The Division’s focus areas for examinations of RIAs will include a review of a RIA’s operations, compliance programs and disclosures in one or more of the following areas: custody and safekeeping of client assets, valuation, portfolio management, and brokerage and execution. In addition, examinations will typically include a review for conflicts, compliance issues, and the oversight and approval process related to RIA fees and expenses, such as the calculation of fees. Finally, a RIA’s policies and procedures for retaining and monitoring electronic communications and selecting and using third party service providers will also be areas of review during examinations.
Additional focus areas included in the 2023 examination priorities are:
- RIAs to Private Funds
- ESG Investing
- Information Securities and Operational Resiliency
- Crypto Assets and Emerging Financial Technology
RIAs to Private Funds
Currently, there are over 5,500 Advisers managing approximately 50,000 private funds with gross assets exceeding $21 trillion. Private fund assets continue to grow and in the past five years, the amount of gross assets managed has increased by 80%. As such, the Division will continue to focus on Advisers of private funds, particularly with a focus on several key areas:
- Conflicts of interest
- Calculation and allocation of fees and expenses
- Compliance with the new Marketing Rule including performance advertising and compensated testimonials and endorsements
- Policies around the use of alternative data and compliance with Advisers Act Section 204A
- Compliance with the Advisers Act Rule 206(4)-2 (Custody Rule)
In addition, the Division will focus on Advisers to private funds with specific risk characteristics, including:
- Highly leveraged private funds
- Private equity funds that use affiliated companies and advisory personnel to provide services to their portfolio companies
- Private funds that hold certain hard to value investments such as crypto assets and real estate, with an emphasis on commercial real estate
- Investments in Special Purpose Acquisition Companies
- Private funds involved in restructurings including secondary transactions.
ESG Investing
The SEC staff identified ESG investments and strategies as a top focus area. The Division will continue to evaluate whether an Adviser is overstating the ESG factors used in portfolio selection. In addition, it will focus on whether retail recommendations of ESG products are made in the best interest of investors.
Information Securities and Operational Resiliency
Cybersecurity is a widespread issue and is now a perennial focus area for Advisers and other market participants under the purview of the SEC. The Division will continue to evaluate an Adviser’s policies and procedures to prevent business interruptions and to protect investor information. Examinations will focus on:
- Reviews of policies and procedures, governance practices, and response to cyber incidents
- Measures being taken to safeguard customer records and information
- Actions taken to prevent intrusions and the response protocol for any such incidents
- Reviews of policies and procedures relating to third party vendors, particularly relating to the transfer of client information from one firm to another
- Assessments of an Advisers’ operational resiliency such as its efforts to consider and/or address climate related risks
Crypto Assets and Emerging Financial Technology
Given recent events in the digital asset space, it should come as no surprise that the Division will continue its focus on crypto assets and their associated products and services, as well as emerging financial technology. To address these concerns, the Division will conduct examinations of Advisers offering new products and services, such as robo advisers and digital assets. Examination focus areas are expected to review an Adviser’s practices and policies around:
- Whether the Adviser met and followed standards of care when making recommendations, referrals, or providing investment advice
- Whether the Adviser routinely reviewed, updated, and enhanced their compliance, disclosures, and risk management policies and procedures
- Determining if any advice or recommendations that were given to investors were in their best interest, taking into account the investor’s financial situation
- A review to determine if the operations and controls in place are consistent with disclosures made to investors
How we can help
Apex Group’s Global Compliance team has many years of experience managing SEC regulatory compliance programs, giving clear insight into how to help Advisers interpret and navigate the implementation of procedures to comply with new regulations and prepare for SEC examinations.
If you require more information, please reach out to Michael Barakat, Assistant Director, Compliance on michael.barakat@apexfs.com.
