The Securities and Exchange Commission (the “SEC”) recently announced its 2021 examination priorities, providing a glimpse into the Biden administration’s overall priorities for registered investment firms. The exam priorities provide registered investment advisers the opportunity to amend their compliance programs accordingly.
The three priorities that the STRAIT Compliance team believe are unique in this year's release include:
- ESG Matters
- The LIBOR Transition
- Structured Products
The priorities make it clear that that the SEC intends to focus on how registered investment advisers approach environmental, social, and governance, or ESG matters.
The SEC mentions that investment advisers “are increasingly offering investment strategies that focus on sustainability” and these statements are going to be closely reviewed by the examination staff. Essentially, the SEC wants to ensure that if an investment adviser discusses in its marketing collateral that they offer an ESG strategy, that they’re not only talking the talk but walking the walk.
Investment advisers should consider undertaking an ESG audit, including a review of the marketing materials and the implementation of ESG-focused investment strategies.
The LIBOR Transition
Like last year, the SEC is focused on the industry’s transition away from LIBOR. The SEC will assess an adviser’s understanding of any exposure to LIBOR, their preparations for the expected discontinuation of LIBOR, and the transition to an alternative reference rate.
Investment advisers should determine if they are exposed to LIBOR (e.g., through lending facilities), begin transitioning to a fall back reference rate, and measure the risk and volatility of using that fall back rate.
The SEC will continue to focus on private fund advisers to assess compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest. In particular, there will be an increased focus on advisers that have a higher concentration of structured products such as collateralized loan obligations (“CLOs”) 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.
The SEC specifies that it will be reviewing the “preferential treatment of certain investors by advisers to private funds that have experienced issues with liquidity, including imposing gates or suspensions on fund withdrawals,” and “portfolio valuations and the resulting impact on management fees.”
Investment advisers should review their compliance procedures, risk mitigation measures, and disclosures to ensure the issues are being addressed.
The 2021 examination priorities reflect the SEC’s assessment of issues, risks, and policy matters stemming from developments in the markets and regulation of those markets. Although the priorities will steer the SEC’s examination, the list is not exhaustive, and they can look into other areas as well.
If you have any questions regarding the 2021 exam priorities, need assistance in preparing for a regulatory exam, or would like to discuss your firm’s compliance program, please contact a member of the STRAIT Compliance team.
About STRAIT Compliance
STRAIT provides a comprehensive range of compliance and regulatory services to the global financial services industry. Our services span a wide range of ongoing and project-based offerings, including cyber security and other regulatory policy reviews, regulatory exam support, regulatory filings, and the development and execution of entire compliance programs. Our experienced compliance team leverages our proprietary Compliance Control Framework to provide advisers with a real-time picture of task progress on a secure, cloud-based platform enhancing both transparency and accountability while reducing overall risk. STRAIT is more than a compliance consultant - we are your partner, and as your compliance partner we function as an extension of your internal team, providing proactive service and real-time visibility into ongoing compliance initiatives.