Our recent posts have walked you through the SEC’s new marketing rule and discussed valuation and fee assessment. Now, with the ADV season, hopefully, in your rear-view mirror, we turn your attention to planning for the remainder of the year. Determining the most efficient use of a compliance department’s time and resources is essential. Fortunately, the SEC’s Division of Examinations (EXAMS) provides an annual publication of Exam Priorities that is extremely helpful in developing risk-based reviews.
Unsurprisingly, for 2021, the Division will be looking at how advisers have conducted business during the COVID-19 pandemic, including the execution of business continuity plans and remote-work processes. Specifically, EXAMS will focus attention on whether advisers followed their disclosed plans during this period. While the SEC acknowledges the extraordinary disruption COVID-19 had on operations, it will be important to have records showing how you responded to those disruptions.
The Division further highlights the following issues for its 2021 reviews that will be of key interest to robo-advisers:
- Form CRS
EXAMS will continue its review of compliance with Form CRS, and noted that many firms failed to adequately include disciplinary disclosures. It also highlighted the importance of ensuring that Chief Compliance Officers are sufficiently funded and empowered to meet regulatory requirements. Firms are advised to include such consideration in compliance reviews.
- Retail Investors
The Division will continue to examine advisers to assess whether they have fulfilled their fiduciary duties to retail investors including reviewing fees and expenses, best execution, and compensation arrangements.
- Mutual Funds and ETFs
As many digital advisers offer ETFs, this EXAMS priority deserves particular attention. The Division will focus on financial incentives that pose potential conflicts of interest in recommending investments, and the adequacy of disclosures regarding such conflicts.
- Information Security and Operational Resiliency
The Division will review whether firms have taken appropriate measures to: (1) safeguard customer accounts, including identity verification methods; (2) oversee vendors and service providers; (3) address malicious email activities; and (4) manage operational risk in a work-from-home environment, particularly for online access to firm systems.
Firms are advised to document responses to breaches and attempted breaches, and have a well-reasoned analysis of risks posed by remote working.
Division staff will focus on automated tools and platforms, and whether they perform as described in their disclosures. Firms are well advised to compare policies with procedures long before a regulator comes knocking.
EXAMS remains committed to reviewing all facets of adviser operations. Firms are encouraged to utilize the Exam Priorities publication as a roadmap for compliance, and to seek legal advice to ensure that risks of examination and enforcement are appropriately minimized.
Our next series of posts will take a deeper dive on these examination priorities. We invite you to join us next time when Craig will take a closer look at the issues highlighted by EXAMS with respect to two particular investments commonly used by robo-advisers, mutual funds and ETFs.