The Securities and Exchange Commission’s Division of Examinations has published its 2021 examination priorities.
The big headline is a greater focus on climate-related risks as part of information security and operational resiliency.
“Building on the efforts noted above concerning our business continuity plan outreach related to the pandemic, the Division will shift its focus to whether such plans, particularly those of systemically important registrants, account for the growing physical and other relevant risks associated with climate change. The scope of these examinations will be similar to the post-Hurricane Sandy work of the Division and other regulators, with a heightened focus on the maturation and improvements to these plans over the intervening years. As climate-related events become more frequent and more intense, we will review whether systemically important registrants are considering effective practices to help improve responses to large-scale events.”
The other big focus looks like it will be Regulation BI and Fiduciary Duty compliance.
“The Division will focus on compliance with Regulation Best Interest, Form CRS, and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty. The Division will examine whether 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 new addition to the priorities is looking at LIBOR.
“The Division will continue to engage with registrants through examinations to assess their 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.”
The rest looks like perennial items that a carry-over from the 2020 Examination Priorities.
Private funds are still on the list. The Division will always been focused on the disclosure of fees and conflicts for private fund managers. The Division detailed some very specific types of funds that are in its crosshairs.
One is private funds that invest in structured products, such as collateralized loan obligations and mortgage backed securities. The Division wants to see if these funds have higher risk of non-performing loans and loans with higher default risk. Fund mangers need to be sure that the default risk is being disclosed to investors. Sounds like the Division is going to be very focused on those disclosures.
The Division highlighted four other private fund specific items:
- preferential treatment of certain investors by advisers to private funds that have experienced issues with liquidity, including imposing gates or suspensions on fund withdrawals;
- portfolio valuations and the resulting impact on management fees;
- adequacy of disclosure and compliance with any regulatory requirements of cross trades, principal investments, or distressed sales;
- conflicts around liquidity, such as adviser led fund restructurings, including stapled secondary transactions where new investors purchase the interests of existing investors while also agreeing to invest in a new fund.
That last one looks very specific. I suspect the SEC has found some fund restructurings that it doesn’t like. Those may be more prevalent as a result of the pandemic.
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