SEC Division of Examinations Releases 2023 Priorities | 7 Takeaways
SEC Releases
Brief Introduction
On February 7th, the SEC Division of Examinations announced its priorities for 2023.
This contains a significant number of priorities; this is unsurprising considering the plethora of rules the SEC plans on finalizing in the calendar year.
The SEC announcement provides insight into what examiners will be looking for this year.
Key Takeaways
New Investment Adviser and Investment Company Rules
New Marketing Rule
The Division will review whether an RIA has adopted and implemented policies and procedures to prevent violations by advisers and supervised persons
RIAs must reasonably believe they can substantiate material statements of fact.
Stricter requirements for performance advertising, testimonials, endorsements, and third-party ratings.
Derivatives Rule (for funds that rely on the Derivatives Rule)
Registered Investment Companies
- Mutual Funds (not Money Market Funds)
- ETFs
- Close-End Funds
- Business Development Companies (“BDC”)
Relevant actors should have adopted and implemented policies and procedures designed to manage Funds’ derivates risk and prevent violations of Derivatives Rule.
The Division will review for Compliance with Rule 18f-4 including the implementation of a derivates risk management program with board oversight.
Disclosures about the Fund’s use of derivates should be complete, accurate, and without misleading statements.
Fair Valuation Rule
Assessments of Funds’ and Fund Boards’ Compliance with determining fair value, implementing board oversight duties, setting recordkeeping and reporting requirements, and permitting Funds’ Board to designate valuations designees to perform fair value determinations subject to oversight by the board.
The Division will review whether adjustments been made to valuation methodologies, compliance policies and procedures, governance, service provider oversight, and reporting/recordkeeping?
Investment Advisers and Investment Companies
Focus Areas for Examinations of RIAs
During Examinations, the following areas are typically reviewed for an RIAs Compliance Program and related Disclosures:
- Custody and Safekeeping of Client Assets
- Valuation
- Portfolio Management
- Brokerage and Execution
- Conflicts
- Compliance Issues
- Oversight and Approval Process related to RIA fees and expenses
On top of the above core focus areas, the Division will review RIA policies and procedures for retaining and monitoring electronic communications and selecting and using third-party service providers.
With no surprise in this aspect, the Division will prioritize examining the following RIAs below:
RIAs that have never been examined (including recently Registered Firms).
RIAs that have not been examined for multiple years.
Focus Areas for RICs (Including Mutual Funds and ETFs)
Focus Areas for each Exam for RICs is below:
Assessment of the RICs Compliance Program and Governance Practices.
Disclosures to Investors.
Accuracy Reporting to the SEC.
Advisory Contract Approval Process
Fund Code of Ethics
Practices that deviate from Disclosures
Implementation and Effectiveness of the Funds Compliance Program
Oversight of Services Providers
The Division will continue to focus on additional key areas:
Fiduciary Obligations of RIAs to RICs.
Receipt of Compensations for Services
Evaluate Boards’ Processes for assessing and approving advisory or other fund fees (Funds with weaker performance compared to peers).
Effectiveness of a Funds Derivatives Risk Management Program and Liquidity Risk Management Programs (as applicable).
The following Funds below with specific characteristics will be focused on by the Division:
Turnkey Funds.
Mutual Funds converted to ETFs.
Non-Transparent ETFs.
Loan-Focused Funds.
Medium and Small Fund Complexes.
Contact Us to Schedule a Mock SEC Exam
RIAs to Private Funds
Private Fund RIAs will be examined for:
Conflicts of Interest;
Calculation and allocation of fees and expenses;
Compliance with new Marketing Rule;
Use of alternative data and compliance; and
Compliance with the Custody Rule where applicable.
The Division will focus on Private Funds with specific risk characteristics below:
Highly-Leveraged Private Funds.
Private Funds managed side-by-side with BDCs.
Private Equity Funds holding hard-to-value investments (emphasis on commercial real estate).
Private Funds involved in adviser-led restructurings including stapled secondary transactions and continuation funds.
Private Equity Funds using affiliated companies and advisory personnel to provide services to their clients.
Private Funds that invest in or sponsor SPACs.
Adviser Fiduciary Duty and Regulation Best Interest
BD and RIA examinations will prioritize compliance with the applicable standard of conduct.
BDs and dually registered RIAs are “an area of continued interest”.
Examinations may focus on the RIAs:
Portfolio strategies.
Risk management for retail investors
Investment recommendations and allocations.
Disclosures of financial information and all material conflicts of interest.
Advice or Recommendations that may draw additional attention:
Complex products (Leveraged ETFs, Derivatives, ETNs, and ETPs).
High cost and illiquid products (Variable Annuities and REITs).
Proprietary Products.
Unconventional strategies to address rising interest rates.
Microcap securities.
The Division will review if Firms have active policies and procedures to address potential conflicts of interest stemming from economic incentives for financial professionals to recommend certain products, services, or account types.
ESG Investing
The Division will continue to evaluate and review whether ESG RIAs and Registered Funds advisory services and fund offerings are operating how they are outlined in their disclosures.
ESG products being appropriately labeled and if recommendations are being made in the investors best interest for retail investors are also key areas the Division will assess.
Information Security and Operational Resiliency
There will be a focus on Firms policies and procedures, governance practices, and response to cyber-related incidents.
Having policies and procedures reasonably designed to safeguard customer records and information will be an additional focus area, among many more.
Vigilant’s Final Conclusion
Firms should consider investing heavily into compliance in preparation for a more aggressive regulatory environment in 2023.
The SEC has made it clear that it intends to begin assessing firms for compliance with their new rules shortly after its Compliance Date.
It is essential that compliance departments are taking a proactive approach, and abandoning the old ad hoc form of compliance that cannot quickly adjust to regulatory changes.
Vigilant offers a customized suite of tailored compliance solutions across the globe, tapping into decades of industry experience to help decrease the regulatory burdens taken away from your business goals.
Please reach out to us if you have any questions regarding the 2023 Examination Priorities or if you feel that your department required additional support.