The long wait for the SEC’s 2022 examination priorities is finally over. On March 30, 2022, the SEC’s Division of Examinations (Division) announced its priorities for the 2022 fiscal year. By reviewing these priorities, Registered Investment Advisers (RIAs) will be better prepared for a potential regulatory examination in 2022.
The Division will prioritize examinations of perennial risk areas, as well as emerging threats to investors and the integrity of the U.S. capital markets. RIAs should be aware, however, that the Division’s list of priorities is not exhaustive. Examiners may focus on new risks that the SEC becomes aware of during the year. In many cases, the SEC will warn RIAs about these new threats in risk alerts that are published during the year.
According to SEC Chair Gary Gensler, “The Division’s 2022 examination priorities identify key risk areas that we expect registrants to address, manage, and mitigate with vigilance.” The SEC’s press release went on to say that the Division’s priorities cover a broad landscape of potential risks that should be considered as firms review and strengthen their compliance programs.
Old and New Priorities are On the List
The Division’s publication highlighted a number of examination priorities, several of which have made the list in past years.
One of the top Division priorities is examinations of RIAs that manage private funds. Examinations will focus on whether advisers have satisfied their fiduciary obligations. Exams will also focus on key areas such as compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, and investment risk disclosure. In addition, examiners will review controls pertaining to material nonpublic information.
Environmental, Social and Governance (ESG)
The Division continues to focus on ESG-related advisory services and investment products. Examinations will routinely review whether RIAs and registered funds are accurately disclosing their ESG investing approaches. Examinations will ensure that firms have adopted and implemented policies and procedures to make certain that their ESG-related disclosures are accurate. The Division is also concerned that firms will misrepresent the ESG factors they considered or incorporated when they built their portfolios. For example, RIAs should not market their portfolios as being built upon ESG criteria if that is not, in fact, the case or their investment approach changes. Furthermore, an examination team is likely to review the firm’s proxy voting policies and procedures, as well as whether shares were voted in accordance with their ESG-related mandates and disclosures.
Protecting Retail Investors
Protecting retail investors has long been a priority for the Division. Examinations will scrutinize whether firms are satisfying their obligations under Regulation Best Interest and the fiduciary standard. As always, RIAs must act in the best interests of retail investors and should not to place their own interests ahead of their clients.
Examinations will focus on account conversions and rollovers, as well as management and disclosure of conflicts of interest. Examiners are also wary of situations where an RIA recommends wrap fee accounts without evaluating whether they are in the best interests of clients and without considering the impact of the move to zero commissions on certain types of securities transactions by many broker-dealers. In addition, examinations will dig into RIAs’ revenue sharing arrangements.
Information Security and Operational Resiliency
Not unexpectedly, protecting investor information, records, and assets, continues to be a high priority. Examinations will continue to review whether firms have taken appropriate steps to safeguard accounts, prevent account intrusions, and oversee vendors and service providers. Firms must also attempt to curb phishing and other malicious email activities. In addition, they must respond decisively to account intrusions, identity theft red flags, and manage operational risks that arise when many employees are working remotely.
The Division will again be reviewing registrants’ business continuity and disaster recovery plans. These examinations will pay particular attention to the impact of climate risk and substantial disruptions to firms’ day-to-day business operations, so clients are not adversely affected.
Emerging Technologies and Crypto-Assets
The Division will conduct examinations of broker-dealers and RIAs to see if their compliance programs address the unique risks arising from the use of developing technologies. With so many firms now providing automated digital advice, often referred to as robo-advisers, there must be operations and controls in place to ensure that they meet their regulatory obligations.
The Division’s 2022 priorities demonstrate that the SEC is very concerned about firms offering, selling, recommending, advising, and trading crypto-assets. Examinations of market participants involved with crypto-assets will review the custody arrangements for those investments. In particular, examinations will determine whether these firms:
- Have met their standards of conduct when recommending to or advising investors, including a focus on their duty of care and the initial and ongoing understanding of the products; and
- Routinely review, update, and enhance their compliance policies and procedures in areas such as custody, anti-money laundering, risk disclosures, and operational resiliency.
Firms engaged with crypto-assets must also implement strong data integrity procedures and business continuity plans.
Although the Division’s release of its 2022 priorities is later than normal, RIAs still have plenty of time to revise and improve their policies and procedures in the areas highlighted in the publication. RIAs should not wait until their annual review of their policies and procedures to make these improvements.
The Division’s publication covers many other issues that are likely to arise during an examination. While the priorities discussed in this publication are the primary driver of the Division’s examinations, the scope of any exam is determined through a risk-based approach. The Division looks closely at many factors such as a RIA’s business model, products and services, disciplinary history of advisory personnel, and the results of previous exams.
Firms can review the publication here.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.