Alternative Investment

SEC 2023 Exam Priorities: New markets, technologies, risks – and a few rules

You have your business priorities, and the SEC’s Division of Examinations has theirs. Our job is to make you aware of — and help you align with — those that apply to your business.

So what’s on the division’s radar in 2023? Broadly, it’s three things – growing markets, evolving technologies and new forms of risk to investors and U.S. capital markets. What should you watch for? Specifically, the new rules that govern these six areas:

Investment Adviser and Investment Company Rules

What to watch for: New marketing regulations, known as Advisers Act Rule 206(4)-1, that require registered investment advisers (RIAs) to adopt and implement stricter policies and procedures around performance advertising, testimonials, endorsements and third-party ratings. What else to watch for: New derivatives and fair valuation rules.

RIAs to Private Funds

What to watch for: Reviews of advisers’ fiduciary duty and assessment of risks, particularly compliance programs, fees and expenses, custody, marketing, conflicts of interest, and the use of alternative data. What else to watch for: Reviews of private fund advisers’ portfolio strategies, risk management, and investment recommendations, particularly highly leveraged private funds and those managed side by side with business development companies.

Retail Investors and Working Families

What to watch for: Tighter regulations to ensure broker-dealers and RIAs give retail investors and working families recommendations and advice in their best interests versus the adviser’s. What else to watch for: Assessments of practices around reviewing investment alternatives, managing conflicts of interest, and weighing investment goals and account characteristics.

Environmental, Social and Governance (ESG)

What to watch for: Monitoring of ESG-related advisory services and fund offerings to determine how closely they operate in accordance with disclosures. What else to watch for: Reviews of labeling on ESG products and whether advisors are making recommendations in retail investors’ best interests.

Information Security and Operational Resiliency

What to watch for: Reviews of broker-dealer and RIA practices to prevent interruptions in mission-critical services and protect investor information, records, and assets. What else to watch for: Special focus on cybersecurity issues associated with third-party vendors, products, and services, including unauthorized use of third-party providers.

Emerging Technologies and Crypto-Assets

What to watch for: Examinations of broker-dealers and RIAs using emerging financial technologies or online solutions for two purposes – to meet the demands of compliance and marketing and to service investor accounts. What else to watch for: Closer scrutiny of offers, sales, recommendations or advice on trading in crypto or crypto-related assets.

Key takeaways: The SEC’s Division of Examinations views its priorities as reflecting “the changing landscape and associated risks in the securities market” and its role as “staying abreast of the latest industry trends and emerging risks to investors and the markets.”

How can you get ready for what’s on the horizon? Read the full report of the SEC’s 2023 Examination Priorities and talk to the alternative investment experts at Richey May. To learn more, email Steve Vlasak.