The Securities and Exchange Commission (SEC) recently released the 2023 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers during the coming year.
Over the last few years, the SEC has adopted several new rules that include compliance obligations. As the implementation dates for these new rules have passed, the SEC will prioritize examining how investment advisers have incorporate the rules into their compliance programs. While impacting a limited number of investment advisers, the amended rules include changes to the Derivates Rule and Fair Valuation Rule.[1]
Impacting a larger swath of advisers are changes to the Marketing Rule. [2] With an implementation date of November 4, 2022, this is the first year that the SEC can review whether an adviser has adopted the written policies and procedures reasonably designed to prevent violations of the Rule. Above checking for the baseline adoption of the policies and procedures, the SEC expressly stated in the Release that it will review the substantive requirements of the new Marketing Rule, “including the requirement that RIAs 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.” We have previously written about the Rule’s requirements, including a closer look at the requirements for testimonials and performance advertising.
With the influx of assets managed by private funds increasing by 80% over the past five years, the oversight of investment advisers to private funds continues to be an area of increased SEC scrutiny. Particular areas of concern include: the investment adviser’s fiduciary duty, compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosure of investment risks, and the new Marketing Rule.
The Division will continue to focus on ESG related topics for both advisory services and investment products. Examinations will look at the accuracy of disclosures concerning ESG investing strategies, whether the investments operate in-line with the related disclosures, and whether ESG products are appropriately labeled as such.
With the enaction of Regulation BI and Form CRS over the past few years, the Division continues to monitor the implementation of both programs in the investment industry and the impact on retail investors. The Division will look at the disclosure of risk, management of conflicts of interest, process for making best interest evaluations, including the process for determining reasonably available alternatives, and the factors contemplated when considering investments appropriate for the investor’s risk profile.
In more traditional examination priorities, the Division will continue to examine whether advisers’ compliance programs are adequately tailored to the advisers’ business, including whether current market conditions are sufficiently contemplated. Examinations focus on core areas of the advisory business including custody, portfolio management, brokerage and execution, conflicts of interests, and advisory fees. Additionally, in light of recent enforcement actions, the SEC will focus on the policies and procedures regarding the dissemination and retention of electronic records and the oversight of service providers.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.
[1] See Investment Company Act Rule 18f-4. See Investment Company Rule 2a-5.
[2] See Advisers Act Rule 206(4)-1.