SEC Examination Priorities cast a wide net

There were few surprises in the SEC’s 2023 Examination Priorities released this month. As expected, the Commission indicated a focus on private funds, ESG and the recently implemented investment adviser marketing rule. 

The Commission also indicated it would prioritise advisers to retail investors, a long-time focus of the prior administration. This addition effectively places the vast majority of investment advisers, from private fund to individual wealth managers, within the scope of the Commission’s priorities.

Investment advisers who have not been examined for more than five years are more likely to be examined if they fall within a priority. Additionally, the Commission specifically addresses certain private fund managers who are within their sites: highly leveraged private funds; private funds managed side-by-side with business development companies; private funds with hard-to-value investment such as crypto assets or real estate; or private funds involved in adviser-led restructuring. Reading between the lines, the Commission is suggesting that it will continue to highly scrutinise private fund advisers, but not to the exclusion of individual investors.

Some focus activities from 2022 continue to be priorities, including electronic communications and alternative sources of material non-public information. As these risks apply to all firms, now is the time to ensure your current policies address these topics and that you’re prepared to demonstrate how you mitigate them.

In addition to the priorities list, we have seen an increase in examinations of UK-based investment advisers during the last two fiscal years. These exams have routinely focused on the knowledge of the Investment Advisers Act of 1940 by adviser staff and the Chief Compliance Officer. Examiners are also focused on whether US regulation is given appropriate deference in the firm’s policies and procedures. These comments are easy to predict and proactively address in an annual review for any adviser who is based outside the US.

How to stay ahead of the curve

Investment advisers who are in the process of updating their Form ADV and compliance manual should review the SEC’s priorities against these. We recommend you identify what updates to disclosures and procedures could be made to enhance the risk areas identified in the release. In addition to a required annual review, you should consider annual staff training focused on regulatory developments to keep abreast of changes to US regulations and the Commission’s priorities. A robust training program, along with a well-documented annual review, will demonstrate that anyone on the receiving end of an examination that compliance with US regulation is a top priority for the firm.

How we can help

We work with a variety of clients to meet their day-to-day compliance needs, understanding the nuances of regulatory compliance and answering difficult questions. We can make sure your compliance systems are robust by helping to draft new policies, assisting with operational compliance or providing your teams with bespoke training. We also regularly conduct SEC mock examinations to help firms prepare for the real thing.