SEC Announces 2022 Examination Priorities

SEC Announces 2022 Examination Priorities

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On March 30, 2022, the Securities and Exchange Commission’s (“SEC”) Division of Examinations (“EXAMS”) released its 2022 examination priorities. The priorities are released annually and highlight areas that the Division will focus on during routine examinations.

Below are key takeaways from 2022 priorities for our clients:

Private Funds. Private fund managers manage approximately $18 trillion in private fund assets, which represents a 70% increase in the past five years. Given the significant exam findings amongst private fund managers in recent years, and less transparency into private fund activities compared to other funds, the SEC is focusing more on these assets in the coming year.In addition to an increase in focus on Special Purpose Acquisition Companies (“SPAC”), EXAMS will continue to review:

  • Fees and expenses and the impact of valuation practices at private equity funds;
  • Potential preferential treatment of certain investors, including imposing gates or suspensions on fund withdrawals;
  • Compliance with the Custody Rule, including the “audit exception” to the surprise examination requirement and Form ADV-related reporting;
  • Adequacy of disclosures and compliance with any regulatory requirements for cross trades, principal transactions or distressed sales; and
  • Conflicts around liquidity, such as fund restructurings.

Environmental, Social and Governance (“ESG”) Investing. Investment advisers are increasingly marketing their funds as investing in ESG strategies or that incorporate ESG criteria. The SEC notes that this presents certain risks, including a lack of standardization in ESG investing terminology, the variety of approaches to ESG investing, and the failure to effectively address legal and compliance issues with new lines of business and products. EXAMS will focus whether registered advisers are:

  • Accurately disclosing and adopting policies and procedures 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; or
  • Misrepresenting the ESG factors considered in portfolio selection, such as in their performance advertising and marketing.

Regulation Best Interest, Fiduciary Duty and Form CRS. The SEC remains focused on reviewing standards of conduct and ensuring that retail investors are receiving recommendations and advice in their best interests. Examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors. Broker-dealer examinations will review firms’ recommendations and sales practices related to certain products (including SPACs). Registered investment adviser examinations will focus on whether advisers are acting consistently with their fiduciary duty to clients, and will include an assessment of the adequacy of their policies and procedures and disclosures. Dually registered investment advisers and broker-dealers will also remain an area of interest.

Information Security and Operational Resiliency. As in years past, information security continues to be an area of focus for the SEC, as protection of data is critical to the operation of the financial markets and the confidence of its participants. EXAMS will review business continuity plans and disaster recovery plans, along with firm practices to protect investor information, records, and assets, specifically:

  • Safeguarding customer accounts and prevent account intrusions;
  • Overseeing vendors and service providers;
  • Addressing malicious email activities, such as phishing or account intrusions;
  • Responding to incidents;
  • Identifying and detecting red flags related to identity theft; and
  • Managing operational risk as a result of a dispersed workforce in a work-from-home environment.

Emerging Technologies and Crypto-Assets. Given an increase in the number of “robo-advisers” on the market (advisers choosing to provide automated digital investment advice to their clients), as well as an increase in the trading of crypto-assets. EXAMS will assess whether:

  • Operations and controls in place are consistent with disclosures and the standard of conduct owed to investors;
  • Advice and recommendations (particularly from algorithms) are consistent with investors’ investment strategies and the standard of conduct owed to such investors;
  • Controls are taken into account to address the unique risks associated with such practices.

EXAMS will also review whether market participants involved with crypto-assets:

  • Have a focus on duty of care and the initial and ongoing understanding of the products;
  • Routinely review and update their compliance practices, risk disclosures and operational resiliency practices.

The Division also, in a foreword about compliance as a whole, highlighted several commonalities of successful resilient compliance programs as seen during their 2021 exams: (i) inclusivity, (ii) change management and (iii) and reviews and testing. As you review the examination priorities, consider those areas that are applicable to your compliance program, including speaking with relevant stakeholders within your firm. Based on your discussions, you may need to reassess your policies and procedures in one or more areas. As always, the Greyline team is happy to assist you with these inquiries.

Read the full 2022 Examination Priorities here.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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