RIA Compliance and Practice Management Blog

Top SEC regulatory examination focuses for investment advisers in 2023

Posted by RIA in a Box

Jan 18, 2023 2:17:21 PM

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The Securities and Exchange Commission (SEC) recently released its Fall 2022 Regulatory Flexibility Agenda. While not all the rules included in the list have passed, the list provides a sense of the SEC’s rulemaking priorities for RIA firms in the coming year. The list also indicates what investment advisers can expect the regulators will heavily scrutinize during examinations in 2023.

We’ve examined the list and pulled out a few themes. Here is where the SEC is headed with rule making and where the agency will likely focus should all these rules pass.

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The SEC’s top focus areas for RIA firm regulatory examinations in 2023

These are the areas which investment advisers can expect the SEC to focus on during regulatory examinations in 2023.

  1. Cybersecurity requirements

A cyber-attack can be devastating to an investment firm. For that reason, and because of the increased complexity of cyber-attacks in recent years, regulators have been placing greater emphasis on the importance of cybersecurity. The SEC is no different.

As a matter of fact, the SEC has proposed amendments to its cybersecurity regulations which “would require, among other things, current reporting about material cybersecurity incidents and periodic reporting to provide updates about previously reported cybersecurity incidents.”

These amendments are in the proposed rule stage.

  1. New SEC marketing rule

On Nov. 4, 2022, the SEC’s new Marketing Rule, or SEC rule 206(4)-1, for investment advisers went into effect. Since then, the SEC released a risk alert in which the agency indicated its plans to scrutinize investment advisers’ compliance with the new Marketing Rule in upcoming investigations and regulatory examinations.

The SEC will examine several details of a firm’s compliance program to determine its compliance with the new Marketing Rule. In particular, the SEC will examine whether investment firms have adopted and implemented written policies and procedures which are reasonably designed to prevent violations of the new rule. In addition, the SEC will scrutinize firms’ compliance with the books and recordkeeping regulations in regard to the new Marketing Rule and whether firms are adequately maintaining records of all advertisements they disseminate.

  1. Books and recordkeeping regulations

In light of a devastating $2 billion books and recordkeeping violation the SEC filed last fiscal year, investment advisers should expect the agency to continue its focus on compliance with books and recordkeeping regulations during next year’s examinations.

On Oct. 12, 2022, the SEC finalized an electronic recordkeeping regulation, SEC rule 17a-4, which would extend the requirements of the books and recordkeeping regulations, SEC rule 17a-3, into electronic mediums. SEC rule 17a-4 requires firms which use electronic media to maintain “electronic records that can be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased.” SEC rule 17a-4 was finalized on Oct. 12, 2022, and became affective on Jan. 3, 2023.

  1. SEC proposed outsourcing rule

On Oct. 26, 2022, the SEC proposed an outsourcing rule which would require registered investment advisers to ensure the third-party providers to whom they outsource work meet a certain set of requirements.

While this rule is still in the proposed rule stage, the amount of noise surrounding the ruling as well as the SEC’s maintained focus on their proposal should indicate to investment advisers the need for greater attention to be given to ensure a thorough vetting of their third-party providers.

  1. Environmental, social, and governance (ESG) disclosures

The SEC proposed a set of environmental, social and governance (ESG) disclosures in response to growing concerns about the climate and investors’ and clients’ interest in the ESG background of their investment options. For this reason, the SEC proposed a set of ESG disclosures which, if finalized, would “seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue.”

The rule is in the final rule stage.

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RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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