On March 30, 2022, the Examination Division (Division) of the Securities and Exchange Commission (SEC) announced its Examination Priorities (Examination Priorities), identifying areas of focus for examinations in 2022. announcement focuses on five different categories:
Environment, Social and Governance (ESG);
retail investors and working families;
Information security and operational resilience; and
Emerging technologies and crypto-assets.
This WG Alert discusses review priorities related to each of these categories.
The Division will focus on reviewing Registered Investment Advisers (RIAs) who manage private funds. Specifically, they will focus on issues relating to adviser law, including an adviser’s fiduciary duty, and assess risks focusing on compliance programs, conflicts of interest, disclosure of investment risks and controls relating to material non-public information. The Division will also focus on fees and expenses, looking specifically at the calculation and allocation of these fees and expenses, including the calculation of post-engagement management fees and the impact of capital fund valuation practices. -investment. The Division will review the potential preferential treatment of certain investors by RIAs to private funds that have experienced liquidity problems, including the imposition of barriers or suspensions on fund withdrawals and review compliance with the Custody Rule of the Advisors Act, including the “Audit Exception” to the Surprise Examination Requirement and related reports and the updated Form ADV regarding audit and auditors.
The Division will also review the adequacy of disclosure and compliance with regulatory requirements for cross trades and principal trades, as well as disputes around liquidity issues, such as initiation or suspension of fund withdrawals, RIA-directed funds and “stapled secondary” transactions. (where new investors buy the interests of existing fund investors while agreeing to invest in new funds). In addition, the Division will review portfolio strategies, risk management, and investment recommendations and allocations, with a focus on conflicts and disclosures in these areas. Finally, the Division will examine the practices, controls and reports to investors relating to the management of risks and the trading of private funds presenting indices or signs of systemic importance.
The division will focus on ESG-related advisory services and investment products, including mutual funds, exchange-traded funds and private fund offerings. Generally, the division will focus on accurately disclosing ESG investment approaches for RIAs and registered funds. The Division will also review whether such RIAs and registered funds have adopted and implemented policies, procedures and practices designed to prevent violations of federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices. The Division will also review the voting of client securities in accordance with proxy voting policies and procedures, including whether votes are consistent with declared ESG disclosures and mandates. Finally, the Division will examine whether there are any misrepresentations of the ESG factors taken into account or integrated into the selection of portfolios.
Individual investors and working families
The Division will continue to address issues of standards of conduct for brokers and RIAs to ensure that retail investors and working families receive recommendations and advice in their best interests. This review priority will focus on how registrants meet their obligations under the Best Interests Regulation and the Fiduciary Standard of the Advisers Act to act in the interests of retail investors rather than only in the company’s own interests. To monitor compliance, the Division will assess practices around reviewing investment alternatives, managing conflicts of interest, trading, disclosures to enable investors to provide informed consent, account screening and conversions and account bearings.
The Division will also focus on revenue sharing agreements; recommending or holding more expensive classes of investment products when cheaper classes are available; recommendations of embedded fee accounts without assessing whether such accounts are in the best interest of clients, including the impact of the move to zero commissions on certain types of securities transactions by a number of brokers; and recommendations of exclusive products incurring additional or higher charges.
Information Security and Operational Resilience
The Division will review the practices of brokers, RIAs and other registrants regarding the prevention of critical service disruptions and will also review data protection measures for investor information, records and assets. Specifically, the Division will review whether companies have taken appropriate steps to protect customer accounts and prevent account intrusions; supervising suppliers and service providers; address malicious email activity, such as phishing or account breaches; respond to incidents, including ransomware attacks; identify and detect red flags related to identity theft; and manage operational risk resulting from remote working. Additionally, the Division will review registrants’ business continuity and disaster recovery plans, with particular emphasis on the impact of climate risk and significant disruptions to normal business operations.
Emerging technologies and crypto-assets
The Division will conduct reviews of broker-dealers and RIAs that use emerging financial technologies to determine whether firms have considered their unique risks when designing their regulatory compliance programs. These reviews will focus on companies that offer or claim to offer new products, services or employ new practices focusing on compliance of related operations and controls with company statements, the standard of conduct that these companies owe investors , and other regulatory obligations as well as these controls taking into account the unique risks associated with them. The Division will also assess whether firms’ advice and recommendations regarding such products, services and practices (including the use of algorithms) are consistent with investors’ investment strategies and the standard of conduct due to them. In addition, reviews by the Division of businesses engaged in crypto assets will continue to include the review of custodial arrangements for said crypto and will also assess the offering, selling, recommending, advising and trading of assets. cryptographic.
In addition to these review priorities, on May 3, 2022, the SEC announced a near doubling of its unit within the Division of Enforcement, now known as the Crypto Assets and Cyber Unit, to oversee see areas: crypto asset offerings, crypto asset exchanges, crypto asset lending and staking products, decentralized finance (DeFi) platforms, non-fungible tokens (NFTs), and stablecoins. To see GT blog post, SEC steps up enforcement activity in crypto markets.
SEC-registered companies should be aware that the Division’s list of review priorities is not exhaustive and that reviews may cover many issues not mentioned in this list. However, the Division’s review priorities align with recent SEC announcements and activities, particularly with respect to private equity, ESG and crypto. Listed firms should take note of these priorities when reviewing compliance programs to ensure that their compliance programs meet the Division’s objective if these priorities relate to their programs and practices.
©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 125