On March 3, 2021, the SEC’s Division of Examinations (the “Division”) released its examination priorities for 2021. The priorities are released annually and discuss key risks, trends and examination priorities the Division intends to focus on in the upcoming year.
Below are key takeaways from 2021 priorities for our clients:
- Information Security and Operational Resiliency. For the sixth year in a row, information security remains on the list of examinations priorities. However, with the sharp increase in remote working conditions due to the COVID-19 pandemic, examinations will also focus on whether firms have taken sufficient measures to (1) safeguard customer accounts and prevent account intrusions; (2) oversee vendors and service providers; (3) address malicious email activities; (4) respond to incidents; and (5) manage operational risk as a result of dispersed employees in a work-from-home The Division will also continue to review business continuity plans, with a heightened focus on whether these plans account for the growing risks associated with climate change, which are expected to become more frequent and more intense.
- Financial Technology (FinTech) and Innovation, Including Digital Assets. As innovation in financial technology continues at a rapid pace, the Division is committed to staying informed about how new developments will impact advisers and their investors. As outlined in the Division’s most recent risk alert on digital asset securities, examinations will focus on evaluating whether firms are operating consistently with their disclosures to investors, handling customer orders in accordance with instructions, and review compliance around trade recommendations made in mobile applications.
- Anti-Money Laundering. Investment advisers are required to maintain policies and procedures designed to identify and verify the identity of beneficial owners of investors, monitor for suspicious activity, and report suspicious activity as necessary. The Division will continue to prioritize examinations for compliance with AML obligations in 2021.
- The London Inter-Bank Offered Rate (LIBOR) Transition. This is a new area of focus in response to the discontinuation of LIBOR, which could present a material risk for investment advisers. Examinations will focus on advisers’ understanding of their exposure to LIBOR, their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate.
- Additional Focus Areas Involving RIAs and Investment Companies. As in previous years, the Division intends to assess the adequacy of advisers’ compliance programs, including in the areas of appropriateness of portfolio management practices, custody and safekeeping of client assets, best execution, fees and expenses, business continuity plans, and valuation of client assets for consistency and appropriateness of methodology. Also important to the examinations will be whether advisers have sufficient resources to perform compliance responsibilities as previously discussed during the SEC’s outreach efforts. Examinations will also focus on ESG programs as indicated by the creation of the SEC’s new enforcement task force, as this becomes more of a priority to advisers.
- Additional Focus Areas Involving Broker-Dealers and Municipal Advisors. Broker-dealer examinations will focus on compliance with Regulation Best Interest, the Customer Protection Rule and the Net Capital Rule. Trading practices will also continue to be an area of interest.
These priorities reflect the Division’s assessment of certain risks, issues and policy matters arising from market and regulatory developments, information gathered from examinations and other sources, including tips, complaints and referrals, and coordination with other regulators.
