On March 30, 2022, the Securities and Exchange Commission’s (“SEC”) Division of Examinations (the “Division”) issued its annual examination priorities for 2022. The Division plans to prioritize five significant focus areas that pose unique or emerging risks to investors or the markets during its examinations.

For a bit of background, the Division completed 3,040 examinations in FY21, a 3% increase from FY20 and on par with pre-Covid-19 pandemic examination totals in FY19. In addition, the staff conducted hundreds of registrant outreach meetings and issued more than 2,100 deficiency letters. Significantly, the Division examined approximately 16% of RIAs, compared to 15% in FY20 and FY19.

The 2022 SEC Examination Priorities address a composite of perennial exam considerations combined with more current emerging focus areas.

Below is a summary of the significant focus areas:

Something Old: Emerging Tech and Crypto Assets

For the past two years, emerging technology and crypto assets have topped the SEC’s list. There has been significant growth in financial technology (e.g., “robo-advisors”) and the proliferation of the offer, sale, and trading of crypto-assets. For this reason, the Division will examine RIAs use of developing financial technologies to assess unique risks of these activities and the design of their compliance programs to manage such risks. Additionally, exams of market participants engaged in crypto-assets will continue to assess the offer, sale, recommendation, advice, and trading of these high-risk vehicles.

Something New(ish): Private Funds

Okay, so while this item isn’t completely new, as it echoes many of the sentiments discussed in the SEC’s recent proposal relating to private funds, it is the first time we’ve seen such a significant focus. According to the SEC, Private Funds represent one of the largest RIA segments, currently at about 35% of advisories and $18 trillion. Over the past five years there has been a 70% increase in the assets managed by these funds. The funds range from fairly straightforward investment vehicles to those that are very complex. Therefore, SEC exams plan to focus on traditional questions such as issues under the Advisers Act. Those include the fiduciary duty of advisers as well as the risks and the focus of the funds. Exams will assess the risks faced by the funds as well as the compliance programs, fees and expenses, custody arrangements, valuation methods and disclosures employed.

Something Borrowed: Reg BI, Form CRS and Information Security

Something borrowed from FINRA’s priority list, as well as previous SEC lists, is compliance with Reg BI, Form CRS and cybersecurity protocols. Exams will focus on how these items are being satisfied. For broker-dealers and RIAs there will be a focus on compliance programs, testing, and training that is “designed to support retail investors and working families receiving recommendations and advise in their best interest.” Broker-dealer exams will focus on sales practices related to SPACs, structured products, leveraged and inverse exchange traded products, annuities, municipal securities and other fixed income investments and microcap securities. RIA exams will focus on whether advisers act consistently with their fiduciary duties to clients as well as conflicts and disclosures.

The Division will review broker-dealer and RIA practices designed to prevent interruptions to mission-critical services and protect investor information. Accordingly, Exams will consider: 1) measures taken to safeguard customer accounts and prevent intrusions; 2) evaluate steps taken to oversee vendors and service providers; 3) examine steps taken to address malicious email activities; 4) responses to incidents; 5) steps taken to identify and detect red flags; and 6) evaluate steps taken to manage operational risk as a result of a dispersed workforce.

Something Blu…Green: ESG Investing

For any firms looking to help their clients “go green,” the Division plans to review ESG disclosures to determine if they involve materially false and misleading statements or omissions. The Division notes that the risk of misleading ESG disclosure is heightened by the lack of standardization in ESG investing terminology along with the increasing size and complexity in ESG investing. To mitigate this risk, the Division will continue to focus on ESG-related advisory services and investment products. Examinations will generally focus on: (i) the accuracy of ESG investing disclosures; (ii) the voting of client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates; and (iii) whether RIAs or registered funds overstate or misrepresent ESG factors used in portfolio selection.

To read the complete 2022 SEC Exam Priorities Letter, click here.

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