In 2023, the Division will prioritize several key areas, including: (1) recently adopted rules for investment advisers and investment companies; (2) standards of conduct for broker-dealers and investment advisers; (3) ESG investing; (4) information security and operational resiliency; and (5) emerging technologies and crypto-assets. While the majority of these focus areas were identified as examination priorities by the Division in 2022, this year’s examinations will scrutinize for the first time compliance by RIAs and investment companies with certain recently enacted rules.
“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”
Due to the increased risk environment presented by cyber security attacks such as ransomware, the Division expects to focus on firms’ policies and procedures for preventing and responding to cyber-related events. This is a perennial focus area for all registrants, and an area of “significant” enforcement action in fiscal year 2022.
A Focus on ESG Offerings
The SEC also says it intends to focus on ESG-related advisory services and fund offerings. The Division intends to identify whether funds are operating consistent with their disclosures, whether ESG products are appropriately labeled, and if advisers’ recommendations for ESG products are in investors’ best interests. ESG has been a longstanding examination priority and the Division staff’s focus on ESG-related representations has increased in recent years—the Division engaged in focused ESG sweep examinations of many registrants in 2022. Several enforcement actions in 2022 highlight potential areas of focus, including allegations that investment advisers failed to maintain or to follow policies and procedures regarding ESG investing, and that advisers misled investors by falsely claiming they considered ESG principles in making investment decisions.
In another repeat area of focus, examinations will focus on offerings by broker-dealers and RIAs of new products and services emerging from new technologies. In light of recent crypto-market disruptions and the resulting Enforcement actions, the Division will also examine whether crypto-market participants meet the requisite standard of care and update their compliance and risk management practices.
“Continuing to make our examination priorities public increases transparency into the examination program and encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors,” said Division of Examinations’ Director Richard R. Best. “We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year.”
The Division conducts examinations and inspections of SEC-registered investment advisers, investment companies, broker-dealers, transfer agents, municipal advisors, securities-based swap dealers, clearing agencies, and other self-regulatory organizations. The Division prioritizes examinations of certain practices, products, and services that it believes present potentially heightened risks to investors or the integrity of the U.S. capital markets. It uses a risk-based approach to fulfill its mission to improve compliance, prevent fraud, monitor risk, and inform policy.
The published priorities are not exhaustive of the focus areas of the Division in its examinations, risk alerts, and outreach. The scope of any examination includes analysis of an entity’s history, operations, services, products offered, and other risk factors.
The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff who are uniquely positioned to identify the practices, products, services, and other factors that may pose risk to investors or the financial markets. The Division also gathers input and advice from the Chair and other Commissioners, staff from other SEC divisions and offices, other federal financial regulators, investors, and industry groups. 