The Securities and Exchange Commission's Division of Examinations said Wednesday that its coverage of RIAs in 2020, a year in which the RIA population continued to increase "and the pandemic necessitated a mid-year shift to remote examining," was 15%.
The SEC completed 2,952 exams in fiscal 2020, a 4.4% decrease from fiscal 2019.
"This small decrease, when viewed in light of the impact of the pandemic, is illustrative of the staff's hard work, resiliency and dedication to the SEC's and the Division's mission to protect investors," the agency said Wednesday in releasing its must-read 2021 exam priorities list.
In the last five years, the number of RIAs the SEC oversees increased from about 12,000 to more than 13,900, and the assets under management of RIAs increased from approximately $67 trillion to $97 trillion, the agency reported.
Pete Driscoll, director of the division, stated in releasing the report that the exam division priorities "reflect the complicated, diverse, and evolving nature of the risks to investors and the markets, including climate and ESG. In this unprecedented time, the Division is committed to continuing to adapt examination processes and find innovative ways to enhance the effectiveness of examinations and our risk-based approach."
Read the galley above to see the securities regulator's top six exam priorities this year.
(Image: Shutterstock) 6. The London Inter-Bank Offered Rate (LIBOR) Transition
Exams will assess registrants' understanding of any exposure to LIBOR, their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate, in connection with registrants' own financial matters and those of their clients and customers.
(Photo: Shutterstock) 5. Anti-Money Laundering Programs
The Division will continue to review for compliance with applicable anti-money laundering (AML) requirements, including evaluating whether broker-dealers and registered investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money-laundering activities.
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4. Financial Technology (Fintech) and Innovation, Including Digital Assets
Exams will focus on evaluating whether registrants are operating consistently with their representations, whether firms are handling customer orders in accordance with their instructions, and review compliance around trade recommendations made in mobile applications.
Exams of market participants engaged with digital assets will continue to assess: whether investments are in the best interests of investors; 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.
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3. Information Security and Operational Resiliency
Reviews of business continuity and disaster recovery plans of firms will continue, but will shift 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.
Also reviewed will be 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.
(Photo: Shutterstock) 2. Focus Areas Relating to Investment Advisors and Investment Companies
Compliance programs: RIAs will be assessed whether those programs and their policies and procedures are reasonably designed, implemented, and maintained. RIAs are also increasingly offering investment strategies that focus on ESG factors.
Registered funds, including mutual funds and ETFs: Exams will focus on disclosures to investors, valuation, filings, personal trading activities, contracts and agreements, and will include a review of fund governance practices and compliance programs. Exams of mutual funds or ETFs that have not previously been examined will be prioritized and the Division will focus on compliance with exemptive relief, including for the newly created non-transparent, actively managed ETFs.
RIAs for private funds: The Division will continue to focus on advisors to private funds.
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1. Retail Investors, Including Seniors and Those Saving for Retirement, Through Reg BI and Fiduciary Duty Compliance
Compliance with Regulation Best Interest, Form CRS, and whether RIAs have fulfilled their fiduciary duties of care and loyalty will be probed. Exams will assess if firms are appropriately mitigating conflicts of interest and, where necessary, providing disclosure of conflicts that is sufficient to enable informed consent by retail investors.
The scope of Reg BI exams will be expanded to focus on whether BDs are making recommendations that they have a reasonable basis to believe are in customers' best interests and evaluating BD processes for compliance and alterations made to product offerings.
Enhanced transaction testing will also be conducted as part of exams, and will evaluate firm policies and procedures designed to meet additional elements of Reg BI — such as rollovers and complex product recommendations as well as costs.
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