The regulator’s Division of Examinations has published its annual list of priorities, leading with a pledge to add ‘new investment adviser and investment company rules’ as a focus for 2023.

“Our priorities reflect the changing landscape and associated risks in the securities market and are the product of a risk-based approach to examination selection that balances our resources across a diverse registrant base. We will emphasize compliance with new SEC rules applicable to investment advisers and investment companies as well as continue our focus on emerging issues and rules aimed at protecting retail investors,” said Division of Examinations Director Richard R Best.

The Division is to focus on the new Marketing Rule (Advisers Act Rule 206(4)-1) and examine whether registered investment advisers (RIAs) have adopted and implemented proper written policies and procedures to prevent violations.

Attention will also be given to new rules that are applicable to investment companies, including the Derivatives Rule (Investment Company Act Rule 18f-4) and Fair Valuation Rule (Investment Company Act Rule 2a-5).

“Our examination program continues moving forward and remains committed to furthering investor protection through high-quality examinations and staying abreast of the latest industry trends and emerging risks to investors and the markets” added Best.

ESG and crypto

Like last year, overall priorities are RIAs to private funds, retail investors and working families; Environmental, Social, and Governance (ESG) issues; information security and operational resiliency; and emerging technologies and cryptoassets. 

“Our priorities reflect the changing landscape and associated risks in the securities market and are the product of a risk-based approach to examination selection that balances our resources across a diverse registrant base.”

Richard R Best,  Division of Examinations’ Director.

This priorities list is provided annually to give insights into the Division’s risk-based approach, and show what areas could present potential risks to investors and to the integrity of the US capital markets.

“In a time of growing markets, evolving technologies, and new forms of risk, our Division of Examinations continues to protect investors,” said SEC Chair Gary Gensler. “In executing against the 2023 priorities, the Division will help ensure compliance with the federal securities laws and rules.”

Examination priorities

• RIAs to private funds – The Division will review issues under the Advisers Act and the adviser’s fiduciary duty. Besides assess risks, the Division will also focus on compliance programs, fees and expenses, custody, the new Marketing Rule, conflicts of interest, and the use of alternative data. Private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations will also be under review, with the focus on conflicts and disclosures around these areas. The Division will also look into RIAs to private funds with specific risk characteristics, such as highly leveraged private funds and private funds that are managed side-by-side with business development companies.

• Retail investors and working families – Standards of conduct issues for broker-dealers and RIAs will continue to be looked at in order to ensure that retail investors and working families are receiving fair recommendations and advice. These examinations will have a special focus on how registrants are managing their obligations under Regulation Best Interest and the Advisers Act fiduciary standard. The work will involve assessments of practices of reviewing of investment alternatives, of how to manage conflicts of interest, plus investment goals and account characteristics.

• Environmental, Social, and Governance (ESG) – Work will continue to overlook ESG-related advisory services and fund offerings. The Division will examine if funds are operating in the same manner set in their disclosures, plus assess if ESG products are appropriately labeled and if product recommendations are “made in the investors’ best interests”.

• Information Security and Operational Resiliency – There will be continued review of broker-dealers’, RIAs’, and other registrants’ practices to prevent interference to mission-critical services, and to protect investor data and assets. The work will also include exploring cybersecurity issues that are associated with the use of third-party vendors.

• Emerging technologies and cryptoassets – The Division will perform examinations of broker-dealers and RIAs that are using emerging financial technologies or employing new practices. That includes technological and on-line solutions to compliance and marketing demands, as well as to service investor accounts. The examinations will focus on offers, sales, recommendations, or advices regarding trading in crypto or crypto-related assets.