Are You Ready for the SEC's Exam Priorities for 2023?
Courtesy of Ackerman, LLP:
On February 7, 2023, the Securities and Exchange Commission’s Division of Examinations published its 2023 examination priorities. According to the Division, “[t]his year’s examinations will prioritize several significant focus areas that pose unique or emerging risks to investors or the markets, as well as examinations of core and perennial risk areas.” The staff’s 2023 examination priorities include:
New Investment Adviser and Investment Company Rules. The Division will focus on the new Marketing Rule (Advisers Act Rule 206(4)-1) and whether registered investment advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the new rule, and whether advisers have complied with the substantive requirements of the rule. The Division will also focus on new rules applicable to investment companies, including the Derivatives Rule (Investment Company Act Rule 18f-4) and the Fair Valuation Rule (Investment Company Act Rule 2a-5).
Registered Investment Advisers and Private Funds. Examinations will review issues under the Advisers Act, including an investment adviser’s fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, the new Marketing Rule, conflicts of interest, and the use of alternative data. The Division will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas. In addition, the Division will focus on private funds with specific risk characteristics, including highly leveraged funds and funds managed side-by-side with business development companies.
Retail Investors. The Division will continue to address standards of conduct issues for broker-dealers and investment advisers. These examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act. Examinations will include assessments of practices regarding review of investment alternatives, management of conflicts of interest, and consideration of investment goals and account characteristics.
ESG Advisory Services. The Division will continue its focus on ESG-related advisory services and fund offerings, including whether funds are operating in the manner set forth in their disclosures. In addition, the Division will assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in the investors’ best interests.
Information Security. The Division will review broker-dealers, investment advisers, and other registrants’ practices to prevent interruptions to critical services and to protect investor information, records, and assets. Reviews of broker-dealers and RIAs will include a focus on the cybersecurity issues associated with the use of third-party vendors, including registrant visibility into the security and integrity of third-party products and services and whether there has been an unauthorized use of third-party providers.
Emerging Technologies and Crypto-Assets. The Division will conduct examinations of broker-dealers and investment advisers that are using emerging financial technologies or employing new practices, including technological and on-line solutions to meet the demands of compliance and marketing and to service investor accounts. Examinations of registrants will focus on the offer, sale, recommendation of, or advice regarding trading in crypto or crypto-related assets and include whether the firm (a) met and followed their respective standards of care when making recommendations, referrals, or providing investment advice; and (b) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.
A copy of the Division’s 2023 examination priorities are attached.