Securities Litigation

The U.S. Securities and Exchange Commission (“SEC”) released its 2021 Examination Priorities on March 3.  The Examinations group – elevated last December to Division status (formerly the Office of Compliance Investigations and Examinations (“OCIE”)) --  covered the list of perennial concerns.  The 2021 priorities include some new subjects, however, reflecting the policy emphasis of the Biden administration.

“This year, the Division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change,” said Acting Chair Allison Herren Lee. “Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”  SEC Press Release No. 2021-39.

New Priorities or Emphasis

Climate and ESG – In recent weeks, Acting Chair has been stumping for the Administration’s climate-change agenda, calling for the SEC to take the lead among other financial regulators in developing a global set of standards and agenda, including increased climate disclosures.  In addition the Division of Examinations will look at the implications of climate change upon registrant’s operations, the materiality and adequacy of climate-change and ESG disclosures and compliance in the context of ESG-oriented investment vehicles.

Pandemic—The COVID pandemic brought with it a host of implications for registrants, including business continuity, operational adjustments, municipal-advisors and COVID-stressed municipal issuers,  and heightened cyber-security and supervision imperatives in a WFH environment.

Zero-Commission Implications – The recent GameStop imbroglio brought to the fore some regulatory and compliance implications of the broad adopting of zero-commission retail trades, among them, best-execution, payment for order flow, market-maker compliance, and disclosures

Perennial Favorites returning among this year’s priorities include:

Retail Investors – With the implementation deadline for Regulation Best Interest (“Reg. BI”) coming during the pandemic, regulators have given registrants some little leeway, but now will examine compliance more searchingly.  The usual focus on seniors, complex retail products and fiduciary duty are back, as ever.

Information Security and Operational Resiliency – These topics always make the list, but they have newer emphasis this year.  Cyber-security has become a greater concern with WFH adjustments during the pandemic, as has business continuity.  Business Continuity Plans (“BCP”) also have a new emphasis on climate change and its potential ramifications for operational concerns – an area likely not commonly addressed among registrants, so far.

FinTech and Innovations – FinTech was on last year’s list, but returns with greater emphasis as digital assets become more common among retail investors.  Indeed, the Examination Division just published a digital-asset risk alert last week, here.  Commissioner Hester Peirce has continued her campaign to drag the SEC up to speed on the issue, and may get additional help if the Senate confirms Biden’s Chair nominee, Gary Gensler.

Anti-Money Laundering – AML is a priority every year, but this year’s version has new twists arising from pandemic and digital-asset concerns.

LIBOR Transition -- The transition away from the London Interbank Offered Rate (“LIBOR”) benchmark interest rate has been looming on the horizon for years, but assumes greater urgency with the discontinuance of USD LIBOR rates scheduled for December 31, 2021.

The Examination Priorities are here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial institutions in litigation, regulatory, and compliance matters. See attorney profile.