Four New SEC Examination Priorities to Spice Up 2023!

If you’re familiar with annual previews from government agencies, you know they’re about as exciting as an instruction manual. They generally follow a boilerplate format that includes familiar discussions of how their plans for the coming year align with their organizational mission. It may be a low bar, but it does stand out when a report like the one issued recently by the Securities and Exchange Commission Division of Examinations – better known as EXAMS – includes a section touting “notable new and significant focus areas” for the coming year.

Consider our interest piqued. Here’s a quick look at those four points of emphasis for the division’s oversight of broker-dealers and investment advisers.

Compliance with Recently Adopted Rules

EXAMS is tailoring some of its work this year in concert with “several significant new rulemakings as part of [the SEC’s] efforts to drive efficiency in the capital markets and modernize SEC rules for the current economy and technologies.”

The three measures include the new Marketing Rule (Rule 206(4)-1) for registered investment advisers. RIAs should prepare for questions about the status of policies and procedures designed to prevent Marketing Rule violations. Additionally, they may be asked to demonstrate they “have a reasonable basis for believing they will be able to substantiate material statements of fact and requirements for performance advertising, testimonials, endorsements and third-party ratings.”

As for the so-called Derivatives Rule (Rule 18f-4), EXAMS will be looking into the policies and procedures registered investment companies have adopted to address their derivatives risks. Compliance with the Derivatives Rules includes evaluating disclosures about how funds use derivatives.

Lastly, EXAMS will monitor compliance with the Fair Value Rule (Rule 2a-5). That means looking into registered funds’ processes for determining fair value and implementing board oversight. Furthermore, the division will want information regarding adjustments in areas such as valuation methodologies and oversight of service providers.

RIAs to Private Funds

Picking up on one of the most significant trends in the financial sector, EXAMS plans to take a closer look at private funds’ advisers. The report noted that this segment of the RIA universe now manages gross assets of more than $21 trillion. The division said it plans to review potential conflicts of interest, fees and expenses, compliance with the aforementioned Marketing Rule, and other aspects of RIAs’ relationships with private funds.

Some RIAs can expect particular scrutiny, according to EXAMS. They include RIAs to highly leveraged funds; advisers to funds that specialize in opaquely priced investments, such as cryptocurrency; and RIAs to funds that focus on special purpose acquisition companies.

Standards of Conduct

Think Regulation Best Interest for broker-dealers and fiduciary duty for RIAs here. EXAMS staffers will want to know about the steps both groups are taking to mitigate conflicts of interest. For example, what processes are in place to determine the best interests of clients? Are the disclosures being made adequate?

Look for EXAMS to drill down on specific types of investments, such as complex financial products and illiquid asset classes. The division will also check for compliance with Form CRS to disclose the relationship summaries of broker-dealers and IRAs.

ESG Investing

What would a report from the SEC be without some mention of environmental, social and governance issues, right? The EXAMS report makes a cursory nod to the growth in ESG investing, which has led to competition among both RIAs and funds for the influx of capital into the space. Consequently, the division said it will review product offerings and related disclosures to make sure they are in sync.

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