Published on Mar 31st, 2022 |

Brief Introduction to the 2022 Examination Priorities

On Wednesday, March 30th, the Division of Examinations (“EXAMS”) released the 2022 Examination Priorities.

Vigilant has broken down the key highlights from EXAMS below.

What was covered in the released 2022 Examination Priorities?

 

  • Key Focus Areas

    • Private Funds;
    • ESG Investing;
    • Reg BI Fiduciary Duty and Form CRS;
    • Information Security and Operational Resiliency; and
    • Emerging Technologies and Crypto-Assets.

  • Investment Adviser and Investment Company Examination Program

    • Registered Investment Advisers; and
    • Registered Investment Companies (Including Mutual Funds and ETFs).

  • Broker Dealer and Exchange Examination Program

    • Microcap, Municipal, Fixed Income, and Over-The-Counter Securities;
    • Broker-Dealer Operations;
    • National Securities Exchanges;
    • SBSDs;
    • Municipal Advisors; and
    • Transfer Agents.

  • Clearances and Settlement Examination Program

  • Regulation Systems Compliance and Integrity

  • FINRA

  • MSRB

  • The London Inter-Bank Offered Rate (LIBOR) Transition

  • Anti-Money Laundering

 

 

Vigilant’s Key Takeaways and Implications from the Released Examination Priorities

Private Funds

  • EXAMS will continue their focus on RIAs to private funds.
  • EXAMS will continue to review issues under the Investment Advisers Act of 1940 (Advisers Act) which include 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 (MNPI).
  • EXAMS will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas.

ESG Investing

  • There is a risk that disclosures regarding portfolio management practices could involve materially false and misleading statements or omissions, which can result in misinformed investors.
  • The Division will continue to focus on ESG-related advisory services and investment products.

Standards of Conduct

Examinations will include:

  • Assessments of practices regarding consideration of alternatives;
  • Management of conflicts of interest;
  • Trading, such as RIA best execution obligations;
  • Disclosures, such as disclosures provided in Form ADV and Form CRS and made pursuant to Regulation BI;
  • Account selection, such as brokerage, advisory, or wrap fee accounts; and
  • Account conversions and rollovers.

Information Security and Operational Resiliency

  • EXAMS will review Broker Dealers’ and RIAs’ practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets.
  • EXAMS will also review registrants’ business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations.

Registered Investment Advisers

  • EXAMS will assess whether policies and procedures are reasonably designed to prevent violations of the Advisers Act and its rules, including breaches of the RIA’s fiduciary duty in violation of the antifraud
    provisions.
  • EXAMS will review whether the firm has implemented oversight practices to diminish any heightened risks as part of their assessment of the effectiveness of a compliance program.
  • EXAMS will also continue to focus on RIA disclosures and other issues related to fees and expenses.

Registered Investment Companies (Including Mutual Funds and ETFs)

  • EXAMS usually focuses on the following areas below during their assessments of registered funds’ compliance programs and governance practices:
    • Disclosures to investors;
    • Accuracy of reporting to the SEC; and
    • Compliance with the new rules and exemptive orders.
  • The following types of Registered Funds, Portfolio Investments, and Fund Practices will be prioritized:
    • Money Market Funds; and
    • Business Development Companies.
  • EXAMS will focus on portfolio investments will include examinations of mutual funds investing in private funds to assess risk disclosure and valuation issues.
  • EXAMS will also prioritize examinations of certain fund practices, including a focus on advisory fee waivers to assess the sustainability of services for firms that provide such waivers, and trading activities of portfolio managers that may be designed to inflate fund performance.

 

Final Takeaways From 2022 Examination Priorities

The 2022 Examination Priorities provide great insight and updates that are helpful for the entire Industry.

The Priorities reflect the Division of Examinations assessment of certain risks, issues, and policy matters from information they gathered, market and regulatory developments, tips, complaints, and more.

Following your review of these Examination Priorities, should you require (1) analysis of potential gaps in your compliance program (2) need assistance in filling gaps in your program, or (3) need additional compliance resources; Contact Us today to learn more.

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