The SEC Cites Its Priorities
Art by Klaas Verplancke
The Division of Examinations at the Securities and Exchange Commission (SEC) has published its 2021 list of examination priorities, offering the advisory and asset management industry a look into the market regulator’s plans for the coming year.
Likely expected by most who follow the SEC and the Department of Labor (DOL), a top priority 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 emphasis 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 priorities statement says. “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.”
Several further topics on the list relate 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 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.”
The SEC also announced 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. In its settlement with the SEC, it admits no wrongdoing.
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 to stress 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 is available to clients.