March 6, 2021

SEC 2021 Examination Priorities

 SEC 2021 Examination Priorities

Each year, the Division of Examinations (the “Division” - formerly known as the Office of Compliance Inspections and Examinations) of the U.S. Securities and Exchange Commission (“SEC”), publishes its examination priorities for the upcoming year. While there was a slight delay in the release of the report, on March 2, 2021, the Division released its 2021 examination priorities which aligned with our expectations based on recent examination deficiencies and enforcement cases. 

These priorities are designed to enhance the transparency of the Division’s examination program and to provide insight into their risk-based approach. Below are some of the key topics that we believe are of utmost importance for registered investment advisors (“RIAs”).


In June of 2019, the SEC released an interpretation regarding the standard of conduct (“Fiduciary Duty”) owed by RIAs. The Division will focus on assessing, among other things, whether RIAs provide advice, including whether account or program types continue to be, in the best interests of their clients, based on their clients’ objectives. Additionally, the Division will assess whether RIA’s are either eliminating or making full and fair disclosure of all conflicts of interest so clients can provide informed consent. 


Effective June 2020, the Client Relationship Summary (“Form CRS”) was a newly required disclosure document required of all SEC registered RIAs. Therefore, the Division will prioritize examinations of RIAs to assess compliance with Form CRS disclosure, filing and delivery requirements.


Conflicts of interest, particularly those with the prospect of financial gain or economic benefit, can improperly influence a firm’s fundamental obligation to act in a client’s best interest. The Division’s examinations will review firms’ disclosures regarding their conflicts of interest, including those related to fees and expenses. Fee and compensation-based conflicts of interest may take many forms, including revenue sharing arrangements between a registered firm and issuers, service providers, amongst others, and direct or indirect compensation to personnel for executing client transactions. 

One particular area the Division will prioritize is the examination of RIAs operating and utilizing turnkey asset management platforms (“TAMPs”). TAMPs provide RIAs with technology, investment research, portfolio management and other outsourcing services, and the Division’s examinations will seek to assess whether such fees and revenue sharing arrangements are adequately disclosed.


Concerns may arise when an RIA does not aggregate certain accounts for purposes of calculating fee discounts in accordance with its disclosures. In reviewing fees and expenses, the Division will review for:

  • advisory fee calculation errors, including, but not limited to, failure to exclude certain holdings from management fee calculations;

  • inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts; and

  • failures to refund prepaid fees for terminated accounts.


The Division will concentrate on recommendations regarding account type, conversions, and rollovers, as well as the sales practices used by firms for various product types, such as structured products, exchange-traded products, real estate investment trusts, private placements, annuities, digital assets, municipal and other fixed income securities, and microcap securities. 

The Division will also continue to prioritize the examination of incentives provided to financial services firms and professionals that may influence the selection of particular higher cost mutual fund share classes when lower cost classes are available.


Due to increasing demand, RIAs are increasingly offering investment strategies that focus on sustainability (sustainable, socially responsible, impact, and ESG conscious investing). The Division will focus on products in these areas that are widely available to investors such as open-end funds and ETFs, as well as those offered to accredited investors such as qualified opportunity funds. The Division will review the consistency and adequacy of the disclosures RIAs and fund complexes provide to clients regarding these strategies, determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.


As RIAs have spent the last twelve (12) months testing their cybersecurity policies and business continuity plans, the Division will now take this opportunity to review and assess whether RIAs have taken appropriate measures with respect to COVID-19 and whether appropriate measures were put in place to:

  • safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access;

  • oversee vendors and service providers;

  • address malicious email activities, such as phishing or account Intrusions;

  • respond to incidents, including those related to ransomware attacks; and

  • manage operational risk as a result of dispersed employees in a work-from-home environment.


The use of technology to facilitate compliance with regulatory requirements (“RegTech”) has experienced immense growth in recent years. RegTech, when implemented appropriately, may increase the efficiency of compliance staff, reduce manual processes, and exponentially increase transaction review capabilities. However, misused or improperly configured RegTech may lead to compliance program deficiencies. Examinations will focus on the implementation and integration of RegTech in firms’ compliance programs.


The digital asset market continues to evolve, and so too does the adoption of distributed ledger technology in financial services and market infrastructure. Examinations of market participants engaged with digital assets will continue to assess the following:

  • whether investments are in the best interests of investors;

  • portfolio management and trading practices; 

  • safety of client funds and assets;

  • pricing and valuation;

  • effectiveness of compliance programs and controls; and

  • supervision of representatives’ outside business activities.

Additionally, on February 26, 2021, the SEC's Division of Examinations released a long-awaited risk alert outlining observations made during examinations of investment advisory firms who utilize digital assets in client portfolios. The alert applies to firms who utilize these assets either directly (cryptocurrency) or indirectly (through private funds, publicly traded funds etc.). 

Click here to read the full alert.


The Division will continue to review RIA compliance programs, including whether the compliance programs and their policies and procedures are reasonably designed, implemented, and maintained. Specifically, the Division will pay particular attention to the following:

  • appropriateness of account selection;

  • portfolio management practices;

  • custody and safekeeping of client assets;

  • best execution;

  • fees and expenses;

  • business continuity plans;

  • compliance resources;

  • sustainable investing; 

  • broker-dealer affiliations (including RIAs with supervised persons who serve as registered representatives of a broker-dealer);

  • conflicts of interest;

  • outside business activities; and

  • valuation of client assets for consistency and appropriateness of methodology.


The Division noted that over 36% of RIAs manage private funds. This number is likely to continue to grow as RIAs look for different ways to distinguish themselves. As expected, the Division will continue to monitor and focus examination priorities on RIAs that manage private funds, specifically those that also provide services to retail investors. The Division will assess compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest

Finally, the Division will focus on how firms are complying with the recent changes to the definition of accredited investor when recommending and selling certain private offerings (click here to review the SEC’s modernized Accredited Investor definition).

Please remember that OCIE communicates these as PRIORITIES, and should not be relied upon as an all-inclusive list of all focus areas. To read the full report, click here: 2021 National Exam Program Examination Priorities.


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