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Over the past few months, we’ve been tracking the breakneck rule making agenda proposed by Securities and Exchange Commission Chairman Gary Gensler. While a number of proposed rules were poised for action in April 2023, very little action has actually been taken.
Following the collapse of Credit Suisse and Silicon Valley Bank, the Commission delayed the implementation of amendments to Form PF. Chair Gensler noted at the time that he didn’t wish to put additional burdens on firms during a time of market dislocation. However, the item has been set for a vote on May 3rd, indicating that the Commission’s reprieve will be brief.
While all remains quiet on the rulemaking front, the Commission Examination program recently hosted an outreach event which provided useful tips for preparing for an SEC examination along with detailed comments on the implementation of the new marketing rule, ESG compliance and a continued focus on electronic communications.
Are you prepared for an SEC examination?
If you’re considering your exam readiness, it’s useful to ask yourself the following questions:
- Have you mitigated findings from prior exams in advance of the next exam?
- Have you examined results of annual reviews and periodic testing; what changes could be implemented to improve compliance?
- Did you add any new products / services? Did you amend your existing program to address any new risks?
- Have you kept up with the pace of regulatory change?
- Are you consulting with your business partners? Your compliance program should be supported by key players in the firm to demonstrate that the tone at the top places emphasis on compliance.
As well as keeping your compliance policies up to date, you should also engage in annual training of access persons. Key stakeholders and C-suite individuals should attend routine trainings with supervised and access persons, as well as management specific training, which is focused on fiduciary duty and oversight obligations.
Focus on advertising compliance
The SEC continues to highlight the new Advertising Rule for investment advisers. As we continue to see examinations focus on compliance with the new rule, CCOs can consider the recent comments from the Commission:
- Firms should consider the seven ‘General Prohibitions’ in all aspects of marketing.
- Having robust policies and procedures is vital in demonstrating compliance.
- Substantiation of claims, particularly related to performance, is a current focus of Exam staff.
Be prepared to describe how you’ve approached the new rule and taken steps to come into compliance. The Commission has noted that performance history (track record) claims are the biggest source of deficiencies, along with failures to immediately update websites.
Increase in ESG investing
The Commission noted that more ESG-centric strategies are offered to investors. This serves as a reminder for firms offering ESG strategies to review disclosures and testing plans to ensure that all ESG strategies are complying with clients’ investment mandates.
Firms with ESG strategies are encouraged to review the SEC’s 2021 Risk Alert. The Commission indicated it will continue to focus on these strategies during examinations. Finally, if you engage in advertising with respect to ESG strategies, you’ll find yourself in the crosshairs of both the Advertising Rule and the Commission’s current focus on ESG.
Supervision of electronic communications
As indicated last fall, the Commission has continued to focus on electronic communications, and off-channel communications in particular. In 2023, the examinations have concentrated on producers governing electronic communications, along with recordkeeping obligations of both investment advisers and broker-dealers. The Commission highlighted the need for supervision and training of staff on approved communication methods. Additionally, it has suggested that firms require approval for use of personal devices in business communications.
How can you strengthen your compliance program?
The Commission’s tips for preparing for an examination provide a roadmap into how a strong compliance program should be implemented. Those frequently re-evaluating risks, the adequacy of policies and the tone from the top will find an exam less daunting than those who do not.
In additional to regular training, mock interviews for senior staff members can be another invaluable tool in preparing for an examination.
We can help
Our team of compliance specialists include former SEC examiners who understand exactly what is required. Our mock exam process assesses both the investment and operational aspects of your firm, including controls and adherence to compliance policies and procedures. We tailor the scope of the mock exam to your business and proactively work to ensure the mock exam meets your objectives.
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