SEC Exam Priorities for 2022 – Registered Investment Advisors

*The SEC Division of Examinations announced its 2022 examination priorities for Registered Investment Advisors as outlined below: *

Private Funds
The Division will focus on registered investment advisers (RIAs) who manage private funds.

Examinations will review issues under the 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 Division will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas.

Environmental, Social, and Governance Investing (ESG)
The Division will continue its focus on ESG‑related advisory services and investment products, including mutual funds, exchange traded funds, and private fund offerings.

Examinations will 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, including review of their portfolio management processes and practices.

Examinations 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
The Division will continue to address standards of conduct issues for broker‑dealers and RIAs, with reviews focused on how they are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors’ interests.

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.

Focus areas include: (1) revenue sharing arrangements; (2) recommending or holding more expensive classes of investment products when lower cost classes are available (e.g., RIAs that recommend no transaction fee mutual fund share classes that have 12b‑1 fees in wrap fee accounts where the RIA may be responsible for paying transaction fees); (3) recommending wrap fee accounts without assessing whether such accounts are in the best interests of clients, including the impact of the move to zero commissions on certain types of securities transactions by a number of broker‑dealers; and (4) recommending proprietary products resulting in additional or higher fees.

Such reviews also will include an assessment of the adequacy of RIAs’:

(1) compliance policies and procedures designed to address conflicts and ensure advice in the best interest of clients, including the cost of investing; and (2) disclosures to enable investors to provide informed consent.

Retail Investors and Working Families
The Division will continue to address standards of conduct issues for broker‑dealers and RIAs to ensure that retail investors and working families are receiving recommendations and advice in their best interests. Specifically, these examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act 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
The Division will review broker‑dealers’, RIAs’, and other registrants’ practices to prevent interruptions to mission‑critical services and to protect investor information, records, and assets.

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 as a result of a dispersed workforce.

The Division will also 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 will conduct examinations of broker‑dealers and RIAs that are using emerging financial technologies (automated digital investment advice/mobile apps/robo‑advisers) to review whether the unique risks these activities present were considered by the firm when designing their regulatory compliance programs.

RIA and broker‑dealer examinations will focus on firms that are, or claim to be, offering new products and services or employing new practices to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and controls take into account the unique risks associated with such practices.

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.

*The entire SEC Division of Examination 2022 Exam Priorities can be found here. *

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