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.