INVESTMENT ADVISERS—Examinations staff reviews Division’s priorities at SEC Speaks - 21 October 2021

As is the case in other SEC divisions and offices, the Examinations staff is taking a closer look at issues related to ESG and climate risk.

This year’s SEC Speaks conference presented by the Practising Law Institute featured a discussion by several senior officials in the SEC’s Division of Examinations. The officials outlined several areas of focus in upcoming examinations, including advisers to private funds, the Commission’s new marketing rule, robo-advisors, compliance with Regulation Best Interest, business continuity plans, climate risk, and LIBOR.

Recent areas of focus. While the staff remains busy with its examinations, Acting Director Dan Kahl noted that it has been distracted from routine exams by recent market events, including the Solar Winds cyberattack, the collapse of Archegos Capital Management, and the “meme stocks” market volatility in January 2021, on which the SEC just issued a report. While these events did require the attention of Examinations staff, Kahl reassured that the Commission remains vigilant in its exams program. The Division has issued 10 Risk Alerts in the past year, with particular focus on climate risk and the transition away from LIBOR.

Co-Deputy Director Kristin Snyder described the priorities of the Division’s private funds unit. In its examinations of registered investment advisers to private funds, Examinations staff will focus on compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest. The staff will take special interest in advisers to private funds that have a higher concentration of structured products, such as collateralized loan obligations and mortgage-backed securities, to assess whether the private funds are at a higher risk for holding non-performing loans and having loans with higher default risk than that disclosed to investors.

Areas of focus for investment advisers in upcoming exams include the SEC’s new marketing rule, which becomes effective in May 2022 with varied compliance dates. The staff will also continue to look at custody issues and the safekeeping of customer assets, she said. As for the type of registrants being examined, the Division will focus its resources on new registrants, registrants that had not previously been examined, and registrants that have not been examined in a while, Snyder said. The staff will also concentrate on fintech issues in exams, including robo-advisors and advisers to sellers of digital assets, she added.

Broker-dealer examinations. John Polise, associate director of the National Broker-Dealer Exchange program, outlined the Division’s examination priorities with respect to broker-dealers. While he has been pleased with the efficacy of remote examinations that became a necessity during the COVID-19 pandemic and praised the flexibility afforded to the staff and to registrants of these exams, he also stated his desire to return to more in-person exams.

During upcoming broker-dealer exams, the staff will look at compliance with Regulation Best Interest, broker-dealer financial responsibility, anti-money laundering programs, broker-dealer disclosure, municipal securities advisers, and issues related to the LIBOR transition, Polise said.

Keith Cassidy, associate director of the Division’s Technology Controls Program (TCP) discussed some of the areas TCP is looking at in examinations. These include risks posed by third-party service providers, business continuity plans and disaster recovery (with a particular focus on severe climate activity such as Hurricane Sandy), risks involved in remote and hybrid work environments, and defending against and responding to ransomware attacks.

Credit ratings and muni advisers. Ahmed Abonamah, acting director of the Division’s Office of Credit Ratings, noted that his office performs both examination functions as well as policy and rulemaking functions, although examinations are its core work. In addition to looking at how NRSRO advisers responded to the challenges of the pandemic, it is also tackling new and emerging areas such as climate and ESG and how new products might create conflicts of interest. In particular, the office will look at product-specific risks such as collateralized loan obligations, he said.

Abonamah also said that his office is seeking more informal dialogue about what is going on in the markets. In addition, he mentioned that going forward, instead of issuing two annual reports—a summary examination report and an annual report—the office will be combining the two into one document.

Rebecca Olsen, director of the Office of Municipal Securities, explained that while her office does not conduct examinations itself, it does provide assistance to other offices in the Division, including technical assistance. It also acts as a liaison between the Division and the MSRB, she said. One particular area of focus municipal advisers should be aware of during the upcoming examination season is the LIBOR transition, she advised.

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