On March 30th, 2022, the Securities and Exchange Commission’s Division of Examinations (SEC) announced its 2022 examination priorities. The focus in 2022 will be on Private Funds and Registered Investment Advisors (RIAs), Environmental, Social and Governance (ESG) Investing, Reg BI and retail investor protections, information security and operational resilience, and emerging technologies and Crypto assets. The Division publishes its examination priorities annually, and in 2022 highlights areas that have emerged as priorities for the SEC since Gary Gensler took the helm in 2021. “The Division’s 2022 examination priorities identify key risk areas that we expect registrants to address, manage, and mitigate with vigilance,” said SEC Chair Gary Gensler, “and examinations against our laws and rules are fundamental to instilling the trust necessary for our markets to thrive.”  

What this means  

While the SEC’s examination priorities cover a broad range of financial market regulations, in 2022 they specifically focus on a number of key areas.  

ESG

The SEC will focus on ESG related advisory services, and the investment products offered, including mutual funds, ETFs and private fund offerings. Examinations will focus on whether Registered Investment Advisors (RIAs) are accurately disclosing their ESG investment approaches, and whether there may be any misrepresentations of the ESG factors and approaches considered or incorporated into portfolio asset selection.  

Emerging Technologies and Crypto Assets

The Division will conduct examinations of broker-dealers and RIAs that are using emerging financial technologies. These examinations will focus on firms that are, or claim to be offering new products and services, or employing new practices, and will assess whether operations and controls in place are consistent with disclosures made, and the standard of conduct owed to investors is documented, as well as other regulatory obligations.  

Examinations of market participants engaged with crypto assets will continue to review the use of Robo-advisors, fractionalization, and custody arrangements for such assets, and will assess the offering, sale, advice, and trading of crypto assets. Specifically, in 2022, the SEC will review whether market participants involved with crypto assets have met their respective standards of conduct when recommending such investments, routinely review, update, and enhance their compliance practices, including crypto-asset wallet reviews and digital asset custody practices.  

Additionally, the SEC will examine mutual funds and ETFs offering exposure to crypto assets to assess compliance, liquidity and operational controls around portfolio management and market risk.  

Private Funds 

An additional focus in 2022 will be on RIAs who manage private funds. Examinations will review any issues under the Advisers Act, including an adviser’s fiduciary duty, and will assess risks such as fees and expenses, custody arrangements, fund audits, conflicts of interest, disclosure of investment risks, and controls around material non-public information (MNPI). The SEC will also review Private Fund advisors investment strategies, controls, and investor reporting and disclosure, around risk management and trading.  

Retail investors and Reg BI 

The SEC will continue to address standards of conduct issues for broker-dealers and RIAs to confirm that retail investors are receiving investment advice that is in their best interest. The Division will focus on how obligations under Reg BI and the Advisors Act to act in the best interests of retail investors are being satisfied. Examinations will be directed at assessments of practices regarding investment alternatives, management of conflicts of interest, trading, disclosures, and account selection, among others.  

Information Security and Operational Resilience 

The SEC will review broker-dealers and RIAs best practices to confirm they include procedures to prevent interruptions to critical services, and to protect investor information and assets. Examinations will review whether firms have taken appropriate measures to safeguard customer accounts, oversee vendors, address malicious activities and respond to incidents such as ransomware attacks, and identify and detect red flags related to identity theft. The Division will also be reviewing registrants business continuity and disaster recovery plans, with particular focus on the impact of climate risk, and any other substantial disruptions to business operations.  

Conclusion  

While the SEC’s published priorities are not exhaustive, and will not be the only areas the Division looks at throughout 2022, they primarily drive the examination focus. The scope of any examination will be determined by a risk-based approach, and an analysis of any firms’ history, operations, and products offered. SEC Division of Examinations’ Acting Director Richard R. Best stated, “In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades – such as protecting retail investors, “. He continued, “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs. 

References 

  1. SEC Division of Examinations Release 2022 Examination Priorities – Press Release  SEC.gov | SEC Division of Examinations Announces 2022 Examination Priorities 
  2. SEC Announces 2022 Examination Priorities, Includes Crypto-Assets | Sheppard Mullin Richter & Hampton LLP – JDSupra 
  3. 12b-1 Fees in Wrap Accounts Are an SEC Exam Priority in 2022 | ThinkAdvisor 
  4. U.S. securities regulator names crypto, ESG among 2022 exam priorities | Reuters 
  5. Financial Advisor IQ – ESG, Reg BI, Crypto, Cybersecurity Among SEC’s 2022 Exam Priorities

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