“Given the disruptions caused by recent financial distress among crypto asset market participants, the Division will continue to monitor and, when appropriate, conduct examinations of potentially impacted or affected registrants.”
The Securities and Exchange Commission’s Division of Examinations…announced its 2023 Examination Priorities. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.
“In a time of growing markets, evolving technologies, and new forms of risk, our Division of Examinations continues to protect investors,” said SEC Chair Gary Gensler. “In executing against the 2023 priorities, the Division will help ensure compliance with the federal securities laws and rules.”
“Our priorities reflect the changing landscape and associated risks in the securities market and are the product of a risk-based approach to examination selection that balances our resources across a diverse registrant base. We will emphasize compliance with new SEC rules applicable to investment advisers and investment companies as well as continue our focus on emerging issues and rules aimed at protecting retail investors,” said Division of Examinations’ Director Richard R. Best. “Our examination program continues moving forward and remains committed to furthering investor protection through high-quality examinations and staying abreast of the latest industry trends and emerging risks to investors and the markets.” (1)
What Next? The SEC Examination of Crypto Assets and Emerging Financial Technology
From the report:
The Division continues to observe the proliferation of:
- certain types of investments [such as] crypto assets and their associated products and services; and
- emerging financial technology [such as] broker-dealer mobile apps and RIAs choosing to provide automated digital investment advice to their clients.
To address these observations, the Division will conduct examinations of broker-dealers and RIAs offering new products and services or employing new practices. These new practices include technological and online solutions to meet the demands of compliance and marketing and to service investor accounts [such as]:
- online brokerage services
- internet advisers, and
- automated investment tools and trading platforms, including RIAs, referred to as “robo-advisers”.
Given the disruptions caused by recent financial distress among crypto asset market participants, the Division will continue to monitor and, when appropriate, conduct examinations of potentially impacted or affected registrants. Examinations of registrants will focus on the offer, sale, or recommendation of, advice regarding and trading in crypto or crypto-related assets. Specifically, the staff will assess whether such market participants involved with crypto or crypto-related assets:
- Met and followed their respective standards of care when making recommendations, referrals, or providing investment advice, to the extent required; and
- Routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.
In addition, the Division will focus on new or never before examined registrants offering crypto or crypto-related assets.
Broker-dealer and RIA examinations will also focus on firms that employ digital engagement practices (2) and the related tools and methods to assess whether:
- Recommendations were made or advice was provided (e.g., through the use of social media marketing and social trading platforms);
- Representations are fair and accurate;
- Operations and controls in place are consistent with disclosures made to investors;
- Any advice or recommendations are in the best interest of the investor taking into account the investor’s financial situation and investment objectives; and
- Risks associated with such practices are considered, including the impact these practices may have on certain investors, such as seniors. (2)
The Securities and Exchange Commission’s Division of Examinations 2023 Priorities
Additional SEC Division’s 2023 priorities include:
New Investment Adviser and Investment Company Rules – The Division will focus on the new Marketing Rule (Advisers Act Rule 206(4)-1) and whether registered investment advisers (RIAs) have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the new rule and whether RIAs have complied with the substantive requirements. The Division will also focus on new rules applicable to investment companies, including the Derivatives Rule (Investment Company Act Rule 18f-4) and Fair Valuation Rule (Investment Company Act Rule 2a-5).
RIAs to Private Funds – Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, the new Marketing Rule, conflicts of interest, and the use of alternative data. 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. In addition, the Division will focus on RIAs to private funds with specific risk characteristics, including highly leveraged private funds and private funds managed side-by-side with business development companies.
Retail Investors and Working Families – The Division will continue to address standards of conduct issues for broker-dealers and RIAs to ensure that retail investors and working families are receiving recommendations and advice in their best interests. Specifically, these 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 and not to place their own interests ahead of retail investors’. Examinations will include assessments of practices regarding the review of investment alternatives, management of conflicts of interest, and consideration of investment goals and account characteristics.
Environmental, Social, and Governance (ESG) – The Division will continue its focus on ESG-related advisory services and fund offerings, including whether funds are operating in the manner set forth in their disclosures. In addition, the Division will assess whether ESG products are appropriately labeled and whether recommendations for such products for retail investors are made in the investors’ best interests.
Information Security and Operational Resiliency – The Division will review broker-dealers’, RIAs’, and other registrants’ practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets. Reviews of broker-dealers and RIAs will include a focus on the cybersecurity issues associated with the use of third-party vendors, including registrant visibility into the security and integrity of third-party products and services and whether there has been unauthorized use of third-party providers. (1)
Sources:
(2) An investment adviser’s fiduciary duty is established by and enforced through Advisers Act Section 206. See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Rel. No. 5248 (June 5, 2019) (An investment adviser’s fiduciary duty is broad and applies to all advisory clients and the entire adviser-client relationship).
Crypto Enforcement Actions, the SEC Crypto Assets and Cyber Unit, and National Security Risk
