SEC Division of Examinations Releases Priorities for 2021

March 15, 2021

The SEC’s Division of Examinations announced its 2021 examination priorities, including a greater focus on climate-related risks. The Division will also focus on conflicts of interest for brokers (Regulation Best Interest) and investment advisers (fiduciary duty), and attendant risks relating to FinTech in its initiatives and examinations. The Division announced the release as lawmakers considered the nomination of Gary Gensler to lead the SEC. In Capitol Hill sessions, Gensler answered questions on recent trading volatility, ESG and on climate risks disclosures, which appears to be a top priority for the Biden Administration. “This year, the Division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change,” said Acting Chair Allison Herren Lee. “Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.” According to the Division of Examinations’ release, examinations of registered funds will focus on disclosures to investors, valuation, filings with the Commission, personal trading activities, contracts and agreements, and will include a review of fund governance practices and compliance programs. In addition, the Division will prioritize exams mutual funds or ETFs that have not previously been examined or have not been examined in a number of years, and will also look into:

Valuation: The Division will review mutual fund filings and reports to funds’ boards for compliance with regulatory requirements and for valuation issues. In focusing on valuation and the resulting impact on fund performance, liquidity and risk-related disclosures, the Division will review for investments in market sectors that experienced, or continue to experience, stress due to the pandemic, such as energy, real estate, or products such as bank loans and high yield corporate and municipal bonds.
Securities lending: The Division will review funds’ and advisers’ disclosures and practices related to securities lending.
Compliance programs: Examiners will generally focus on funds’ compliance programs and financial condition, particularly where funds have instituted advisory fee waivers.
ETFs: Examiners will focus on compliance with exemptive relief, including for the newly created non-transparent actively managed ETFs.
Liquidity Risk Management Programs: As part of its review of funds’ compliance programs, the Division will focus on mutual funds’ LRMPs to determine whether they are reasonably designed to assess and manage the funds’ liquidity risk. The Division will also review the implementation of required liquidity classifications, particularly in light of the recent stresses in the market due to the pandemic.
Money market funds: The Division intends to review money market funds’ compliance with stress-testing requirements, website disclosures and board oversight.