2022 SEC Exam Priorities: Reg BI, ESG, Private Funds, Information Security and Operational Resilience, and Crypto | Faegre Drinker Biddle & Reath LLP
The SEC’s Examinations Division recently released its 2022 Examinations Division “Priorities”. and most potential for investors, and provide guidance to regulated entities on where to focus their compliance efforts.
Individual investors and working families
While retail investors remain the primary focus of the SEC across the agency, consistent with this goal, the Review Division is focused on ensuring that working families receive recommendations and advice consistent with their best interests. Specifically, “these reviews will focus on how registrants meet their obligations under the Best Interests Regulations and the Fiduciary Standard of the Advisers Act to act in the best interests of retail investors. and not to put their own interests ahead of those of retail investors.” Thus, for the brokerage industry, compliance with Best Interest (BI) regulations and all related obligations will continue to be a priority for the Division in 2022. More generally, regulated entities can expect that the reviews include assessments of practices regarding alternative investment products. , management of conflicts of interest, disclosures where applicable, and account conversions and rollovers.
The division will continue to focus on ESG-related investment services, investment products and providers, “including mutual funds, exchange-traded funds and private fund offerings.” As was done in 2021, the reviews will focus on “whether RIAs and registered funds accurately disclose their ESG investment approaches and have adopted and implemented policies, procedures and practices designed to prevent breaches federal securities laws in relation to their ESG-related activities”. disclosures, including reviewing their portfolio management processes and practices. This focus is consistent with the Examinations Division’s prioritization of data privacy, which continues to gain momentum as remote and hybrid roles in the workplace appear to be here to stay.
Examiners will carefully review registered investment advisers who manage private funds for compliance with the Investment Advisers Act 1940, including their compliance with fiduciary duties, and “assess risks, including with a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, investment risk disclosure and material non-public information controls. The Division will also review “private fund adviser portfolio strategies, risk management, and investment recommendations and allocations, with a focus on conflicts and disclosures in these areas,” and the reviews will examine practices and investor reports regarding risk management and trading of private funds. .
Information Security and Operational Resilience
The Examinations Division plans to review registrant practices to avoid service disruptions and protect investor information. Unsurprisingly, reviews will continue to assess whether companies have sufficient measures in place to protect customer accounts, combat malicious email activity, including phishing, and respond in a timely manner to such incidents that could occur. The Examinations Division will also maintain its spotlight on registrant business continuity plans, disaster recovery plans and the impact of climate risks.
Emerging technologies and crypto-assets
“The RIA and broker reviews will focus on companies that offer or claim to offer new products and services or employ new practices to assess whether the operations and controls in place comply with the disclosures made and the standard of investor conduct and other regulatory obligations; the advice and recommendations, including by algorithms, are consistent with the investors’ investment strategies and the standard of conduct due to those investors; and controls take into account the unique risks associated with such practices. Reviews of market participants engaged in these assets will continue, with a focus on custodial arrangements for these assets as well as transfer and advice regarding crypto-assets.
Registrants are well advised to review and apply the 2022 Exam Priorities Division guidelines when evaluating and updating their compliance programs for this year.
Registrants who believe that examination results may be referred to the Enforcement Division should consider engaging an outside securities defense attorney.