SEC Exams Director Driscoll Addresses Newly Announced 2021 Exam Priorities at IAA Compliance Conference

Driscoll__Peter_LR_4x5.jpgOne day after the SEC Division of Examinations staff announced its exam priorities for fiscal year 2021, Division Director Peter Driscoll addressed the enhanced focus on climate risks and ESG-related issues in remarks at the IAA’s Investment Adviser Compliance Conference. Many of this year’s themes are perennial risk areas the agency routinely covers in its examinations. This article presents an overview of the SEC’s examination priorities for investment advisers. A video of Driscoll’s Compliance Conference remarks is available on our Videos page.
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SEC Announces Enforcement Task Force on Climate and ESG

Commissioners Peirce, Roisman Question Timing, Recent Focus on ESG

SEC Acting Chair Allison Herren Lee

In the yet another move to intensify its focus on matters relating to ESG disclosures and investments, the SEC’s Division of Enforcement has created a Climate and ESG Task Force, led by Kelly L. Gibson, Acting Deputy Director of the Division. Its 22 employees will analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies and identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force is charged with developing initiatives to “proactively identify ESG-related misconduct” and will review ESG-related tips, referrals, and whistleblower complaints.
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SEC’s Division of Examinations Releases Roadmap for Advisers that Invest Clients in Digital Assets

Saying activities involved in the offer, sale, and trading of digital assets present unique risks to investors, the SEC’s Division of Examinations has issued a new Risk Alert to assist firms in developing and enhancing their compliance practices related to digital securities and other distributed ledger assets. The Alert also outlines areas of focus for future exams.

The Division of Examinations prepared the Alert following recent exams of investment advisers, broker-dealers, and transfer agents. Risks identified during exams of investment advisers managing digital securities, other digital assets, and derivatives products for clients – either directly or through pooled vehicles such as private funds – have prompted the Division to focus future exams on regulatory compliance in several areas.
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SEC Staff to Increase Focus on Climate-Related Disclosures

New ESG Committee to Guide IAA Policy Responses

In yet another move elevating the SEC’s attention to climate and ESG issues, Acting Chair Allison Herren Lee has directed staff in the SEC’s Division of Corporation Finance to “enhance its focus on climate-related disclosure in public company filings.” In a statement issued on February 24, Lee highlighted “immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.”
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SEC Offers Guidance for Investing in ESG Funds

The SEC’s Office of Investor Education and Advocacy has added to the agency’s focus on sustainable investing with an Investor Bulletin that focuses on environmental, social, and governance (ESG) principles. The bulletin explains ESG components, emphasizing that a fund manager may choose securities that meet one or multiple criteria. It also discusses different investment strategies in the ESG area.
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IAA Introduces Comprehensive Online Resources for Implementing the New Investment Adviser Marketing Rule

Investment advisers have much to learn and put into practice during the 18-month implementation period for the SEC’s new Investment Adviser Marketing Rule. To assist our members with navigating the first real update to their advertising regulation in decades, the IAA has launched a number of initiatives – including an entire website section that explains and explores the rule, the new opportunities it creates and the requirements it imposes. It includes the rule’s text, IAA summaries and analysis, analyses from prominent law firms, links to a continuing series of IAA webinars on the rule’s significant provisions, original FAQs, SEC statements, news reports and compliance-focused columns appearing in our online newsletter IAA Today, and more.
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Following Weeks of Speculation, DOL Confirms February 16 Effective Date for Fiduciary Exemption

The Department of Labor (DOL) has issued a press release in which it confirmed that the fiduciary exemption, titled “Improving Investment Advice for Workers and Retirees,” will go effective as scheduled on Tuesday, February 16, 2021, putting to rest conjecture about whether the new exemption would be immediately revisited by the Biden Administration. The exemption includes a transition provision that extends the temporary non-enforcement policy discussed in Field Assistance Bulletin 2018-02 for investment advice fiduciaries that work diligently and in good faith to comply with the Impartial Conduct Standards until December 20, 2021.
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SEC Acting Chair Lee Changes Policy on Contingent Settlement Offers

Commissioners Peirce and Roisman Disagree, Say Policy Has Worked Well

In a move sure to unnerve registrants looking to settle an SEC enforcement action, SEC Acting Chair Allison Herren Lee has reversed a practice introduced under former SEC Chairman Jay Clayton in 2019 that has allowed the SEC’s Division of Enforcement to recommend a settlement offer to the SEC that is conditioned on granting a waiver from a disqualification provision under the federal securities laws. SEC Commissioners Hester Peirce and Elad Roisman have issued a separate statement taking issue with Acting Chair Lee’s “attempt to rescind” the settlement policy, expressing the view that the policy has worked well and has not created structural conflicts or pressures.
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SEC Acting Chair Boosts Enforcement Division Powers
Acting SEC Chair Allison Herren Lee

In another signal that the SEC will become more aggressive under the Biden Administration, Acting Chair Allison Herren Lee has restored authority to senior Division of Enforcement officers to initiate formal investigations – authority they had been stripped of by the Trump Administration.

More than 30 senior Enforcement Division officials will now be able to authorize investigations. During the previous administration, only the two Co-Directors of Enforcement were permitted to approve new investigations. As a result, the process has taken longer and likely factored into the drop in the number of new SEC probes each year. According to SEC figures, there were 1,063 new investigations launched in 2016, down to 827 in 2019. Lee framed the move as important to investor protection when she announced it on February 9.
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Financial Transaction Tax:  Trouble Ahead?

