In addition to examining obligations under Regulation Best Interest, the SEC’s 2022 exam priorities will include several new emerging areas of focus, the Division of Examinations announced March 30.
Among the top areas include private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies and crypto assets. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.
“In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades—such as protecting retail investors,” Richard Best, Acting Director of the Division of Examinations, said in a statement. “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.”
The following are among the 2022 priorities the Division has highlighted.
Private Funds
The Division will focus on registered investment advisers (RIAs) who manage private funds. Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty and will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks and controls around material nonpublic information.
Also subject to review will be private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas, the SEC notes. Moreover, practices, controls and investor reporting around risk management and trading for private funds with indicia or signs of systemic importance will also be part of the review.
ESG
ESG-related advisory services and investment products—including mutual funds, exchange-traded funds and private fund offerings—will also be of continued review. Examinations will typically focus on whether RIAs and registered funds are accurately disclosing their ESG investing approaches and have implemented policies designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures. This includes a review of their portfolio management processes and practices. Examinations also will review the voting of client securities in accordance with proxy voting policies and procedures.
Retail Investors and Working Families
Standards of conduct issues for broker-dealers and RIAs to ensure that retail investors are receiving recommendations and advice in their best interests will also be of continued review. Specifically, the Division notes that these examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in investors’ best interests. Examinations will include assessments of practices regarding consideration of investment alternatives, management of conflicts of interest, trading, disclosures, account selection, and account conversions and rollovers.
Information Security and Operational Resiliency
Practices to prevent interruptions to mission-critical services and to protect investor information, records and assets will also be of heightened review. This includes whether firms have taken measures to:
- safeguard customer accounts and prevent account intrusions;
- oversee vendors and service providers;
- address malicious email activities, such as phishing or account intrusions;
- respond to incidents, including those related to ransomware attacks;
- identify and detect red flags related to identity theft; and
- manage operational risk as a result of a dispersed workforce.
In addition, the Division will again be reviewing registrants’ business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations.
Emerging Technologies and Crypto
Examinations of broker-dealers and RIAs that are using emerging financial technologies will include a review of whether the risks these activities present were considered by the firms when designing their regulatory compliance programs. Examinations will focus on firms that are, or claim to be, offering new products and services or employing new practices to assess, among other things:
- whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; and
- whether advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors.
Examinations of market participants engaged with crypto-assets will continue to review the custody arrangements for such assets and will assess the offer, sale, recommendation, advice and trading of crypto-assets.
The SEC notes that the published priorities are not exhaustive and will not be the only areas the Division focuses on in its examinations. “While the priorities primarily drive the Division’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of a given entity’s history, operations, services, products offered and other risk factors.”
