The SEC’s Division of Examinations (the “Division”), formerly the Office of Compliance Inspections and Examinations, announced yesterday its 2021 Exam Priorities.
Exam Priorities
These SEC exam priorities are announced each year to help promote and improve compliance and protect investors. The exam priorities also indicate what specific areas SEC examiners may be focusing on during upcoming examinations this year. The exam priorities cover not only investment advisors but also broker-dealers and transfer agents.
Retail Investors
As has been the case in the past few years, examinations of RIAs will focus on recommendations and advice given to retail investors, with a particular focus on seniors. Compliance with Form CRS, for example, will be one priority during examinations of RIAs with retail investors. In addition, SEC examiners will assess, whether RIAs, as fiduciaries, have fulfilled their duty of care and duty of loyalty. For instance, examiners will look at whether RIAs provide advice (including with regard to account or program types) that is in the best interests of their clients, based on their clients’ objectives, and eliminate or make full and fair disclosure of all conflicts of interest. The Division said they will also continue to focus on risks associated with fees and expenses, complex products, best execution, and undisclosed or inadequately disclosed, compensation arrangements. Recommendations to retail investors regarding account type, conversions, and rollovers are also areas of focus.
Advisory Fees and Compensation
Fee and compensation-based conflicts are also of particular interest to the Division. Similarly, in reviewing fees and expenses, examiners will look for: (1) advisory fee calculation errors, such as the failure to exclude certain holdings from management fee calculations; (2) inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts; and (3) failures to refund prepaid fees for terminated accounts.
Information Security
In light of the pandemic and the increasing importance of information security, examiners will review whether RIAs have taken appropriate measures to: (1) safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access; (2) oversee vendors and service providers; (3) address malicious email activities, such as phishing or account intrusions; (4) respond to incidents, such as ransomware attacks; and (5) manage operational risk as a result of dispersed employees in a work-from-home environment.
In addition, due to the substantial disruptions that occurred this past year to normal business operations over the past year, the Division said that they will again be reviewing firms’ business continuity and disaster recovery plans.
ESG
With regard to investment strategies that focus on ESG factors, the Division will review the consistency and adequacy of the disclosures RIAs and fund complexes provide to clients regarding these strategies to help determine whether the firms’ processes and practices match their disclosures.
Private Funds
With respect to private funds, the Division will be looking at, among other things, 1) preferential treatment of certain investors by advisers to private funds that have experienced issues with liquidity, including imposing gates or suspensions on fund withdrawals; 2) portfolio valuations and the impact on management and incentive fees; 3) disclosure and compliance with respect to cross trades, principal investments, and distressed sales; 4) conflicts of interest regarding liquidity, such as adviser led fund restructurings, including stapled secondary transactions where new investors purchase the interests of existing investors while also agreeing to invest in a new fund.
Please click on the link below to access the full report issued by OCIE.
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