By Neil Simon, IAA Vice President, Government Relations

House Transportation and Infrastructure Chairman Peter DeFazio (D-Ore.) has introduced the Wall Street Tax Act of 2021 (H.R.328), which would impose a 0.1% financial transaction tax (FTT) on trading firms. The IAA is steadfastly opposed to the legislation as it would increase the cost of capital, depress returns on investment, and harm American taxpayers saving for retirement.

Proponents of the tax used the controversy surrounding the recent frenzy of retail trading in GameStop to advocate for imposition of the levy. And, while not the subject of the February 18th House Financial Services Committee hearing on GameStop, the tax was raised by several committee members making clear a sharp partisan divide.
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Not So Fast: Why Compliance Can’t Ignore Digital Assets – Even If the Investment Team Does

By Susan Gault-Brown, Partner, and Kelley Howes, Of Counsel, Morrison & Foerster, LLP

Susan Gault-Brown and Kelly Howes of Morrison Foerster

Registered investment advisers – even those that do not provide advice about digital assets – are increasingly becoming aware of the need to take digital assets into account when drafting and implementing their codes of ethics. This is a direct result of the increasing frequency with which an adviser’s access persons may want to make personal investments in digital assets. In this column, we provide a brief background on the personal transaction reporting requirements of the code of ethics rule, and then discuss different types of digital assets, the securities law analysis that is currently applied to digital assets, and the resulting application of the code of ethics rule to digital assets.
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Examining Best Execution and Trading in the Current Landscape

By Ari Burstein, President, Capital Markets Strategies* 

Burstein__Ari_LR_4x5.jpgThere is no shortage of issues for investment advisers to consider when examining the impact of changes to trading and market structure on an adviser’s best execution responsibilities and other responsibilities relating to the trading function. Regulators and policymakers, as well as market participants themselves, in the U.S. and globally, continue to move forward on initiatives that will change the structure of the markets and how trading occurs. 

Best execution itself also continues to receive attention. Several SEC Commissioners have reiterated the need to look at best execution, including considering what constitutes best execution in today’s trading environment, and market participants continue to roll out products and services for investment advisers to help address their best execution obligations.
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Boston Firm Pays Over $1.85 Million to Settle Share Class Charges
SEC Continues Crackdown, Expanding Focus on Revenue Sharing, Cash Sweep Vehicles

In its latest enforcement case involving adviser selection and disclosure of conflicts arising from sales of mutual fund shares, the SEC has fined a Boston-based dual-registrant for breaches of fiduciary duty for failing to adequately disclose conflicts of interest when the firm received 12b-1 fees and revenue sharing payments for placing clients in mutual fund share classes and money market fund cash sweep vehicles when less costly alternatives were available. The SEC also found that the firm violated its duty to seek best execution and violated the Advisers Act Compliance Program Rule.
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SEC Order Permits Alternative Mutual Fund to Suspend Redemptions for Inability to Value Assets and Strike a Net Asset Value

The SEC has approved an order from an alternative registered investment company to suspend redemptions due to the fund’s inability to value swaps in the fund’s portfolio, and therefore, the fund’s inability to strike a net asset value (NAV) for the fund. The fund’s investment adviser’s Chief Investment Officer had apparently been adjusting certain parameters within the third-party pricing model that affected the valuation of the fund’s swaps.
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IOSCO Presses for Globally Consistent Sustainability Disclosure Standards

The International Organization of Securities Commissions (IOSCO) has issued a press release announcing progress made by its Sustainable Finance Task Force and upcoming work with the International Financial Reporting Standards Foundation (IFRS) on sustainability disclosure standards. IOSCO has observed that “investor demand for sustainability-related information is currently not being properly met” and has identified three areas for improvement in company and asset manager sustainability-related disclosure.
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EU’s Sustainable Finance Disclosure Reg Takes Effect March 10

The European Union’s Sustainable Finance Disclosure Regulation, colloquially known as SFDR or the “Disclosure Regulation,” will begin to apply on March 10. It requires new disclosures relating to ESG as well as reporting requirements for asset managers that market funds in or into the EU both at a product and manager level.
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SEC Requests Comment on Money Market Fund Report

The SEC is requesting public comment on potential reforms for money market funds that were discussed in a report by the President’s Working Group on Financial Markets (PWG). The PWG report describes the outflows in March 2020 from prime and tax-exempt money market funds, steps taken to support short-term funding markets despite previous money market fund reform efforts, and potential reform measures.
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SEC Charges CA Adviser for Withholding Adverse Financial Information Impacting Client’s Promissory Notes

The SEC has settled charges against a California-based adviser and its principal for failing to disclose adverse financial information and making false and misleading statements about a company to trustees of a client account who were considering whether to maintain an investment in promissory notes issued by the company.
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GETTING PROACTIVE WITH CLIENTS ON ESG–ESG and sustainable investing strategies are experiencing strong growth both in asset flows and investor interest. For advisers, this presents an excellent opportunity to engage with clients and lead the discussion on values-based investing.  Industry experts discuss the outlook for sustainable investing in 2021, how to discuss ESG with clients, and how to build portfolios and select funds and managers. This is a presentation of the IAA’s Active Managers Council.


MORE IAA VIDEOS – including SEC officials speaking at our 2020 Trading and Best Execution Summit and our 2020 Compliance Conference – are on our VIDEOS page.