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The SEC Division of Examinations recently announced its examination
priorities for fiscal year 2021, discussing key risks, trends, and examination
priorities in an overall effort to promote and improve compliance.
The two largest programs run by the Division, Investment
Adviser/Investment Company Program and Broker-Dealer and Exchange Program, focus
on the protection of retail investors and retirement savers. The Division stated in its annual report that
this year’s emphasis will be on sales related to mutual funds and
exchange-traded products, municipal securities, other fixed income products,
and microcap securities, but the examinations will be in the context of
compliance with Regulation Best Interest (“Reg BI”).
For broker dealers, the Division says it will conduct “enhanced
transaction testing” on various Reg BI-related policies and procedures on the
recommendation of rollovers and alternatives considered, complex product recommendations,
assessment of costs and reasonably available alternatives, how sales-based fees
paid to broker-dealers and representatives impact recommendations, and policies
and procedures regarding how broker-dealers identify and address conflicts of
interest.
For registered investment advisers (“RIAs”), the Division
said it will review whether they are adequately assessing whether RIAs are
meeting their fiduciary duties of care and loyalty, revolving around the risks
associated with “fees and expenses, complex products, best execution, and undisclosed
or inadequately disclosed, compensation arrangements.”
The Division also noted that extra attention will be paid to
the use of “turnkey asset management platforms” that provide technology, investment
research, portfolio management, and other outsourcing services. The Division’s examinations will seek to
assess whether the fees and revenue sharing arrangements of such platforms are
adequately disclosed.
Also, for both RIAs and broker dealers, there is expected
continued examination on the adequacy of the content and filing requirements of
the Customer Relationship Summary Form (“Form CRS”).
We urge our clients to review their compliance programs in light of the 2021 Examination Priorities to ensure their policies, procedures, and practices reflect regulatory expectations, focusing on the issue addressed in the report.