SEC Division of Examinations Unveils 2023 Priorities with Enthusiasm
The Securities and Exchange Commission’s Division of Examinations announced its examination priorities for 2023 today. The Division publishes its examination priorities on an annual basis to provide insight into its risk-based approach, including the areas it believes pose potential risks to investors and the integrity of the United States’ capital markets.
“In an era of expanding markets, evolving technologies, and new forms of risk, our Division of Examinations remains committed to protecting investors,” said SEC Chair Gary Gensler. “In carrying out the priorities for 2023, the Division will assist in ensuring compliance with federal securities laws and rules.”
Our priorities reflect the changing landscape and associated risks in the securities market, and they are the result of a risk-based approach to examination selection that evenly distributes our resources across a diverse registrant base.” “We will emphasize compliance with new SEC rules applicable to investment advisers and investment companies, as well as continue our focus on emerging issues and rules aimed at protecting retail investors,” said Richard R. Best, Director of the Division of Examinations.
“Our examination program continues to advance, and we remain committed to improving investor protection through high-quality examinations and staying current on industry trends and emerging risks to investors and markets.”
The following are some of the Division’s priorities for 2023:
Rules for Investment Advisers and Investment Companies – The Division’s focus will be on the new Marketing Rule (Advisers Act Rule 206(4)-1) and whether registered investment advisers (RIAs) have adopted and implemented written policies and procedures reasonably designed to prevent violations of the new rule by advisers and their supervised persons, as well as whether RIAs have complied with the substantive requirements. The Division will also focus on new investment company rules, such as the Derivatives Rule (Investment Company Act Rule 18f-4) and the Fair Valuation Rule (Investment Company Act Rule 2a-5).
Examinations will focus on compliance programs, fees and expenses, custody, the new Marketing Rule, conflicts of interest, and the use of alternative data. RIAs to 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, the new Marketing Rule, conflicts of interest, and the use of alternative data.
The Division will also examine private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, with a particular focus on conflicts and disclosures in these areas. Furthermore, the Division will concentrate on RIAs to private funds with specific risk characteristics, such as highly leveraged private funds and private funds managed in tandem with business development companies.
Working Families and Retail Investors – The Division will continue to address broker-dealer and RIA standards of conduct issues to ensure that retail investors and working families receive recommendations and advice that is in their best interests.
These examinations will specifically focus on how registrants are meeting their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors while not putting their own interests ahead of retail investors’. Exams will include assessments of practices such as reviewing investment alternatives, managing conflicts of interest, and taking into account investment goals and account characteristics.
Environmental, Social, and Governance (ESG) – The Division will maintain its focus on ESG-related advisory services and fund offerings, including determining whether funds are operating in accordance with their disclosures. Furthermore, the Division will examine whether ESG products are appropriately labeled and whether recommendations of such products to retail investors are made in the best interests of the investors.
Information Security and Operational Resiliency – The Division will examine broker-dealers’, RIAs’, and other registrants’ practices to ensure that mission-critical services are not disrupted and that investor information, records, and assets are protected. Broker-dealers and RIAs will be scrutinized for cybersecurity issues related to the use of third-party vendors, such as registrant visibility into the security and integrity of third-party products and services, as well as whether third-party providers were used improperly.
Emerging Technologies and Crypto-Assets – The Division will conduct examinations of broker-dealers and RIAs that use emerging financial technologies or new practices, such as technological and on-line solutions, to meet compliance and marketing demands and to service investor accounts.
Registrant examinations will focus on the offer, sale, recommendation, or advice regarding trading in crypto or crypto-related assets, as well as whether the firm (1) met and followed their respective standards of care when making recommendations, referrals, or providing investment advice; and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.
The Division’s focus areas in its examinations, risk alerts, and outreach are not exhaustively covered by the published priorities. Any examination will include an examination of an entity’s history, operations, services, products offered, and other risk factors.
The collaborative effort to develop annual examination priorities begins with feedback from examination staff, who are uniquely positioned to identify practices, products, services, and other factors that could endanger investors or the financial markets. The Chair and other Commissioners, staff from other SEC divisions and offices, other federal financial regulators, investors, and industry groups also provide input and advice to the Division.
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