United Atlantic Legal Services shares FinProLaw’s review of the SEC’s 2022 Examination Priorities.
The Securities and Exchange Commission’s Division of Examinations (“Division”) released its 2022 Examination Priorities. This press release covered several key emphasis areas as well as a number of persistent danger areas that investors and investment advisers should be aware of. Private funds, environmental, social, and governance (“ESG”) investments, retail investor safeguards, information security and operational resiliency, new technologies, and crypto-assets are among the subjects addressed. The Division discloses its examination priorities every year to offer insight regarding its risk-based approach and to emphasize the areas where it considers the most significant potential hazards to investors and the integrity of the U.S. financial markets are.
The experts at FinProLaw have prepared an overview of the priorities with some action steps in this article.
2022 Examination Priorities
The Division has highlighted five major areas of concern that it feels provide new or developing dangers for investors and markets, as well as areas where the gravity and frequency of observations in previous years indicate the need for continuous attention. The Division disclaimed that these five categories did not establish an exhaustive list and that it continues to monitor a variety of additional compliance and regulatory issues involving registered investment advisors (“RIAs”), registered investment firms, registrants, and other broker-dealers. The following are the Division’s priorities for 2022:
- Private Funds
RIAs that handle private funds will be one of the primary focuses of the Division. Examiners will analyze the concerns under the Investment Advisers Act of 1940 (“Advisers Act”), such as an adviser’s fiduciary obligation. Examiners will also review the various risk factors, such as compliance procedures, fees and expenditures, custody, fund audits, valuation, conflicts of interest, investment risk disclosures, and controls surrounding material nonpublic information. In addition, the Division will review the portfolio strategies, risk management, investment advice, and allocations of private fund advisers, with an emphasis on potential conflicts and disclosures in these areas. Finally, the Division will examine risk management and trading methods, controls, and investor reporting for private funds with indicia or symptoms of systemic significance.
- ESG Advisory Services and Investment Products
The Division will continue to focus on ESG-related advisory services and investment products, such as mutual funds, exchange-traded funds, and private fund offerings. Examining RIAs and registered funds will typically focus on whether they are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including portfolio management processes and practices. The voting of client securities following proxy voting policies and procedures will also be examined, as well as whether the votes are consistent with their ESG-related disclosures and mandates, and whether there are any misrepresentations of the ESG factors considered or incorporated into portfolio selection.
- Working Families and Retail Investors
The Division will continue to investigate broker-dealers and RIA policies and procedures to ensure that retail investors and working families receive recommendations and guidance that are in their best interests. These investigations will concentrate on how registrants are meeting their fiduciary requirements, under Regulation Best Interest and the Advisers Act, to act in the best interests of retail investors and not to put their interests ahead of retail investors. Examinable procedures will include examination of investment options, conflict of interest management, trading, disclosures, account selection, and account conversions and rollovers.
- Information Security and Operational Resiliency
The Division will examine the procedures of broker-dealers, RIAs, and other registrants to ensure that mission-critical services are not disrupted, and that investor information, records, and assets are protected. Examiners will continue to look into whether companies have taken appropriate measures to protect customer accounts and prevent account intrusions. Additionally, the Division will monitor vendors and service providers, address malicious email activities such as phishing or account intrusions, respond to incidents such as ransomware attacks, identify and detect red flags related to identity theft, and manage operational risk as a result of a dispersed workforce. And finally, the Division will also examine registrants’ business continuity and disaster recovery plans, with a particular focus on the impact of climate risk and substantial disruptions to ordinary business operations.
- Emerging Technologies and Crypto-Assets
The Division will conduct examinations of broker-dealers and RIAs that use emerging financial technologies to evaluate whether the firms considered the unique risks these activities pose when designing their regulatory compliance programs. RIA and broker-dealer examinations will concentrate on firms that are, or claim to be, providing new products and services or employing new practices to determine whether operations and controls are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; advice and recommendations, including those made by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and a firm’s operations and controls take into account the unique risks relating to those specific practices. Market participants dealing in crypto-assets will be scrutinized for their custody arrangements, as well as their offer, sale, recommendation, advice, and trading of such crypto-assets.
Other Areas of Focus
The Division’s investigations, risk alerts, and outreach will not be limited to the areas listed in the priorities. While the Division’s inspections are generally guided by its priorities, the scope of each examination is established using a risk-based methodology that includes an assessment of a specific entity’s history, activities, services, products offered, and other risk considerations.
The Division will look for any “heightened risk” at RIAs, such as the hiring of people with a disciplinary past, in addition to the five areas of concern mentioned above. The Division will also look for mistakes in management fee computations or modifications, as well as failures to execute breakpoints and refund prepaid costs.
The Division will also focus on compliance concerns for broker-dealers, such as sales practices, microcap fraud, and anti-money laundering duties. The Division will continue to review broker-dealer trading practices, payment-for-order-flow issues, and large trader reports, among other things. National securities exchanges, security-based swap dealers, municipal consultants, and transfer agents will all be reviewed by the Division. The Division also listed some of the additional statutory requirements that require inspection and reporting, such as clearing agency examinations and control of the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”).
Finally, the Division incorporates input and advice from the SEC Chair and Commissioners, staff from other SEC divisions and offices, and other federal financial regulatory bodies.
About the Author
Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.
Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include:
- Investment Adviser Compliance Essential for Chief Compliance Officers
- Foundations of Investment Adviser Compliance
- What is a “Security”?
- Investment Adviser Marketing Rule
- Regulation A – Exemption from Registration
- Regulation Crowdfunding – Exemption from Registration
- Regulation D – Exemption from Registration
Michael can also be found on LinkedIn.
Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.