Hundreds of firms that serve retail investors failed to file a relationship summary document with the SEC, which is part of the regulator’s recent overhaul of standards of conduct for advisors and brokers.
The commission’s examiners have been asking the firms — sometimes twice — why they opted not to produce a Form CRS. Some firms didn't do themselves any favors by ignoring those inquiries, enforcement division Director Peter Driscoll said.
"We had a large number that didn't respond to us at all, so we're opening up exams on them to look at the requirements and whether or not that firm should have filed, particularly as they were non-responsive to us with two different outreaches," he said. "That's in flight right now."
Driscoll’s comments, made during the Investment Adviser Association's virtual compliance conference, shed light on what the SEC will be prioritizing for advisor exams. In addition to Form CRS, the industry can expect regulatory scrutiny on cybersecurity and ESG practices.
And in a signal that examinations of advisors and other registered entities are an increasing area of focus at the commission, what had been the Office of Compliance Inspections and Examinations is now a division, a step up in the SEC's organizational hierarchy.
"It sends a message publicly: compliance is important," Driscoll said. "For all intents and purposes, we truly were doing division work."
Those with the resources to sort through compliance thickets may be better positioned to take advantage of some long-awaited changes.
Driscoll's team has been doing that work almost exclusively remotely for about a year in response to the COVID-19 pandemic, and he says that there are no immediate plans to resume in-person exams. At present, examiners are only visiting a firm's physical location in extreme cases such as suspicion of an ongoing fraud or concern that the firm is destroying its documents.
But even when the federal government signals all clear on the pandemic, Driscoll expects that his division will continue to conduct many of its advisor exams remotely.
"Before COVID, we were doing around 30% of our exams through correspondence. I think that that will be higher," he said. "There's no substitute to being on-site, but I think a lot of the types of exams that we do are very conducive through correspondence and interviews."
Driscoll's division this week
The enforcement division is also planning to scrutinize firms' cybersecurity defenses, a perennial exam priority that Driscoll said has taken on fresh urgency in an environment where advisors and support staff are working remotely, accessing sensitive information through a multiplicity of devices and networks.
Also climbing up the exam priority list are the ways that firms are engaging in ESG investing, what Mark Perlow, a partner at the law firm Dechert, calls "probably one of the biggest secular trends that we as a firm have been seeing."
"It's real and it's here, and the SEC has not been ignoring this trend," Perlow said at the IAA conference.
Indeed, on Thursday, the SEC
With ESG, as with so many other aspects of advisor regulation, compliance hinges on how accurately firms represent their policies and practices. So if a firm advertises itself or one of its products as an adherent to a particular type of ESG investing, the examiners will expect the firm to be able to document that with considerable granularity.
"We'll look at the trading and the investment style," Driscoll said. "We'll dig into the detail."
