RIA Compliance Blog
The Securities and Exchange Commission (SEC) recently released the 2022 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.
While the SEC notes the continued impact of COVID-19 on investment advisers and the investment industry, the SEC reported an increase in examinations conducted during FY21, with the total number of completed examinations close to the pre-pandemic levels of FY19.
For FY22 examinations, the SEC will place a significant focus on (1) private funds; (2) environmental, social, and governance (ESG) investing; (3) standards of conduct: Regulation Best Interest (Regulation BI), fiduciary duty, and Form CRS; (4) information security and operational resiliency; and (5) emerging technologies and crypto-assets. Many of these focus areas, such as ESG and Regulation BI, are carried over from previous years and mark a multi-year emphasis for the SEC.
With the influx of assets managed by private funds increasing by 70% 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 controls of material nonpublic information. The Division will also look at situations where private funds cross into other areas of SEC concern, such as Special Purpose Acquisition Companies (SPACs), including both private fund’s investment in SPACs and when a private fund adviser is also a SPAC sponsor.
Not surprisingly, 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 voting of client securities is in-line with ESG related disclosures, and the misrepresentation of ESG factors into performance advertising and marketing (i.e., greenwashing).
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, trading, and account selection and rollover recommendations. With the SEC’s recent release of the Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors, it would not be surprising to see more violations in this area being referred for enforcement action.
The Division will continue to focus on information security and operational resiliency. While this area has been a concentration for the past few years, it has expanded over the last two years due to the increase in work-from-home situations. The SEC will look to ensure that firms have adequate policies and procedures to address account intrusions, including unauthorized account access, oversight of service providers, malicious email activities, incident response, the detection of red flags associated with identity theft, and the management of a work-from-home staff.
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.