SEC Releases Exam Priorities for Registered Investment Advisers and Broker-Dealers

The SEC, Division of Examinations, released its annual priorities and list of high-risk areas affecting US capital markets. Each year the division examines registered investment advisers (RIAs) and broker-dealers to promote compliance and risk management. Priorities for 2023 are listed below.

Compliance With New Rules

Newly adopted rules apply to both the Investment Advisers Act of 1940 and the Investment Company Act of 1940, further detailed below.

Marketing Rule

The SEC recently adopted Rule 206(4)-1 – Marketing Rule, which posed restrictions on marketing materials produced by RIAs. The rule requires advisers to substantiate claims made in marketing materials, including the timeliness of their performances, hypothetical scenarios, and allowing use of testimonials.

RIAs to Private Funds

The division will continue its focus on private funds managed by RIAs, particularly:

  • Conflicts of interest
  • Calculation and allocation of fees and expenses, including management fees
  • Compliance with the marketing rule
  • Policies and practices regarding use of alternative data and compliance
  • Compliance with the Advisers Act Rule 206(4)-02 – Custody Rule

The division will also prioritize high-risk RIAs to private funds focusing on:

  • Highly leveraged private funds
  • Private funds managed side-by-side with business development companies
  • Private equity funds that use affiliated companies and advisory personnel to provides services to their fund clients and underlying portfolio companies
  • Funds that hold crypto assets and investments connected to real estate
  • Private funds that invest in special purpose acquisition companies (SPACs)
  • Private funds involved in adviser-led restructurings

Dually Registered Broker-Dealers and RIAs

Broker-dealers and RIAs each have their own respective standards of conduct, but dually registered companies are of specific interest to the division. The division will continue its focus on:

  • Investment advice and recommendations
  • Disclosures made to investors
  • Best interest evaluation, including conflicts of interest and fiduciary duty
  • Investment goals and account characteristics

The division has further emphasized importance for:

  • Customer protection rule and net capital rule for broker-dealers that hold customer cash and securities, including adequacy of internal controls and procedures related to compliance
  • Municipal advisers, compliance with Municipal Securities Rulemaking Board (MSRB) Rule G-42, which establishes standards of conduct and duties when engaging in municipal advisory activities
  • Anti-money-laundering programs for broker-dealers and certain registered investment companies for appropriate customer identification, suspicious activity report filing obligations, and beneficial ownership requirements
  • Firm preparation for discontinuation of the London Interbank Offered Rate in mid-2023 and its impact on financial markets

Environmental, Social, and Governance (ESG) Investing

The division will continue its focus on ESG-related advisory services and fund offerings, including whether the fund’s operations are consistent with their disclosures and whether ESG procedures are appropriately labeled.

The division will also keep focusing on the financial technology sector, specifically broker-dealer mobile apps and automated digital investment advice.

We’re Here to Help

If you are wondering how the new SEC priorities could affect your business, contact your Moss Adams professional.

Visit our Asset Management & Broker Dealers Practice for more information.

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