The regulator’s Division of Examinations released its annual Examination Priorities Report for 2022, in which it identifies the areas it believes present the highest risks to investors and the markets. The SEC said it completed more than 3,000 examinations in fiscal year 2021, a 3% increase from the previous year, and conducted hundreds of registrant outreach meetings to monitor significant market events, such as the volatility in the equity and options markets in early 2021.
“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,” Richard Best, the SEC’s acting director of the Division of Examinations, said in a statement. “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.” [Source]
One of the SEC’s focuses for the year will be on registered investment advisers who manage private funds. It said it will review advisers’ fiduciary duty, compliance programs, fees and expenses, as well as conflicts of interest, disclosures of investment risks, and controls regarding material nonpublic information.
The regulator also plans to review the portfolio strategies, risk management, investment recommendations, and allocations of private fund advisers, with an emphasis on conflicts and disclosures regarding those areas.
ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings, will also be a major focus of the SEC this year. In particular, the regulator wants to know whether investment advisers and registered funds are accurately disclosing ESG investing approaches, and whether they have controls in place to prevent securities laws violations regarding ESG-related disclosures.
The SEC also said it will review companies’ proxy voting policies and procedures to see if their votes align with their ESG-related disclosures and mandates, and if there are any misrepresentations of the ESG factors considered or incorporated into their portfolios.
Crypto Assets, Emerging Technologies
The SEC will conduct examinations of broker/dealers and advisers using crypto assets and emerging financial technologies to review whether they considered the potential risks involved when designing their compliance programs. The Division of Examinations will review whether market participants involved in digital assets have met their standards of conduct when recommending to or advising investors, and whether they regularly update their compliance practices.
“The division will conduct examinations of mutual funds and ETFs offering exposure to crypto-assets to assess, among other things, compliance, liquidity, and operational controls around portfolio management and market risk,” said the SEC in its report.
It said the examinations will focus on firms that claim to have new products, services, and practices to determine whether they are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.
The SEC said the scope of any examination is determined through a risk-based approach that includes analysis of a firm’s history, operations, services, products offered, and other risk factors.
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