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According to the SEC’s examination priorities for 2023, it will continue concentrating on private fund managers, with exams targeting portfolio management practices, compliance programs, fees and expenses, and conflicts of interest.
The Commission noted a specific focus on highly-leveraged private funds and funds managed side-by-side with business development companies.
In contrast to private funds, which primarily market to institutional and high net worth individuals, the Commission is also returning to a focus on retail investors and working families. This area will focus on compliance, with the adviser fiduciary duty standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors’. Broker-dealers will be reviewed for compliance with Reg BI when recommendations to retail investors are made. Examinations will include assessments of practices regarding review of investment alternatives, management of conflicts of interest, and consideration of investment goals and account characteristics.
The Commission will likely enquire to all registrants on their adoption and implementation of the new Marketing Rule, and whether firms have adopted policies and procedures which reflect the requirements of the rule. It will also see if firms have complied with the substantive requirements of the rule.
As expected, the Commission will also review firms with Environmental, Social, and Governance (ESG) strategies, examining whether funds are operating in the manner set forth in their disclosures. In addition, the Division will assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in the investors’ best interests.
Another carryover from previous years, the Commission will continue to focus on Information Security and Operational Resiliency. This will include a review of how advisers ensure that mission-critical services, including vendors, are adequately prepared to prevent business interruptions and protect critical investor information. Evaluations will focus particularly on cybersecurity, disaster recovery and business continuity plans, as well as the use and oversight of third-party providers.
Finally, the Commission will continue to aim examinations at broker-dealers and advisers that use or recommend Emerging Technologies and Crypto-Assets. These examinations will review the offer, sale and recommendation of these products, including whether the broker or adviser complies with its standard of care when making such recommendations. The Commission will also consider whether firms had adequately addressed specific risks in its compliance programs, disclosures and risk management practices.
Throughout the press release, the Commission referenced the use of alternative data, the new Marketing Rule and the applicable standards of conduct for investment advisers and broker-dealers. All told, the priorities for this year are broad and all investment advisers will find at least one of the priorities touches on their business. CCOs should consider focusing their current reviews on the risk areas impacted by the Commission’s priorities and ensuring all areas have been adequately disclosed and documented during reviews over the past two-year period.
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