SEC Division of Examinations 2023 Examination Priorities
The Division conducts its examinations in order to promote compliance and ensure market integrity for investors. To put things into perspective, in 2022, the Division examined approximately 15% of the 15,000-plus registered investment adviser population overseeing more than $125 trillion in assets. In 2022 the SEC filed over 700 actions, with judgments and orders totaling $6.4 billion, $4 billion of which was in civil penalties.
Below are the key elements that we believe are of the utmost importance for registered investment advisors.
The Marketing Rule
Advisers Act Rule 206(4)-1 (Marketing Rule): The SEC had a significant change to their core examination review area with the implementation of the new Marketing Rule. It is critically important for Firms to ensure that they have adopted and implemented written policies and procedures reasonably designed to prevent violations of the new rule. Firms should review their current and prospective marketing material to ensure that they can substantiate material statements of fact for such items as testimonials/endorsements, third party ratings, and performance advertising
Private Fund Advisors
The SEC will continue their focus on RIAs to private funds, in particular conflicts of interest, calculation, and allocation of fees and expenses, marketing rule compliance especially performance and testimonial marketing, the use of alternative data, and compliance with the Advisers Act section 204A, and custody. The Division released specific risk characteristics they intend to target such as highly leveraged, related BDCs, private equity funds that use affiliated companies and advisory personnel for services, alternative holdings such as crypto and commercial real estate, those that invest or sponsor Special Purpose Acquisition Companies (SPACs); and funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds.
Standards of Conduct: Regulation Best Interest, Fiduciary Duty, and Form CRS
For RIAs the focus during exams continues to be on the following:
Additionally, exams will also include conflict of interest disclosures and whether the disclosures are sufficient in scope that a client can provide informed consent to the conflict, whether express or implied. The inquiry will focus on whether the firm has tailored and established policies and procedures to identify and periodically review conflicts of interest, in alignment with the Firm’s business model, compensation structure, and product lineup
- Investment advice in regard to products, strategies, and account types
- Disclosures and whether they are all encompassing of material facts and conflicts
- Processes for evaluating reasonably available alternatives, costs and risks, and addressing conflicts
- Factors considered in conjunction with a client’s investment profile
Products on the Division's radar will focus on advice or recommendations regarding complex and leveraged products, high-cost and illiquid products, proprietary products, unconventional strategies, and microcaps. There will also be a focus on senior investors, retirement account rollovers, and 529 plans.
Environmental, Social, and Governance (ESG) Investing
With increasing investor demand for ESG-related products, the Division will continue to focus on advisory services and fund offerings paying close attention to fund operations, disclosures, and whether recommendations are in an investor’s best interest.
Information Security and Operational Resiliency
Due to larger market events, geopolitical concerns, and the proliferation of cybersecurity attacks, the Division will focus on the Firm’s policies and procedures (especially with Regulations S-P and S-ID), governance practices, and cyber incident responses. Their reviews of policies and procedures will attempt to determine if policies and procedures are reasonably designed to safeguard customer records and information, whether they are housed internally or through a third-party provider.
Crypto Assets and Emerging Financial Technologies
The Division will continue its focus and exams on certain types of investments such as crypto/crypto-related products and services, along with emerging financial technology such as mobile apps, robo-advisors, and additional online solutions.
Due to recent events in the crypto asset market, the Division will continue to monitor and select applicable registrants for examination which will focus on the offer, sale, or recommendation of, advice regarding and trading in crypto or crypto-related assets. Furthermore, the Division will assess the following:
In particular, the Division will focus on the tools and methods offered via digital engagements through RIAs:
- The registrants’ requirements under the standards of care in crypto or crypto relates assets
- Whether the registrant reviews and updates their compliance and risk practices, and disclosures accordingly
- New or never examined registrants offering crypto or crypto-related assets
Investment Adviser and Investment Companies
- Recommendations being provided via electronic channels such as social media or social trading platforms.
- Whether representations align with Marketing Rule requirements
- Are applicable disclosures and controls in place
- Are recommendations being made in the client’s Best Interest
- Risks that may be associated with this method of business practice
Exams of RIAs: Core examination components do not vastly differ from years past. A typical exam includes a review of the compliance program and disclosure documents for topics such as custody, valuation, portfolio management, and brokerage and execution. Conflicts, compliance issues, and oversight regarding fee calculation, additional revenue streams, and excessive fees are additional focus areas noted. Be prepared with your policies and procedures regarding retention and monitoring of electronic communications and third-party due diligence, as they have been added as additional focus items within the report.
Please remember that the Division communicates these as PRIORITIES, and should not be relied upon as an all-inclusive list of all focus areas. To read the full report, click here: Division of Examinations 2023 Examination Priorities.
Posts
0 comments:
Post a Comment