/>iThe US Securities and Exchange Commission (SEC) Division of Examinations recently released its 2023 Examinations Priorities, a yearly report that provides insight into the Division’s areas of focus to improve compliance, prevent fraud, monitor risk, and inform policy.
Here is a summary of key efforts that are priorities for this year:
1. New Investment Adviser and Investment Company Rules
The Division will prioritize Registered Investment Advisors’ (RIAs) compliance with the Marketing Rule (Rule 206(4)-1), Derivatives Rule (Rule 18f-4), and Fair Valuation Rule (Rule 2a-5), including examining the development of written policies and procedures and meeting the substantive requirements of each rule.
2. RIAs to Private Funds
The Division will examine RIAs’ conflicts of interest, fees and expenses, compliance with the Marketing Rule and Custody Rule, use of alternative data, and timely delivery of audited financials. It will also prioritize RIAs to funds with specific risk characteristics, including highly leveraged funds, funds managed side-by-side with BDCs, private equity funds that use affiliated companies or advisory personnel to provide services, hard-to-value investments, SPACs, and adviser-led restructurings.
3. Retail Investors and Working Families
The Division will examine broker-dealers and RIAs for compliance with their applicable standards of conduct, including advice and recommendations, depth of disclosures, processes for evaluating investor’s best interests, and considerations of the investor’s investment profile. The Division will also prioritize certain types of investments and investors, including complex products, high-cost and illiquid products, proprietary products, unconventional strategies, microcap securities, seniors and retirement-minded investors, rollover accounts, and 529 plans.
4. Environment, Social, and Governance (ESG)
Given the rising demand for ESG-focused investments, the Division will examine whether ESG labeled products are operating in the manner set forth in their materials, whether ESG products are appropriately labeled, and whether recommendations of ESG products are made in the investor’s best interest. For more information on “green-washing” litigation, visit our prior blogs here and here.
5. Information Security and Operational Resiliency
The Division examine firms’ policies and procedures, governance practices, responses to cybersecurity attacks or data breaches, and compliance with Regulations S-P and S-D to determine whether firms’ are reasonably attempting to safeguard customer records and information. The Division will prioritize prevention and response, and reviewing the security of firms’ outside vendors and services.
6. Emerging Technologies
The Division will examine firms that offer completely new types of products and services and firms that launch new-to-them products and services. Particularly: crypto investments, mobile apps, automated investment advice, and digital engagement practices. Unsurprisingly, the Division will also prioritize the offer, sale, recommendation and advice provided for crypto-based investments.
For a full list of the Division’s priorities, the report is available here.
