Despite “stresses” brought on by the coronavirus pandemic and the agency’s “rapid move to a mandatory telework environment,” Securities and Exchange Commission Chairman Jay Clayton touted in mid-October the agency’s accomplishments in 2020.
Looking to 2021, the agency wants to add more examiners to help monitor advisor and broker-dealer compliance with Regulation Best Interest and Form CRS.
While the pandemic “significantly impacted how we do our work, it did not negatively impact the work itself,” Clayton stated at the annual SEC Speaks conference, held virtually by the Practising Law Institute.
The agency’s “planned oversight, examination, rulemaking, and enforcement work continued with vigor, rigor and transparency,” just as the agency “added to its workload,” Clayton said.
The securities regulator’s enforcement division brought over 700 actions in FY20, “a significant percentage” of which occurred after March 15 — when the agency began to telework.
Financial remedies reached more than $4 billion; “The Division’s activities during the pandemic have included three dozen trading suspensions, six COVID-related fraud actions, and over 150 newly opened COVID-related investigations and inquiries,” Clayton reported.
The Commission also awarded 39 individual whistleblowers approximately $175 million — “more, much more, than in any prior fiscal year,” he said.
More Examiners Needed in 2021
As to exams, in FY2020 the Office of Compliance Inspections and Examinations conducted exams that covered 15% of all SEC-registered investment advisors, Clayton stated. OCIE is conducting most exams remotely.
According to the agency’s 2021 budget request, the agency wants to add four positions to its exam division in 2021 to address “emerging risks facing market participants.” Three of those examiners will focus on investment advisor and broker-dealer compliance with Regulation Best Interest and Form CRS, as well as cyber and information security risks.
The size of the SEC-regulated community continues to grow in volume and complexity and significantly exceeds the office’s bandwidth at existing resource levels, the agency states in the request.
At the beginning of FY 2021, OCIE anticipates that it will oversee more than 13,800 investment advisors with over $85 trillion in assets under management; nearly 775 investment company complexes managing over 15,000 investment company portfolios; over 3,700 broker-dealers with more than 155,000 branch offices; approximately 550 municipal advisors; 23 national securities exchanges; and more than 300 transfer agents.
The Investment Management Division, meanwhile, reviewed disclosures relating to more than 10,700 funds, including more than 1,200 new funds — an increase of 7% over last year.
Ensure Reg BI Lives Up to its Potential
SEC Commissioner Caroline Crenshaw, a Democrat, who joined the agency in mid-August, said during the SEC Speaks event that her priorities in the coming year includes focusing “on investors, particularly retail investors. Investor protection is one of our core, and basic, mandates.”
She stated: “Given that investors are relying more and more on themselves to contribute to a 401(k), to find their financial advisors and be responsible for their savings for retirement, it’s absolutely critical that investors are getting the best advice possible.”
Crenshaw noted her particular interest in Reg BI.
“We need to make sure that it does live up to its potential; I’m thinking about it and how to develop its potential — mitigation is one of the areas that’s important. We need to make sure that financial professionals aren’t getting paid to give bad advice.”
Then the disclosure piece of Form CRS —“Do disclosures enable informed decision making by retail investors?”
FINRA Guidance on Reg BI
Meanwhile, expect guidance from the Financial Industry Regulatory Authority in the coming months on areas that BDs should focus on regarding Reg BI compliance, FINRA CEO Robert Cook said in late September.
The BD regulator also is mulling some exam changes, Cook said.
Three months into Reg BI taking hold, FINRA is assessing what it’s noticed recently during exams “with a view to develop a response to this question:
What are we seeing early days, and what guidance would we suggest to the industry about areas to focus on?” Cook said during the Securities Industry and Financial Markets Association’s Compliance & Legal virtual event.
“There are some areas that we’ve identified where we see some trends or patterns where firms might think about spending some more time” in terms of Reg BI compliance, Cook said.
“We recognize this was put into place in the middle of a pandemic or the final stages occurred during the middle of a pandemic,” he explained. “A lot of effort by firms went into coming into compliance. There may be some areas where, now that it’s up and running, [we can] go back and make sure things are working as well as they could.”
Cook said FINRA will partner with the SEC on its guidance.
Also pre-COVID, FINRA’s “cycle exams almost always included some in-person element,” he said. “It might be quite short, but there’s almost always an in-person element to a cycle exam.”
(FINRA conducts up to 2,000 risk-based cycle examinations each year to assess identified risks and controls and determine whether firms are in compliance with laws, rules and regulations.)
Going forward, Cook continued, FINRA will take a look “at doing the in-person component more on a risk-based framework. So decide on a case-by-case basis whether or not it makes sense to include an in-person component.”
Also, as FINRA has pushed the 2020 branch inspections to March 2021, “we can work through with the SEC to allow firms to conduct remote inspections for 2020 and 2021.”
Washington Bureau Chief Melanie Waddell can be reached at [email protected].