The day after SEC Chair nominee Gary Gensler’s confirmation hearing, the Division of Examinations (“EXAMS”) issued its 2021 Examination Priorities letter (“the Letter”). The Letter shares similarities to the 2020 exam priorities with a few twists. In this ComplianceAlert, we focus on the Staff’s priorities for registered investment advisers and especially how they may differ from previous years.
It’s important to note that the Letter was issued prior to the new Chair’s arrival to the Commission. Once Mr. Gensler is in place (assuming official confirmation) the list of priorities for EXAMS may very well change.
In FY 2020, EXAMS was able to examine 15 percent of its registered advisers that now number 13,900 and manage a total of approximately $97 trillion in client assets. The 2021 Letter contains many of the same advisory focus areas as last year’s letter, such as:
- Retail focus areas
- Reg BI/Form CRS
- Fund Turnkey Platforms
- Robo Advisers
Please see our previous ComplianceAlert and Video on the 2020 Examination Priorities for more on these topics. View ComplianceAlert, “New Rules Drive SEC Focus in 2020”
In addition to the above, the primary new items for 2021 that advisers need to be aware of include:
- Specific Conflict of Interest exam areas – fees, best execution, complex products, compensation structures
- Private Funds renewed focus – gates, suspensions and liquidity, prohibited transactions, distressed asset sales, fund restructuring involving stapled secondaries
- Work from Home concerns (COVID-19 related) – supervisory practices and communications
- Use of RegTech in compliance programs – electronic surveillance, personal trading, firm trading
- Digital Asset focus – portfolio management, accounting/valuation, custody, registration issues, and client disclosures
- LIBOR transition for fixed income managers – review firm readiness for the transition to SOFR
- Liquidity Risk Management Programs – review funds’ programs for compliance
- ESG strategies – funds and ETFs with an ESG focus to ensure adequate disclosures, fair marketing and proxy voting practices
Private funds of all types will be under SEC scrutiny in 2021. A strong focus on conflicts of interest will bring this sector back into the spotlight. EXAMS is concerned with private fund use of prohibited transactions such as cross trades and principal trades, which both require investor approval. Private equity firms that operate in the leveraged buyout space may be on the examination list if they are involved in the sale of distressed companies.
CLO funds and RMBS/CMBS funds that have complex investment strategies and risky investments will be examined for compliance with investor disclosures versus the level of non-performing assets. Real estate funds are also on the list since the SEC is concerned about the pandemic effect on the real estate market and the performance of this asset class as a whole.
Mutual funds and ETFs that have never been examined or not examined in a long time have been moved up on the priority list for 2021. This may be especially true for funds using “turnkey platforms” or those that have an ESG mandate.
Firms that have the described areas of focus cited in the Letter should especially review their compliance management practices and gear up quickly to prepare for a possible SEC exam in 2021.