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 The U.S. Securities and Exchange Commission's Division of Examinations named private funds, ESG, standards of conduct, crypto-assets, and information security as its examination priorities in 2022. See below for a summary of each focus area.

Significant Focus Areas

  • Private Funds

    • Continued review of:

        • The calculation and allocation of fees and expenses, including the calculation of post-commitment period management fees and the impact of valuation practices at private equity funds

        • The potential preferential treatment of certain investors by RIAs to private funds that have experienced issues with liquidity, including imposing gates or suspensions on fund withdrawals

        • Compliance with the Advisers Act Custody Rule, including the “audit exception” to the surprise examination requirement and related reporting and updating of Form ADV regarding the audit and auditors that serve as important gate-keepers for private fund investors

        • The adequacy of disclosure and compliance with any regulatory requirements for cross trades, principal transactions, or distressed sales

        • Conflicts around liquidity, such as RIA-led fund restructurings, including stapled secondary transactions where new investors purchase the interests of existing investors while also agreeing to invest in a new fund

    • Additional review of the conflicts and disclosures of:

        • Portfolio strategies

        • Risk Management

        • Investment recommendations and allocations

    • Examples of additional review areas include:

        • Review of private funds’ investments in Special Purpose Acquisition Companies (SPACs), particularly where the private fund adviser is also the SPAC sponsor

        • The practices, controls, and investor reporting around risk management and trading for private funds with indicia of systemic importance.

  • Environmental, Social, And Governance (ESG) Investing

    • Reviews will focus on whether RIAs and registered funds are:

        • Accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures.

        • Voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates

        • Overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing).

  • Standards of Conduct: Regulation Best Interest, Fiduciary Duty, and Form CRS

    • Both RIA’s and Broker-Dealers’ examinations will focus on:

        • How the registrants are satisfying their obligations under Regulation BI and the Advisers Act fiduciary standard to act

        • Assessments of practices regarding consideration of alternatives, management of conflicts of interest, trading, disclosures, account conversions and, rollovers.

        • The effectiveness of compliance programs

        • Testing

        • Training

    • Broker-dealer examinations will:

        • Review firms’ recommendations and sales practices related to SPACs, structured products, leveraged and inverse exchange-traded products (ETPs), REITs, private placements, annuities, municipal and other fixed-income securities, and microcap securities.

        • Review practices, policies, and procedures concerning the evaluation of cost and reasonably available alternatives as they relate to recommendations of these products being in the investor’s best interest.

        • Evaluate the compensation structures for financial professionals, including the conflicts created by such structures, and may focus examinations on the sales of securities by financial professionals that are highly compensated.

    • RIA examinations will focus on:

        • Revenue sharing arrangements

        • Recommending or holding more expensive classes of investment products when lower-cost classes are available

        • Recommending wrap fee accounts without assessing whether such accounts are in the best interests of clients, including the impact of the move to zero commissions on certain types of securities transactions by a number of broker-dealers

        • Recommending proprietary products resulting in additional or higher fees

        • An assessment of the adequacy of:

            • Compliance policies and procedures designed to address conflicts and ensure advice in the best interest of clients, including the cost of investing

            • Disclosures to enable investors to provide informed consent.

        • Examinations of dually registered RIAs and broker-dealers will have an additional emphasis on:

          • Conflicts of interest

            • Examples include:

              • The sale or recommendation of high fee products

              • The sale or recommendation of proprietary products of the firms or their affiliates

              • Incentives for financial professionals to place their own or their firms’ interests ahead of customers/clients

              • Compensation structures that inappropriately influence investment recommendations

            • The implementation of written policies and procedures to effectively mitigate and address conflicts

  • Information Security and Operational Resiliency

    • Examinations will continue to review measures to:

        • Safeguard customer accounts and prevent account intrusions, including verifying an investor’s identity to prevent unauthorized account access.

        • Oversee vendors and service providers.

        • Address malicious email activities, such as phishing or account intrusions.

        • Respond to incidents, including those related to ransomware attacks.

        • Identify and detect red flags related to identity theft.

        • Manage operational risk as a result of a dispersed workforce in a work-from-home environment.

    • The Division will focus on RIAs’ compliance with Regulations S-P and S-ID

    • Additional review will include:

        • Registrants’ business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations

        • The maturation and improvements to business continuity and disaster recovery plans over the years as well as these registrants' resiliency as organizations to anticipate, prepare for, respond to, and adapt to both sudden disruptions and incremental changes stemming from climate-related situations.

  • Emerging Technologies and Crypto-Assets

    • RIA and broker-dealer examinations will focus on assessing:

        • Operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.

        • Advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors.

        • Controls taking into account the unique risks associated with such practices.

    • Continued review will include whether market participants involved with crypto-assets:

        • Have met their respective standards of conduct when recommending to or advising investors with a focus on duty of care and the initial and ongoing understanding of the products.

        • Routinely review, update, and enhance their compliance practices, risk disclosures, and operational resiliency practices.

    • Examinations of mutual funds and ETFs offering exposure to crypto-assets to assess will review:

        • Compliance

        • Liquidity

        • Operational controls around portfolio management and market risk.

The report further outlined the investment advisor and investment company examination program, the broker-dealer and exchange examination program, and the clearance and settlement examination program. The full report can be found here:

None of these priorities come as a surprise to the compliance team at PINE and we continue to work diligently with clients to build or strengthen these key areas of compliance and tailor controls to manage the highlighted risks as they apply to each client. Reach out to the PINE team to discuss these areas of focus and preparation for future exams.

“Division of Examinations -” 2022 EXAMINATION PRIORITIES Division of Examinations. Accessed March 31, 2022.


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