation, filings with the Commission, personal trading activities, contracts, and agreements. They will include a review of fund governance practices and compliance programs.  The Division will prioritize examinations of mutual funds or ETFs that have not previously been examined or have not been examined in many years and will generally focus on fund compliance programs and financial conditions, particularly where funds have instituted advisory fee waivers.  The SEC also will focus on compliance with exemptive relief, including for the newly created non-transparent, actively managed ETFs, and review funds’ and advisers’ disclosures and practices related to securities lending.
  3. RIAs to Private Funds – Private fund advisers also will be targeted as the Division assesses compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest.  The Division will also focus on advisers to private funds that have a higher concentration of structured products, such as collateralized loan obligations and mortgage-backed securities, to assess whether the private funds are at a higher risk for holding non-performing loans and having loans with higher default risk than that disclosed to investors.


What about the SEC and Broker-Dealers and Municipal Advisors?

The SEC’s focus for broker-dealers will be on compliance with the Customer Protection Rule and the Net Capital Rule, including the adequacy of internal processes, procedures, controls, and compliance with requirements for borrowing securities from customers.  Broker-dealer examinations will also focus on compliance with the best execution in a zero-commission environment, recently amended Rule 606 order routing disclosure rules, and market-maker compliance with Reg SHO.

In light of the pandemic, the Division will examine COVID-19’s potential impact on municipal advisors and their clients and how municipal advisors may have adjusted their practices.  The Division will also investigate whether municipal advisors have met their fiduciary duty obligations to municipal entity clients, including disclosing and managing conflicts of interest and documentation of their client engagements’ scope.

 What about the infrastructure that supports the market?

The SEC will focus on the following market infrastructure sectors:

  1. Clearing Agencies – Here, the Division will look at clearing agency examinations on compliance, legal, recovery and wind down, margin, back-testing, settlement and operations, liquidity risk management, the effect of the LIBOR transition, and cybersecurity and resiliency. It also will examine governance, legal, compliance, and risk management frameworks of registered clearing agencies by reviewing the efforts to escalate deficiencies identified by the Division and internal auditors and whether they have taken timely and appropriate action to correct and mitigate the risks associated with those deficiencies.
  2. National Securities Exchanges – These exams will focus on exchange operations to monitor, investigate, and enforce member and listed company compliance with, as applicable, exchange rules and the federal securities laws.
  3. Regulation Systems Compliance and Integrity (SCI) – The Division will continue to evaluate whether SCI entities have established, maintained, and enforced written SCI policies and procedures as required.  Areas of focus will include IT governance, IT asset management, cyber threat management/incident response, business continuity planning, and third-party vendor management, including utilization of cloud services.
  4. Transfer Agents – The Division will continue to examine transfer agents’ core functions, including the timely turnaround of items and transfers, recordkeeping and record retention, and safeguarding of funds and securities.
  5. FINRA and MSRB – The Division will continue its oversight of FINRA by focusing examinations on FINRA’s operations and regulatory programs and the quality of FINRA’s broker-dealers and municipal advisors’ examinations.  It will also examine MSRB to evaluate the effectiveness of its policies, procedures, and controls.

While the aforementioned SEC priorities primarily drive the Division’s examinations, the scope of any review is determined through a risk-based approach that includes analysis of a given entity’s history, operations, services, products offered, and other risk factors.

What does that mean for you and your compliance team?

It will, mostly, be business as usual. Particularly for those professionals who have their compliance processes and procedures in order. And that’s where Patrina delivers. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, comprehensive, 8-module compliance solution, compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.