RIA Compliance Blog
Earlier this month, the Securities and Exchange Commission announced the examination priorities for registered investment adviser and broker-dealer examinations to be conducted in 2021 by the SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations).
The list included a continued focus on conflicts of interest, including examining for compliance with Reg BI (for broker-dealers) and with an investment adviser’s fiduciary duty. Among the matters examined will be whether RIAs comply with care and loyalty duties that arise from the fiduciary duty. Whether firms have taken appropriate steps to mitigate, disclose or eliminate conflicts of interest will continue to be a focus, with an emphasis on whether customers received enough information to be the basis of informed consent. The Division will also continue to prioritize examining information regarding investment products that carry elevated risks, such as certain ETFs, municipal securities, private placements, variable annuities, and microcap securities.
Not surprisingly, the Division will also focus on two areas that were emphasized over the last two years to varying degrees: ESG-related risks and disclosures and proxy voting practices. RIAs who offer asset management based on ESG principles will be questioned regarding their representations regarding products or services provided, including representations regarding third-party managers or products. The Division will also examine to ensure that proxies have been voted consistent with customer’s desires to invest in ESG focused investments.
Business continuity and disaster recovery plans will be a focus this year, including whether lessons learned during the pandemic have appropriately informed changes to such plans. A greater emphasis will also be placed on climate-related risks, due to greater instances of climate hazards experienced in recent years attributable to climate change. These types of issues will be of heightened concern for examinations of critical market participants such as clearing firms and market makers.
The safeguarding of customer account data and information will also be a priority. The Division will examine, for instance, whether steps have been taken to safeguard accounts and prevent intrusions or breaches, to verify account holder identity in order to prevent unauthorized distributions or access. Among the issues in focus will be whether there are increased operational risks that arise from the disbursement of the workforce (including working from home). The Division staff will also examine whether precautions are taken to oversee the preservation of client data by vendors and partners.
Private fund advisers will continue to be examined with a focus on liquidity, adequate disclosures of risks, and conflicts of interest. Following the usual risk-based factor model, the Division will focus on advisers whose advised private funds contain high concentrations of CDOs, structured products, under-performing or non-performing loans and mortgage-backed securities.
The above are merely some examples of the types of issues that will be the focus of examinations in 2021. There are many other priorities discussed in the Division’s release. The release also emphasized that the examiners will continue to focus on the overall compliance programs of RIAs to evaluate whether the overall plan design is reasonable and whether the policies and procedures are being implemented properly and updated as needed. The Division will continue to focus on whether CCOs are vested with sufficient autonomy to effectively carry out a firm’s compliance program and whether a firm has dedicated sufficient resources to compliance.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.