By: Saba Khan, Esq.*
As with the turning of each new Administration, regulatory priorities shift, and that is no different for banking regulations, particularly in the area of securities laws. That being said, we can soon expect the pendulum to swing towards tighter securities regulations, greater oversight, and a higher number of enforcement cases.
When Biden assumed office in January 2021, he nominated Gary Gensler to replace Jay Clayton as Head of the Securities Exchange Commission (SEC) (1). Gensler’s own professional background provides some insight into what lies ahead in the near future. He is a former partner at Goldman Sachs Group Inc., and past Chairman of the Commodity Futures Trading Commission (CFTC) (2). During his time at the CFTC, he implemented new rules and made clear of his goal to “protect the public and market participants through a robust enforcement program.” (3)
In addition to Gensler’s track record as a stringent regulator, now incoming as SEC Chairman, the SEC’s Division of Examination released its 2021 Priorities, as it does each year, on March 3, 2021 (4). This priority report provides financial institutions, such as large banks, with an overview of the Division’s targeted areas of focus for the year (5). Notwithstanding the importance of all eight (8) focus areas outlined in the SEC’s 2021 priorities, there was a particular emphasis given to Regulation Best Interest (BI) – a heightened standard of conduct and duty of care towards retail customers (6). Further, Financial Technology and Anti-Money Laundering are other key regulatory priorities for 2021 (7). The SEC will also focus heavily on environmental, social, and governance (ESG) matters and climate-related risks this fiscal year (8). ESG is a new area of priority from previous years. Other mainstays of SEC activity, such as insider trading, supervision of registered representatives, compliance programs, and disclosures remain in place (9).
Interwoven in these priorities are COVID-19 considerations (10). Prior to the pandemic, the SEC worked with firms on cybersecurity risks, and identification and mitigation of such risks to protect investors from fraud and data privacy issues in today’s technological world (11). Among retail investors, seniors and other vulnerable clients, have been particularly susceptible to predatory scamming ploys (12). As such, cybersecurity and the protection of senior investors both remain a top priority for the SEC this year, with FINRA to also closely review in parallel, in order to identify any challenges big banks may face in these areas (13). Moreover, operational resiliency is another COVID-19-specific topic of concern for the SEC, especially while remote operations are likely to persist through the remainder of the year (14). The SEC will continue to evaluate how firms adjusted, and continue to adjust their operations during the pandemic, as well as perform reviews of business continuity plans (15).
In a sharp departure from the previous Administration, Biden’s SEC will undoubtedly shape the regulatory landscape for investors and financial institutions alike. It will shift its focus on climate and environmental risks, enforce recently effectuated rules, and re-evaluate new priorities through the year with the movement of key risks and industry trends. Under Gensler’s lead, the SEC will likely propose new rules, increase enforcements, and may even enforce areas that received less attention in the past.
Given Gensler’s reputation as a tough regulator, the newly released SEC priorities, and the evolving regulatory framework, firms should work with their stakeholders and senior management beyond mere preparedness. They should ensure their compliance processes and procedures in place are updated and incorporate any new priority focus areas. Furthermore, internal training and enhanced testing will be key in carrying out the necessary requirements. Ultimately, companies should stay informed and abreast of regulatory developments throughout the year, and further on, as they are certain to evolve during the course of this Administration.
Citations:
1) Jeff Stein, “Biden likely to tap Gary Gensler to Lead SEC, But the Decision Isn’t Final,” The Wall Street Journal (Jan. 12, 2021).
2) Id.
3) CFTC, Strategic Plan FU 2011-2015 (Feb. 28, 2011).
4) See generally Securities and Exchange Commission, Division of Examinations, 2021 Examination Priorities (Mar. 3, 2021). 2021 Examination Priorities Report (sec.gov).
5) Id. at 1.
6) Id. at 4, 19-20; 17 CFR §240.15I-1. Reg Best Interest Obligation (a)(1), implemented June 30 2020, states “A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer”; See also SEA Rule 17 CFR 249.641 on Form CRS.
7) See supra note 4 at 25-27.
8) Id. at 17.
9) See The Laws that Govern the Securities Industry, Security Exchange Act of 1934, SEA Rules.
10) See supra note 4, at 2-3; See also Securities and Exchange Commission, Risk Alert: COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisors, at 5-6 (Aug. 12, 2020).
11) Id. at 25.
12) See, e.g., FINRA Rules 2165 (FINRA exploitation rule) and 4512(a)(1)(F) (FINRA rule on trusted contact person) and SEC Office of the Investor Advocate, “How the SEC Works to Protect Senior Investors” (May 2019) (https://www.sec.gov/files/how-the-sec-works-to-protect-senior-investors.pdf, at 5-7).
13) See supra note 4 at 24.
14) See supra note 4 at 25.
15) Id.
You must be logged in to post a comment.