SEC's Division of Examinations Issues 2021 Examination Priorities
On March 3, 2021, the SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations (OCIE)) issued its examination priorities for 2021. In addition to broadly reiterating its continued focus on advisers’ fiduciary duties to their clients, the protection of retail investors and compliance with Regulation Best Interest and Form CRS; knowledgeable and empowered CCOs; conflicts of interest; environmental, social and governance (ESG) matters; and technology and cybersecurity in general, the Division also identified examination priorities that will be of particular interest to managers of both private and registered funds.
Cybersecurity Matters Related to COVID-19
Cybersecurity matters will continue to be a focus, especially those that may be exacerbated by remote work arrangements caused by the COVID-19 pandemic, including with respect to data protection, oversight of vendors, phishing, mobile and remote application access, books and record maintenance, and business continuity and disaster recovery plans.
Financial Technology (FinTech) and Innovation
The Division will focus on whether firms are operating consistently with their representations, handling customer orders in accordance with instructions received and complying with applicable requirements in connection with trade recommendations made in mobile applications. The Division also will focus on how advisers to private and registered funds utilize “alternative data,” or data gleaned from non-traditional sources, including whether an adviser has appropriate controls around the creation and use of that data.
Digital assets and blockchain technology will be scrutinized by the Division, including whether those assets are in the best interest of investors, as will the trading, custody and valuation of those assets.
The Division will continue to prioritize compliance with AML obligations of registered broker-dealers and investment companies, including customer identification programs and their Suspicious Activity Report (SAR) filing obligations.
The effectiveness of advisers’ compliance policies continues to be a focus of the Division, including whether those policies are reasonably tailored to the advisers’ business, if sufficient resources are devoted to compliance and other priorities identified in its risk alert issued November 19, 2020 (as summarized here).
The Division will continue to assess firms’ understanding of exposure to LIBOR and their preparation for its discontinuation and the transition to an alternative reference rate.
Dually Registered Advisers
The Division will continue to prioritize examinations of advisers that are dually registered as or affiliated with broker-dealers, including whether the conflicts of interest associated with this arrangement are adequately disclosed.
Examination of Registered Funds
The Division will prioritize examinations of mutual funds or ETFs that have not been previously examined, focusing on their compliance programs, financial condition and compliance with exemptive relief, particularly with respect to non-transparent actively-managed ETFs.
Private Fund Advisers Concentrated in Structured Products
In addition to familiar priorities with respect to private fund advisers, including conflicts of interest, valuation and the effect on fee calculations, cross-trades, principal investments and distressed sales, the Division also will focus on advisers to private funds with a high concentration in structured products, such as collateralized loan obligations or mortgage-backed securities.
The Division of Examinations’ 2021 examination priorities are available here.