March 30, 2022 – The SEC today announced its 2022 examination priorities, including several significant areas of focus and many perennial risk areas.
“The Division’s 2022 examination priorities identify key risk areas that we expect registrants to address, manage, and mitigate with vigilance,” said SEC Chair Gary Gensler. “Investment advisers, broker-dealers, self-regulatory organizations, clearing firms, and other registrants are critical market participants, and examinations against our laws and rules are fundamental to instilling the trust necessary for our markets to thrive.”
Private Funds
The Division will focus on registered investment advisers (RIAs) who manage private funds. Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty, 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 will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas. In addition, EXAMS will review the practices, controls, and investor reporting around risk management and trading for private funds with indicia or signs of systemic importance.
ESG (Environmental, social and governance)
The Division will continue its focus on ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings. Examinations will typically focus 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. Examinations also will review the voting of client securities in accordance with proxy voting policies and procedures, including whether the votes align with their ESG-related disclosures and mandates, and whether there are misrepresentations of the ESG factors considered or incorporated into portfolio selection.
Retail Investors and Working Families
The Division will continue to address standards of conduct issues for broker-dealers and RIAs to ensure that retail investors and working families are receiving recommendations and advice in their best interests. 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’. Examinations will include assessments of practices regarding consideration of investment alternatives, management of conflicts of interest, trading, disclosures, account selection, and account conversions and rollovers.
Information Security and Operational Resiliency
The Division will review broker-dealers’, RIAs’, and other registrants’ practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets. Examinations will continue to review whether firms have taken appropriate measures to safeguard customer accounts and prevent account intrusions; oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions; respond to incidents, including those related to ransomware attacks; identify and detect red flags related to identity theft; and manage operational risk as a result of a dispersed workforce. In addition, the Division will again be reviewing registrants’ business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations.
Emerging Technologies and Crypto-Assets
The Division will conduct examinations of broker-dealers and RIAs that are using emerging financial technologies to review whether the unique risks these activities present were considered by the firms when designing their regulatory compliance programs. 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 with crypto-assets will continue to review the custody arrangements for such assets and will assess the offer, sale, recommendation, advice, and trading of crypto-assets.
Conclusion
The published priorities are not exhaustive and will not be the only areas the Division focuses on in its examinations, risk alerts, and outreach. While the priorities primarily drive the Division’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of a given entity’s history, operations, services, products offered, and other risk factors.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
