The SEC Division of Examinations recently released its 2022 Division of Examinations “Priorities.” The 2022 Priorities provide critical insight into what the Division of Examinations (the “Division”) considers the most significant and highest potential risk areas for investors, and provides guidance for regulated entities on where to focus their compliance efforts.
Retail Investors and Working Families
While retail investors remain a focus of the SEC across the agency, consistent with that objective, the Division of Examinations is focusing on ensuring that working families are receiving recommendations and advice consistent with their best interests. More specifically, “these examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors’.” So, for the brokerage industry, compliance with Regulation Best Interest (BI) and all of the obligations thereunder will continue to be a priority for the Division in 2022. More broadly, regulated entities can expect examinations to include evaluations of practices regarding investment product alternatives, management of conflicts of interest, disclosures where appropriate, and account conversions and rollovers.
The Division will maintain its focus on ESG-related investment services, investment products, and providers, “including mutual funds, exchange-traded funds, and private fund offerings.” As was done in 2021, examinations will concentrate on “whether RIAs and registered funds are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices.” This focus is consistent with the Division of Examinations’ prioritization of data privacy which continues to gain momentum as remote and hybrid roles in the workplace appear to be here to stay.
Examiners will carefully scrutinize registered investment advisers who manage private funds for compliance with the Investment Advisers Act of 1940, including their adherence to fiduciary duties, and “will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks, and controls around material nonpublic information.” The Division also will be looking at “private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas,” and examinations will review practices and investor reporting around risk management and trading for private funds.
Information Security and Operational Resiliency
The Division of Examinations plans to review registrants’ practices to prevent interruptions to services and protect investor information. Not surprisingly, examinations will continue to evaluate whether firms have sufficient measures in place to safeguard customer accounts, address malicious email activities including phishing, and respond in a timely manner to incidents of this kind that may arise. The Division of Examinations will likewise maintain its spotlight on registrants’ business continuity plans, disaster recovery plans, and climate risk impact.
Emerging Technologies and Crypto-Assets
“RIA and broker-dealer examinations will focus on firms that are, or claim to be, offering new products and services or employing new practices to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and controls take into account the unique risks associated with such practices.” Examinations of market participants engaged in these assets will continue, with an emphasis on custody arrangements for such assets as well as transfer of and advice involving crypto-assets.
Registrants are well-advised to analyze and apply the guidance in the Division of Examinations 2022 Priorities as they evaluate and update their compliance programs for this year.
Registrants who believe that examination results may be referred to the Division of Enforcement should consider engaging outside securities defense counsel.