SEC Exam Division Outlines Priorities

The SEC Division of Examinations outlined its annual priorities for 2023. The new report includes a heightened focus on registered investment adviser ("RIA") regulation, private investment fund RIAs, ESG-focused investing, Regulation Best Interest for broker-dealers and the fiduciary standard for advisers.

In the report, the Division stated that it will focus on, among other things:

Registered Investment Advisers:

• assessing written policies and procedures relating to the substantive requirements of the Advisers Act Marketing Rule, IAA Rule 206(4)-1 ("Investment Adviser Marketing");
• evaluating written risk management controls relating to the Derivatives Rule, ICA Rule 18f-4 ("Exemption from the Requirements of Section 18 and Section 61 for Certain Senior Securities Transactions") and ensuring implementation of a derivatives risk management program, board oversight and appropriate disclosure regimes; and
• reviewing compliance with new fair value rule, ICA Rule 2a-5 ("Fair Value Determination and Readily Available Market Quotations").

Private Funds RIAs:

• evaluating risks related to (i) conflicts of interest, (ii) allocation of fees and expenses, (iii) new Marketing Rule compliance, (iv) alternative data practices and (v) custody of assets; and
• tailoring risk examinations to specific risk characteristics, including highly-leveraged private funds, funds managed alongside business development companies, funds that outsource advisory services and funds that hold "hard-to-value" assets.

Standards of Conduct:

• ensuring compliance with the applicable standards of conduct, with an increased focused on dual registrants that service both brokerage customers and advisory clients;

• evaluating methods for making best interest evaluations, ensuring appropriate disclosure is provided to investors;

• examining conflicts of interest relating to retail investors (i.e., revenue sharing agreements); and

• reviewing compliance on Form CRS.

ESG:

• ensuring ESG-focused funds are operating within the scope of the disclosure provided to investors; and

• assessing whether ESG products are appropriately labeled and recommendations in ESG investments are in the customer's best interest.

Cybersecurity:

• reviewing how firms protect customer information, prevent breaches and address threats from (i) malicious email schemes, (ii) ransomware attacks and (iii) identity theft;

• assessing compliance with Regulation S-P ("Privacy of Consumer Financial Information and Safeguarding Personal Information") and Regulation S-ID ("Identity Theft Red Flags") as applicable; and

• ensuring firms have business continuity plans that adequately consider climate-related risks.

Crypto Assets and Emerging Technologies:

• evaluating new products, services or practices to determine whether the product claims made to investors meet the standards of conduct;

• reviewing algorithm-based investment recommendations to ensure they meet the standards owed to investors;

• ensuring firm controls adequately consider the unique risks associated with emerging technologies; and

• assessing crypto investment trading activity, recommendations and custodial arrangements.

The Division also addressed (i) clearance and settlement risk, (ii) Regulation SCI ("Systems Compliance and Integrity") compliance, (iii) AML risk and (iv) LIBOR transition risk.