2021 SEC Examination Priorities – At a Glance
By JHC attorneys Paul Roshka and T.J. Mitchell
On March 3, 2021 the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (formerly known as the Office of Compliance Inspections and Examinations) announced its 2021 Examination Priorities (the “Priorities”). The Priorities are a key ways for members of the securities industry to stay abreast of what the SEC is focusing on in their investigations and examinations of securities firms and participants. Knowing which key risks, trends and examination priorities the SEC is currently focusing on is the best way to stay ahead of a potential SEC investigation or examination.
Cognizant that many financial services professionals do not have the time to read all 36 pages of the SEC’s 2021 Priorities, this article seeks to distill each 2021 Priority that the SEC has identified into one paragraph.
For fiscal year 2021, the SEC has adopted nine key priorities:
- Retail Investors (in particular Seniors and those saving for retirement)
- Information Security and Operational Resiliency
- Financial Technology (FinTech) and Innovation (including digital assets)
- Anti-Money Laundering
- The London Inter-Bank Offered Rate (LIBOR) Transition
- RIAs and Investment Companies
- Broker-Dealers and Municipal Advisors
- Market Infrastructure
- FINRA and MSRB
Priority #1: Retail Investors and Seniors
As has been the case for the last few years, the SEC is placing a focus on protecting retail investors, in particular seniors, teachers, military personnel, and other individuals saving for retirement. In practice, this means the SEC is keeping a keen eye on investments and services that are marketed to retail investors, such as mutual funds, exchange-traded products, fixed income instruments, and securities traded over-the-counter. This prioritization also means the SEC is eager to police broker-dealers’ compliance with the new Regulation Best Interest, RIA’s fiduciary duties, and compliance with Form CRS requirements.
Priority #2: Information Security and Operational Resiliency
This second priority is in large part a response to the COVID-19 pandemic. As a result of the pandemic, remote operations have increased which have in turn created new risks from an information security perspective. In particular, the SEC will be paying attention to whether firms have taken appropriate measures to safeguard customer accounts, oversee remote vendors and service providers, address malicious email activities such as phishing and ransomware attacks, and manage risk as a result from increased employee remote work. The Division will also be reviewing firms’ business continuity and disaster recovery plans in light of the new challenges attendant to a post-pandemic work environment.
Priority #3: Financial Technology and Innovation (including digital assets)
As a result of the increasing innovations and investments made in the FinTech industry, SEC examiners are focusing on whether firms that employ new financial technologies or services (such as “robo-adviser” services) are complying with their obligations and are operating consistently with what they represent to customers. The SEC is also keeping a keen eye on whether technology implemented to assist with regulatory compliance (“RegTech”) is being appropriately implemented and integrated with a firms’ written policies. Finally, SEC Examiners are working to ensure that firms that offer digital assets to their customers are complying with their regulatory obligations, such as whether digital assets are appropriate for the client and his/her portfolio, and whether these assets/portfolios are being properly supervised.
Priority #4: Anti-Money Laundering
Although this is not a new priority for the SEC, the Bank Secrecy Act requires financial institutions like broker-dealers to establish Anti-Money Laundering (“AML”) programs to address the unique risks associated with the firm’s activities. These programs are to be designed to help identify and verify the identity of customers, as well as performing due diligence related to their customer activities, and, where appropriate, filing Suspicious Activity Reports (“SARs”) with the Financial Crimes Enforcement Network. In its 2021 Priorities, the SEC indicates that it will continue to closely monitor whether firms are complying with their AML obligations.
Priority #5: The London Inter-Bank Offered Rate (LIBOR) Transition
On November 30, 2020, the International Exchange Benchmark Administration (who administers the LIBOR) announced it intended to cease publishing some of the LIBOR rates on December 31, 2021. This discontinuation is likely to have an impact on the U.S. financial markets, and the SEC has made clear that U.S. firms are to assess their exposure to volatility related to the discontinuation of LIBOR and prepare for it by transitioning to an alternative reference rate.
Priority #6: RIAs and Investment Companies
The SEC has announced it will continue to closely monitor RIA compliance programs, including the areas of appropriate account selection, portfolio management practices, fees and expenses, and business continuity plans. In light of the increasing popularity of investment strategies focusing on environmental sustainability, the SEC is investing additional time in assessing these products and their sale to retail investors. As discussed above, in its 2021 Priorities the SEC made clear that it is also focusing on mutual funds and ETFs, particularly those marketed to the retail investor, and particularly those that have never been examined or have not been examined recently. Finally, SEC Examiners will also be concentrating on RIAs to private funds that have higher investment concentrations in structured products such as collateralized loan obligations and mortgage backed securities.
Priority #7: Broker-Dealers and Municipal Advisors
When it comes to broker-dealers in particular, the 2021 Priorities stated that the SEC will be paying specific attention to whether BDs are complying with rules related to liquidity risk management (including following the Customer Protection Rule and Net Capital Rule) as well as payment for order flow. Municipal advisors who provide advice to municipal entities or to persons involved with the issuance of municipal securities are also under additional scrutiny in 2021.The COVID-19 pandemic has impacted municipal advisors and their clients, and SEC Examiners will be assessing whether these advisors have complied with their fiduciary duty obligations as well as other registration, supervision and filing requirements.
Priority #8: Market Infrastructure
As is required by law, each clearing agency will receive at least one SEC risk-based exam. These exams will focus on compliance with SEC regulations as well as whether the clearing agencies have taken timely measures to correct any deficiencies found by the SEC in the past. The SEC is also prioritizing the examination of national securities exchanges for their monitoring, investigation and enforcement various exchange rules and federal securities laws. In light of the COVID-19 pandemic, transfer agent examinations will also take into account a firm’s business continuity and disaster recovery programs, as well as the adequacy of their cybersecurity and account takeover precautions.
Priority #9: FINRA and MSRB
In 2021, the SEC will also be prioritizing its oversight of self-regulatory organizations like FINRA and MSRB. This includes conducting risk-based examinations of these SROs as well as engaging with members of these industries to ensure that FINRA and MSRB are consistently implementing their policies, and that these policies remain effective in light of the ever-changing marketplace.
Many of the SEC’s 2021 Priorities were shaped by the impact of the COVID-19 pandemic and the market volatility that resulted. One thing can be sure, though – that the SEC is only looking to increase its examination presence in the coming year.
Paul and T.J. are attorneys with Jennings Haug Cunningham’s business law practice. If you have any questions related to this article or what it may mean for you or your firm, feel free to contact Paul Roshka at [email protected] or T.J. Mitchell at [email protected].