Compliance March 4, 2021

Reading Into the SEC’s 2021 Enforcement Priorities

The ongoing implementation of Regulation Best Interest gets top billing in the SEC’s recently published 2021 examination priorities list, though recent evidence suggests the regulator’s focus on share class disclosures remains a chief concern. 

Reported by


The Division of Examinations at the U.S. Securities and Exchange Commission (SEC) has published its 2021 list of examination priorities, offering the advisory and asset management industry a telling glimpse into the market regulator’s plans for the coming year.

Likely unsurprising to most who follow the SEC and the U.S. Department of Labor (DOL), one of the top priorities on the list is making sure firms are complying with Regulation Best Interest (Reg BI) and the related DOL fiduciary rule. More surprising—or at least a newer development—is the division’s enhanced focus on climate change and its impact on equity market participants.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

“The division will focus on compliance with Regulation Best Interest, Form CRS [Customer Relationship Summary], and whether registered investment advisers [RIAs] have fulfilled their fiduciary duties of care and loyalty,” the SEC’s priorities statement explains. “The division will examine whether firms are appropriately mitigating conflicts of interest and, where necessary, providing disclosure of conflicts that is sufficient to enable informed consent by retail investors.”

Next come several items related to cybersecurity, operational resiliency and the ongoing proliferation and development of financial technology innovations, including digital assets. Notably, the SEC links the publication of disaster-related and climate change-related data to this examination priority.

“The division will continue to review business continuity and disaster recovery plans of firms, but 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 priorities list says. “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 will also review whether registrants have taken appropriate measures to: safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access; oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions; respond to incidents, including those related to ransomware attacks; and manage operational risk as a result of dispersed employees in a work-from-home environment.”

Many other items are cited on the full priorities list, including projects to analyze and prevent money laundering and to assess the equity markets’ overall structural integrity.

The publication of the 2021 examination priorities list comes the same week that the Biden administration’s nominee for SEC chair, Gary Gensler, fielded nearly three hours of questions from the Senate Banking Committee. Many of the same topics covered in the newly published 2021 priorities list came up during the hearing, but it stands to reason that, should Gensler win Senate approval, his input could reshape and/or reshuffle the Division of Examination’s priorities. The same can be said of the potential influence of Boston Mayor Marty Walsh on the DOL’s SEC-adjacent priorities, should he win approval from the Senate as the next secretary of labor.

Something else to consider is that the SEC also announced this week that its enforcement staff had secured a final judgment in the U.S. District Court for the District of Massachusetts in a case involving Bolton Securities Corp. Underlying the case are SEC allegations that Bolton Securities failed to disclose material conflicts of interest related to mutual fund 12b-1 fees and principal trading compensation generated from client investments. Though it does not admit any wrongdoing in its settlement with the SEC, the firm has agreed to pay approximately $450,000 in disgorgements, interest and a civil penalty.

As sources have suggested, such cases underscore the fact that the SEC, even as it seeks to promote and prioritize its rollout of the Reg BI package, continues its focus on curtailing the use of mutual fund share classes that pay a “Rule 12b-1 fee” when a lower-cost share class for the same fund was available to clients.

Finally, this week’s SEC action also included an announcement of the creation of a dedicated “Climate and ESG Task Force” within the Division of Enforcement. The SEC leadership says the new group will be led by Kelly Gibson, the acting deputy director of enforcement, who will oversee a “division-wide effort with 22 members drawn from the SEC’s headquarters, regional offices and enforcement specialized units.”

“Consistent with increasing investor focus and reliance on climate and ESG [environmental, social and governance]-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct,” the announcement explains. “The task force will also coordinate the effective use of division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”

Compliance March 4, 2021

Practice of Rebranding Investments Questioned in ERISA Lawsuit

The American Red Cross is accused of allowing excessive investment and recordkeeping fees in its 401(k) plan.

Reported by


An Employee Retirement Income Security Act (ERISA) lawsuit has been filed on behalf of participants in the American Red Cross Savings Plan against the American National Red Cross, its Board of Governors, members of the board, its Benefit Plan Administration Committee and members of the committee for breaches of their fiduciary duties.

According to the complaint, the plan’s assets under management (AUM) qualify it as a jumbo plan in the defined contribution (DC) plan marketplace and among the largest plans in the United States. As such, it had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments. The plaintiffs accuse the defendants, however, of not trying to reduce the plan’s expenses or exercising appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent. The complaint cites data from BrightScope that found the Red Cross plan fell in the category of plans with the highest total plan cost for plans with more than $500 million in assets.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The lawsuit says the defendants breached the duties they owed to the plan and its participants by (1) failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; (2) maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and (3) failing to control the plan’s recordkeeping costs. The plaintiffs say the actions of the defendants cost the plan and its participants millions of dollars.

For example, according to the lawsuit, the use of revenue sharing to pay for recordkeeping resulted in a worst-case scenario for the plan’s participants because it saddled them with above-market recordkeeping fees.

The lawsuit cites an NEPC survey which found that the majority of plans with more than 15,000 participants paid slightly more than $40 per participant in recordkeeping, trust and custody fees. Per participant fees in the Red Cross plan ranged from $126.89 in 2015 to $207.67 in 2019.

Although the plan changed its recordkeeper in 2016, recordkeeping costs were higher after the change. The plaintiffs say this strongly suggests that the defendants failed to conduct a proper and effective request for proposals (RFP) at any time prior to 2015 through the present to determine whether the plan could obtain better recordkeeping and administrative fee pricing from other service providers.

The defendants are also accused of failing to timely consider available collective investment trusts (CITs) that were identical to the funds offered by the plan and lower in cost. The complaint explains that the plan has engaged in a rebranding process in which it contracts with providers of CITs to offer each provider’s CIT bearing the Red Cross name with the only difference being additional cost. In its March 2020 fee disclosure, the plan detailed how its rebranding process works: The plan “adds basis points to the expense ratio of funds to cover administrative fees.” The 2020 fee disclosure further states that “15 basis points (0.15%) have been included in the expense ratio of each listed investment for administrative expenses.”

There is no difference between the underlying CITs and the rebranded Red Cross product, the complaint argues. The funds hold identical investments and have the same managers, risk return profiles and investment strategy. “Because the underlying funds are otherwise identical to the Red Cross version, but with lower fees, a prudent fiduciary would know immediately that a switch is necessary,” the lawsuit states. “Had the plan’s fiduciaries prudently undertaken their fiduciary responsibility for oversight of the plan, determining the appropriateness of the plan’s investment strategy and monitoring investment performance, the plan would have moved to the unbranded versions of the identical fund.”

In a statement, the American Red Cross told PLANADVISER, “We don’t believe there is any validity to the claims that the American Red Cross 401(k) plan has been mismanaged. To the contrary, we believe that the Red Cross 401(k) plan has been well managed and provides a valuable benefit to our employees. We do not believe any litigation against our plan would have any merit and plan to defend vigorously. Plaintiff law firms have been very active in soliciting participants in company 401(k) plans to pursue litigation against plans and employers, and this is part of an uptick in litigation in this area. Many of these lawsuits have been shown to be without merit.”

«