SEC 2022 Examination Priorities
Division of Examinations (the “Division”) of the Securities and Exchange Commission (“SEC”) published its 2022 examination priorities. We have mentioned below all and focus only on the Private Funds and Digital Assets due to interest of our clients:
- Private funds;
- Emerging Technologies and Crypto-Assets.
- Standards of Conduct;
- Environmental, social and governance (“ESG”) investing; and
- Information Security;
The Division is continuing its focus on the private fund industry. Exams will assess private fund risks with a focus on:
- 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 advisers to private funds that have experienced issues with liquidity, including imposing gates or suspensions on fund withdrawals;
- compliance with the custody rule under the Investment Advisers Act of 1940, including the “audit exception” to the surprise examination requirement, and related reporting and updates of Form ADV regarding the audit and auditors;
- the adequacy of disclosure and compliance with any regulatory requirements for cross trades, principal transactions or distressed sales; and
The Division will also review private fund advisers’ portfolio strategies, risk management, and investment recommendations and allocations, focusing on conflicts and disclosures around these areas.
Emerging Technologies and Crypto-Assets:
The Division will continue to examine RIAs and broker-dealers that are (or claim to be) offering new robo and/or crypto products and services to identify whether these activities present additional risk and how such risk(s) is being considered when developing compliance programs. There will be a heightened focus on firms that are offering new products and services or employing new practices (e.g., fractional shares, “Finfluencers,” or digital engagement practices) to assess whether:
- 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; and
- controls take into account the unique risks associated with such practices.
In regard to crypto-assets, the Division will continue to review whether market participants involved in 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 (e.g., blockchain and cryptoasset feature analysis); and
- routinely review, update, and enhance their compliance practices (e.g., crypto-asset wallet reviews, custody practices, anti-money laundering reviews, and valuation procedures), risk disclosures, and operational resiliency practices (i.e., data integrity and business continuity plans).
If you have any questions about this alert, or any other regulatory matters, do not hesitate to reach out to Akram Team.