On March 30, 2022 the Securities and Exchange Commission’s (SEC’s) Division of Examinations (Exams) issued a press release announcing its 2022 examination priorities which included several significant areas of focus and many perennial risk areas. For asset managers, there are five main areas to pay attention to.
Private Funds
Exams will continue to prioritize their focus on registered investment advisers (RIAs) to private funds. This focus is due to the significance of examination findings over the past several years, and the size, complexity, and significant growth of the private fund market Exams will continue to review key items for advisers to private funds including:
- The calculation and allocation of fees and expenses
- The potential preferential treatment of certain investors by RIAs to private funds
- Compliance with the Advisers Act Custody Rule
- The adequacy of disclosure and compliance with any regulatory requirements for cross trades, principal transactions, or distressed sales.
- Conflicts around liquidity
- Conflicts and disclosures around private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations.
- Review the practices, controls, and investor reporting around risk management and trading for private funds.
Environmental, social and governance (ESG) investing
Exams will continue to focus on ESG-related advisory services and investment products (e.g., mutual funds, exchange-traded funds (ETFs), and private fund offerings). These examinations will focus on whether RIAs and registered funds are:
- Accurately disclosing their ESG investing approaches and have adopted and implemented policies
- Voting client securities in accordance with proxy voting policies and procedures
- Overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection
Standard of Conduct
RIAs examinations related to Standards of Conduct will include:
- Revenue sharing arrangements.
- Recommending or holding more expensive classes of investment products when lower-cost classes are available
- Recommending wrap fee accounts without assessing whether such accounts are in the best interests of clients
- Recommending proprietary products resulting in additional or higher fees
Information Security and operational resilience
Exams describes the critical nature of applying information security controls to ensure business continuity and the importance of protecting investor data. We have seen examinations around information security and operational resiliency increase throughout the pandemic and expect that trend to continue for years to come. Exams will be keenly focused on broker-dealers’ and RIAs’ compliance with Regulations S-P and S-ID and whether firms have taken appropriate measures to:
- Safeguard customer accounts and prevent account intrusions
- Oversee vendors and service providers.
- Address malicious email activities
- Respond to incidents
- Identify and detect red flags related to identity theft
- Manage operational risk
Emerging Technologies and crypto assets
Exams will focus regulatory compliance on RIAs providing automated digital investment advice to their clients due to the significant increase in these services and the use of mobile apps by broker-dealers and the proliferation of crypto-assets.
- RIA and broker-dealer examinations will focus on firms that are, or claim to be, offering new products and services or employing new practices
- 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
