The U.S Securities and Exchange Commission released its Division of Exams 2021 Examination Priorities last week, outlining the key risks, trends and examination priorities for the year ahead. The report addressed recurrent themes and new focus areas.
What’s In A Name?
This is the first priorities report issued under the new Division of Exams (EXAMS) moniker. The re-naming – after 25 years as the Office of Compliance Inspections and Examinations - chimes with it assuming new responsibilities beyond investment advisers and securities market participants.
A broadened remit alongside a condensed name, which is actually more descriptive of the department’s function. A new name for a new compliance era.
Regulation Best Interest (Reg BI) and Form CRS
As financial institutions adapted to the global pandemic, and with the requirements of Reg BI simultaneously coming into force, the SEC worked proactively with firms in 2020 – issuing two risk alerts to ensure they understood their obligations.
I’m sure that firms were grateful for this opportunity to better apply this most significant change in regulation. The SEC has since has pointed out that in 2021 it will move focus onto the considerations around costs of recommendations and processes firms are using when recommending complex products. As such firms should continue to ensure that the Form CRS is accurate and being appropriately delivered.
However, the report also highlighted that some firms didn’t adequately respond to the Form CRS disciplinary disclosure requirements, an area all firms should ensure they address. Timeliness of response was also mentioned.
Technology – especially around data capture and retention – will play a crucial part in meeting the evidence-based requirements for regulators against the core tenets of disclosure, anti-conflict, and customer care. From compliance analyst to the CCO – those responsible for information management must ensure that procedures around Reg BI are captured and auditable, and that compliance with the rules is being monitored. You can hear more about the impact of Reg BI and best practices in our previous Reg BI Webinar - where we were joined by experts at Bates Compliance.
The Investment Adviser/Investment Company Program
This is truly an interesting section in the Report. Here the SEC admits that it simply “does not have sufficient resources to adequately cover the RIA space.” This is scary stuff. I am sure we all still remember that Bernie Madoff committed his earth-shattering Ponzi scheme through his registered investment adviser. The SEC’s lack of resources is of course not its fault, as it is reliant upon Congress to adequately fund the agency, and that is clearly not happening in this particular area. Let’s hope Congress reads the SEC’s report and steps up the Commission’s funding so that EXAMS no longer has a category of RIAs referred to as “have not been examined.” This does beg the question – is it finally time to create a Self-Regulatory Organization (SRO) for RIAs, similar to what FINRA does for broker-dealers?
Information Security and Operational Resiliency
With remote work arrangements forced on firms so quickly last year by the pandemic, EXAMS will be taking a close look this year at how firms have managed this transition. Some of the areas of focus will be: protecting client data; managing risk for employees working remotely; and protecting against email phishing attacks. EXAMS will also be looking to ensure that firms are appropriately managing vendor relationships that have been so important to firms over the past year. Firms need to verify that third-party vendors are in fact performing the functions they have been hired to do.
These are just a few highlights. There is much more in the Report itself and it is always a great exercise to read the Report and apply it to the particular circumstances and business of a regulated firm.
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