[co-author: Ahmed Abdelhamid]
REGULATORY DEVELOPMENTS
FDIC REQUESTS COMMENTS TO DRAFT PRINCIPLES FOR CLIMATE-RELATED FINANCIAL RISK MANAGEMENT
On March 30, the FDIC requested comments on draft principles to provide a framework for the safe and sound management of climate-related financial risks. The draft principles – which address governance; policies, procedures and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis – are targeted at financial institutions with over $100 billion in total consolidated assets, though the FDIC notes that all financial institutions may have material exposures to climate-related financial risks. Comments are due by June 3, 2022. This request for comments is substantially similar to the one issued by the Office of the Comptroller of the Currency on December 16, 2021.
“Climate-related financial risks pose a clear and significant risk to the U.S. financial system and, if unmitigated, may pose a near-term threat to safe and sound banking and financial stability.”
- FDIC
SEC PUBLISHES 2022 EXAM PRIORITIES
On March 30, the SEC Division of Examinations (the Division) published its exam priorities for 2022. The priorities letter provides a roadmap for firms to better understand where the Division will direct its examination efforts over the coming year. Covering the Divisions’ entire area of remit, the priorities outline significant focus areas for investment companies and investment advisers, broker-dealers, national securities exchanges, FINRA, security based swap dealers, and clearance and settlement. The SEC’s areas of focus correspond largely to recent significant rulemakings, including for private funds (which Goodwin discusses further in a client alert), ESG, cybersecurity, and cryptocurrency and other emerging technology, including digital engagement practices. The Division will also maintain its focus on the retail investor, focusing on Regulation Best Interest (Reg BI) and Form CRS compliance.
For investment advisers and investment companies, the Division will also focus on more typical perennial issues, including: marketing practices; custody; valuation; advisory fee calculations; portfolio management; brokerage and execution; conflicts of interest and related disclosures, and the adequacy of compliance programs relating to advice and the standard of conduct, oversight of service providers, and addressing heightened risks. Similarly, for broker-dealers, the Division will continue to prioritize compliance with the Customer Protection and Net Capital Rules, best execution obligations and managing conflicts of interest, including Rule 606 disclosures, large trader reporting, Regulation SHO compliance and compliance with Regulation ATS, specifically focusing on ATSs that trade NMS stocks. Given how many priorities overlap with recent rulemaking, it is likely the SEC will leverage its exam findings to inform and perhaps support its policy initiatives.
SEC ISSUES GUIDANCE ON REGULATION BI
On March 30, the SEC released a staff bulletin discussing Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors. The bulletin is presented as questions and answers reiterating the standards of conduct for broker-dealers and investment advisers when they are making account recommendations to retail investors. The SEC recommends using this staff bulletin in conjunction with, among other sources, the specific SEC releases discussing Reg BI and the Investment Advisers Act (the IA fiduciary standard) fiduciary standard.
The bulletin questions and answers reiterate key fiduciary principles from Reg BI for broker-dealers and the fiduciary standard for investment advisers under the IA Act. These principles include an obligation to act in the retail investor’s best interest and not to place their own interests ahead of the investor’s interest. Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the SEC staff’s view, application of Reg BI and IA generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors. Further, this staff bulletin discusses the SEC’s views on how broker-dealers, investment advisers and their associated persons can satisfy their obligations to retail investors when recommending accounts. According to the SEC staff, selection of an account type is a consequential decision for retail investors and is associated with potentially significant conflicts of interest and raises particular issues for financial professionals operating within dually registered or affiliated firms, as well as dually licensed financial professionals.
