The SEC's exam priorities in 2021 will focus on climate-related risks and conflicts of interests for brokers and investment advisers, among other areas, according to the Securities and Exchange Commission's Division of Examinations.
The division, formerly the Office of Compliance Inspections and Examinations, will concentrate on compliance with Regulation Best Interest, Form CRS and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty, it said in a report released Wednesday.
In December, the division announced it would focus on specific requirements of Reg BI, including those that go beyond suitability standards and require broker-dealers to have a reasonable basis to believe that recommendations are in retail customers' best interests.
The best-interest standard was the centerpiece of a package designed to address the obligations of broker-dealers and investment advisers when they provide recommendations or investment advice to retail investors. It was adopted in June 2019 and went into effect June 30, 2020.
The client relationship summary, or Form CRS, necessitates that firms disclose to retail investors the nature and scope of their services, the types of fees customers would incur, the conflicts of interest faced by the firm and the firm's disciplinary history.
The division will also focus more closely on climate-related risks. While it will continue to review business continuity and disaster recovery plans of firms, it will shift its focus to whether such plans, particularly those of systemically important registrants, are accounting for the growing physical and other relevant risks associated with climate change, the division said. "As climate-related events become more frequent and more intense, the division will review whether firms are considering effective practices to help improve responses to large-scale events," the division said in an accompanying news release.
"This year, the division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors' best interests and expectations, as well as firms' business continuity plans in light of intensifying physical risks associated with climate change," said Acting Chairwoman Allison Herren Lee, in the news release. "Through these and other efforts, we are integrating climate and ESG considerations into the agency's broader regulatory framework."
Regarding digital assets, examinations of market participants will continue to assess whether investments are in the best interests of investors; and will also assess portfolio management and trading practices; safety of client funds and assets; pricing and valuation; effectiveness of compliance programs and controls; and supervision of representatives' outside business activities.
Jason E. Brown, asset management partner at Ropes & Gray, said in a statement that while nothing in the division's report comes "as a surprise based on what we have been seeing on recent SEC exams (such as a focus on an adviser's fiduciary duty, conflicts, ESG, fees and expenses, and emerging investment strategies), it is helpful for the SEC to spell out its exam priorities."
In fiscal year 2020, which ended Sept. 30, the division completed 2,952 examinations, a 4.4% decrease from the previous fiscal year.
