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The SEC Examination Priorities for 2022

Posted by RIA in a Box

Apr 5, 2022 2:30:42 PM

The SEC Examination Priorities for 2022

On March 29, 2022, the Securities and Exchange Commission ("SEC") Division of Examinations (the Division) released its annual top exam priorities for the 2022 calendar year. The Division of Examinations is the SEC division which conducts examinations of registered investment adviser ("RIA") firms and this priority list can help investment advisers be better properly prepared for a regulatory examination. The examination priorities for 2022 include a focus on private funds, climate and environmental, social, and governance ("ESG")-investments, and emerging technologies and crypto-assets. In comparison to the SEC’s lists published in past years (2019, 2020, and 2021), there are similar priorities such as compliance programs and business continuity plans.

In 2021, the Division of Examinations increased the number of examinations conducted bringing them back on par with pre-Covid-19 pandemic examination numbers.  

  • In the 2021 fiscal year, the Division of Examinations completed 3,040 examinations compared to 2,952 in 2020, a 3% increase.
  • During 2021, the Division issued more than 2,100 deficiency letters. 

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The Division states that within the priority areas, the agency will be particularly focused on these common and emerging RIA regulatory compliance issues. These are the Significant Focus Areas for 2022:

  • Private Funds: The Division will continue to prioritize a focus on RIAs to private funds, given the significance of examination findings over the past several years, and the size, complexity, and significant growth of the private fund market. Examinations will review issues under the Investment Advisers Act of 1940 (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 review of private fund advisers’ risk management, portfolio strategies, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas will also be prioritized. Additionally, EXAMS will review the practices, controls, and investor reporting around risk management and trading for private funds with indicia or signs of systemic importance.

  • Environmental, Social, And Governance (ESG) Investing: The Division will continue its focus on ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings. RIAs and registered funds increasingly offer and assess investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments. This risk can be aggravated by the lack of standardization of ESG investment terminology; the variety of ESG investment approaches; and the inability to effectively resolve legal and compliance issues with new lines of business and products.

    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, review of their portfolio management processes and practices will be prioritized. 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.

  • Standards of Conduct: Regulation Best Interest, Fiduciary Duty, and Form CRS: Examinations will include assessments of practices regarding consideration of alternatives, management of conflicts of interest, trading, disclosures, account selection, and account conversions and rollovers. For RIAs, examinations will focus on the effectiveness of compliance programs, testing, and training that are designed to support retail investors and working families receiving recommendations and advice in their best interests. Examinations will review practices, policies, and procedures concerning the evaluation of cost and reasonably available alternatives as they relate to recommendations of these products being in the investor’s best interest.

    RIA examinations will focus on whether advisers are acting consistently with their fiduciary duty to clients, looking at both duties of care and loyalty, including best execution obligations, financial conflicts of interest and related impartiality of advice, and any attendant client disclosures. The focus areas for examinations will be on how registrants are satisfying their obligations under the Advisers Act’s 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: Applying information security controls and vigilant protection of data is critical to ensuring business continuity and to the operation of the financial markets and the confidence of its participants. Failing to prevent unauthorized access, use, disclosure, disruption, modification, inspection, recording or destruction of sensitive records could have consequences that extend beyond the firm compromised to other market participants and retail investors. 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 because 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 has observed a significant increase in the number of RIAs choosing to provide automated digital investment advice to their clients, continued growth in the use of mobile apps, and a proliferation of the offer, sale, and trading of crypto-assets. The Division will conduct examinations of RIAs that are using developing financial technologies to review whether the unique risks these activities present were considered by the firms when designing their regulatory compliance programs. 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. In addition, the Division will conduct examinations of mutual funds and ETFs offering exposure to crypto-assets to assess, among other things, compliance, liquidity, and operational controls around portfolio management and market risk.

These are additional Focus Areas Involving Registered Investment Advisers for 2022:

  • Registered Investment Advisers: Typically in an examination, the Division reviews the compliance programs of RIAs in one or more of the following core areas: marketing practices, custody and safety of client assets, valuation, portfolio management, brokerage and execution, conflicts of interest, and related disclosures. The Division will assess policies and procedures to determine if they are reasonably designed to prevent violations of the Advisers Act, including breaches of the RIA’s fiduciary duty in violation of the antifraud provisions. Additionally, to the extent that firms are using alternative data or data gleaned from non-traditional sources as part of their business and investment decision-making processes, reviews will include examining whether RIAs are implementing appropriate compliance and controls around the creation, receipt, and use of potentially MNPI. Assessing the effectiveness of a compliance program, the Division will review whether the firm has implemented oversight practices to mitigate any heightened risks. Additionally, The Division will continue to focus on RIA disclosures and other issues related to fees and expenses. In particular, EXAMS will concentrate on issues related to: (1) advisory fee calculation errors, including, but not limited to, failure to adjust management fees in accordance with investor agreements; (2) inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts; and (3) failures to refund prepaid fees for terminated accounts or pro-rated fees for onboarding clients

  • The London Inter-Bank Offered Rate (“LIBOR”) transition: For RIAs overseen by the Division, there may be significant impacts on the financial markets and possibly present a material risk for certain market participants from the discontinuation of LIBOR. Preparation for the transition is essential for minimizing any potential adverse effects associated with LIBOR discontinuation. EXAMS will continue to engage with registrants through examinations and outreach efforts to assess and transition.

As RIA compliance consultants, we strongly recommend that the principals and Chief Compliance Officer of all investment advisory firms registered with the SEC, regardless if the firm has been examined before or not, review the contents of the SEC 2022 exam priority document. Furthermore, past exam priority lists released in prior years should also be reviewed. Links to these past investment adviser audit priority lists are here:

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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.

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