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.
“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.”