SEC Examination Priorities for 2023
Each year the Securities and Exchange Commission (SEC) publishes its current year priorities and focus areas for the year’s exam. Consistent with prior years, many of the 2023 priorities contain recent regulatory changes, emerging areas of risk, and continued areas of focus.
Although the Examination Priorities Guide provides a great list of considerations, it doesn’t dive deep into the requirements. Below, you will find a comprehensive drill down into three areas of focus, so that you can identify if there are any areas you need to improve prior to your exam.
1. Marketing Rule
The Marketing Rule went into effect on November 4, 2022. Based on an initial review of the SEC 2023 priorities, it’s clear that this will be a significant focus. Not only is this called out as the first area of focus, but it is also mentioned in the Registered Investment Advisers to Private Fund section. Key things to prepare for your exam are:
Written policies and procedures that are reasonably designed to prevent violations.
Establish a reasonable basis for substantiating material statements of facts and requirements for performance advertising.
Any advertisements utilizing testimonials contain the required disclosures and a written agreement was obtained for anyone compensated. Furthermore, the person giving the testimonial must not have any misconduct claims from the last 10 years.
The inclusion of third-party ratings only from non-related parties who conduct surveys as part of ordinary course of business.
2. Regulation Best Interest
Regulation Best Interest continues to be a focal point of regulators. It is evident that registered investment advisors and broker dealers continue to struggle with this principal-based law based on the amount of literature the SEC has published on the topic. In addition to the large section in the SEC Examination Focus Report, the SEC also issued a staff bulletin on broker-dealer conflict of interest last year to address some frequently asked questions.
Key areas to consider as you prepare for upcoming reviews include:
Program documentation, including policies and procedures, disclosures, and client agreements.
Establish a process for making best-interest evaluations including evaluation of costs, risk, alternative investments, investment goals, and account characteristics.
Advice or recommendations made regarding complex, high cost, or unconventional products.
3. Crypto Assets and Emerging Financial Technology
With the continued disruption in the crypto markets, this is a key area of focus for upcoming exams. If your company offers crypto or crypto-related assets and you have not been examined, you are on the SEC’s priority list. As exams take place, we’ll have a better understanding of how well the SEC delivers on this claim. In addition to the other areas of focus mentioned, those offering crypto products or related assets should ensure that their compliance programs, disclosures, and risk management practices are reviewed and updated regularly to meet the requirements of this evolving landscape.
Digital engagement practices will include behavioral prompts, differential marketing, gamification, and other analytical programs. The SEC will focus on firms that engage in these practices and related tools. Moreover, they’ll look to assess the advice and recommendations made through these firms. A particular focus will be on ensuring that the advice or recommendations are in their best interest and appropriate, given the client’s age or investment goals. Firms should also verify that their disclosure practices are consistent when utilizing these tools versus traditional advice and recommendation models.
Other Important Recurring Items for Your 2023 SEC Examination
Above, we highlight some recent entrants to the SEC exam priorities; however, there are still many other key areas to keep in mind.
- Cybersecurity continues to be a heightened area of risk. The SEC will focus on each firm’s policies and procedures, governance practices to protect and safeguard customer records, and cyber-related incident response. Check out Wolf & Company’s blog for current topics related to cybersecurity.
- Anti-Money Laundering (AML) programs also continue to have heightened risk for many of the same reasons as cybersecurity. Examinations will evaluate programs to ensure they are reasonably designed to identify suspicious activity. For the main points to consider in BSA and AML compliance, check out this article.
- LIBOR transition is nearing end of life with the discontinuation of LIBOR scheduled for mid-2023. Examiners will assess preparedness and results of transition plans in this upcoming year.
Conclusion
As SEC penalties and enforcement actions continue to increase, it is more important than ever that you evaluate your firm’s preparedness prior to an exam. If you have any concerns about how your policies or practices stack up against examiner expectations, please reach out to our seasoned investment management team.
