The SEC Division of Examinations, previously known as the SEC Office of Compliance Inspections and Examinations, recently released its 2021 Examination Priorities Report. This publication serves as an annual reminder to, and opportunity for, industry professionals to reexamine their internal policies and procedures to ensure compliance with industry regulations. Ultimately, the goal for both the SEC in issuing this report and industry professionals in implementing the guidance set forth therein is to protect the investor clients. In this year’s publication, the SEC continued to emphasize, as it usually does, the importance of compliance programs and the need for “active engagement” from the top down to ensure that supervisory policies and procedures are continually reviewed and modified, where appropriate, in response to developing industry trends. This proactive approach is something we see as a repeated emphasis from regulators, including FINRA and the SEC.
The SEC discussed numerous topics and priorities designed to protect retail investors—particularly seniors and individuals saving for retirement. Some of the prominent topics included:
- Impact of the Pandemic: In response to the COVID-19 pandemic, registered investment advisers, like many other professions, increasingly transitioned to remote work and had to adjust to the operational difficulties associated with that transition, including cybersecurity. The SEC specifically highlighted the threats posed by ransomware attacks and the need for strong credentialing systems to prevent unauthorized account access and ensure security of client information. The SEC noted the need to adapt supervisory procedures to respond to this increase in remote working, including concerns regarding “endpoint security, data loss, remote access, use of third-party communication systems, and vendor management.”
- Regulation Best Interest (Reg BI): After performing more than 13,000 initial examinations for compliance with Reg BI, the SEC noted that many firms have updated their written supervisory procedures and conducted relevant training. However, the SEC encouraged firms to continue developing and implementing these policies. Additionally, while initial exams were focused on the efforts undertaken to implement Reg BI, the SEC noted that it will begin expanding examinations “to focus on assessing whether broker-dealers are making recommendations that they have a reasonable basis to believe are in customers’ best interests and evaluating broker-dealer processes for compliance and alterations made to produce offerings.” This shift in focus is particularly important because it appears that it will no longer be sufficient for firms to present evidence that their supervisory procedures have been amended or that training has been conducted on Reg BI. Instead, firms must increasingly show that they are, in fact, applying and enforcing these newly implemented procedures.
- Form CRS: The purpose of Form CRS is to provide a short customer or client relationship summary providing information to the customer about the firm. As firms continue to develop their Form CRS, the SEC made a specific note to guide firms on this issue, stating that “firms are generally avoiding legalese and generic boilerplate language, but we also noted the readability of some Form CRSs could still be improved.”
- RIA Fiduciary Duty: The SEC reemphasized an investment adviser’s fiduciary duty to act in the best interests of its clients and eliminate (where possible), mitigate or, at a minimum, make full disclosure of all conflicts of interest. The SEC will continue to focus on “risks associated with fees and expenses, complex products, best execution, and undisclosed or inadequately disclosed compensation arrangements.”
- Fraud, Sales Practices, and Conflicts: Because of the economic pressures on firms due to the pandemic and related market volatility, the SEC noted that individuals and/or firms may turn to inappropriate or fraudulent sales practices to increase their revenue. As a result, the SEC placed a renewed emphasis on ensuring that investment recommendations, and particularly recommendations related to alternative investments and other complex products, are appropriate for each investor.
- Regulation Technology (RegTech): In addition to technological innovations related to the actual offering of financial services, such as automated investment advice, technology is increasingly being used as a supplement to existing compliance programs. Although RegTech increases review capabilities and may lead to increased efficiency for compliance departments, the SEC cautioned readers to ensure that RegTech is appropriately configured on the front end to identify and detect inappropriate sales practices.
These points represent just a few of the many topics addressed by the Division of Examinations. We encourage you to read the entire report. Should you have any questions about the SEC’s 2021 Examination Priorities, or any other FINRA, SEC, or state regulatory issues, the experienced regulatory attorneys at Reminger would be happy to help. Feel free to contact one of our Financial Services Professional Liability or Broker-Dealer and Investment Advisor Regulatory Compliance and Enforcement practice group attorneys.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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