2023 SEC Exam Priorities Overview
It’s that time of year again, the time when registered investment advisors (“RIAs”) and broker dealers (“BDs”), jointly (“Firms”) routinely review and update their compliance programs. A component of this process is the review of the SEC’s Division of Examinations (“the SEC”) 2023 Exam priorities (the “exam priorities”), which includes areas of risk that the SEC is most focused on in the upcoming year.
Planning for 2023
The SEC will continue in 2023 to carry out examinations at Firms which are designed to protect investors and to support and empower compliance staff to better ensure strong compliance cultures.
Areas of focus for the SEC include the following:
Advisers Act Rule 206(4-1), Marketing Rule – The SEC will review RIAs for compliance with the requirements of the Marketing Rule, including the requirement that RIAs have a reasonable basis for believing they will be able to substantiate material statements of fact and requirements for performance advertising, testimonials, endorsements and third-party ratings.
RIAs to Private Funds – The SEC plans on conducting exams of private fund RIAs’ with a focus in the following areas: (1) conflicts of interest; (2) calculation and allocation of fees and expenses, including the calculation of post-commitment period management fees and the impact of valuation practices; (3) compliance with the new Marketing Rule, including performance advertising and compensated testimonials and endorsements; (4) policies and practices regarding the use of alternative data and compliance with Advisers Act Section 204A; and (5) compliance with the Advisers Act Rule 206(4)-2 (Custody Rule).
The SEC will also focus on RIAs that offer: (1)highly-leveraged private funds; (2) private funds managed side-by-side with BDCs; (3) private equity funds that use affiliated companies and advisory personnel to provide services to their fund clients and underlying portfolio companies; (4) private funds that hold certain hard-to-value investments, such as crypto assets and real estate-connected investments, with an emphasis on commercial real estate; (5) private funds that invest in or sponsor Special Purpose Acquisition Companies (SPACs); and (6) private funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds.
Other areas of focus for 2023 include the following:
Regulation Best Interest and Fiduciary Duty – Examinations will focus on: (1) investment advice and recommendations with regard to products, investment strategies, and account types; (2) disclosures made to investors and whether such disclosures include all material facts relating to the conflicts of interest associated with the advice and recommendations; (3) processes for making best interest evaluations, including those for reviewing reasonably available alternatives, evaluating costs and risks, and identifying and addressing conflicts of interest; and (4)factors considered in light of the investor’s investment profile, including investment goals and account characteristics.
Form CRS – Compliance with Form CRS will continue to be prioritized and incorporated into examinations of broker-dealers and RIAs.
Information Security and Operational Resiliency – The SEC will continue to review practices to prevent interruptions to mission critical services and to protect investor information, records, and assets. The focus will include policies and procedures, governance practices, and response to cyber-related incidents, including those related to ransomware attacks, and compliance with Regulations S-P and S-ID.
Crypto Assets and Emerging Financial Technology – The SEC will conduct examinations of Firms offering new products and services or employing new practices, including technological and on-line solutions to meet the demands of compliance and marketing and to service investor accounts (e.g., on-line brokerage services, internet advisers, and automated investment tools and trading platforms, including “robo-advisers”). Examinations will also focus on the offer, sale, or recommendation of trading in crypto or crypto-related assets. Specific focus will include whether such market participants involved with crypto or crypto-related assets: (1) met and followed their respective standards of care when making recommendations, referrals, or providing investment advice, to the extent required; and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices. There will also be a focus on new or never before examined registrants offering crypto or crypto-related assets.
RIA Examinations Focus Areas – Routine examinations will continue of operations and compliance practices. These examinations include reviewing compliance programs and related disclosures in one or more core areas, such as custody and safekeeping of client assets, valuation, portfolio management, and brokerage and execution. They will also review for conflicts, compliance issues and the oversight and approval process related to fees and expenses, policies and procedures for retaining and monitoring electronic communications and selecting and using third-party service providers.
Broker- Dealers Focus Areas – The focus on broker-dealer compliance and supervisory programs including those for electronic communications related to firm business, as well as the recordkeeping for those electronic communications, compliance with the Customer Protection Rule and Net Capital Requirements, conflicts of interest in order routing and compliance with Regulation SHO, and a continued focus on customer recommendations, over-the-counter securities and compliance with penny stock disclosure rules.
As you can see, it will be a very active year in the compliance and examination space. Aspect Advisors recommends that Firms continually review their policies and procedures, risk controls, systems, vendors and books and records and enhance these controls as business and regulatory requirements change. Please let us know if we can assist with this process.
The 2023 Examination priorities can be found at the following: https://www.sec.gov/files/2023-exam-priorities.pdf
Aspect Advisors is a consulting firm that works with a variety of firms including registered investment advisers, broker-dealers, commodity, digital asset and private fund managers. Additional information can be found at https://aspectadv.com/