The highly anticipated 2023 SEC Examination Priorities statement from the Division of Exams (“EXAMS”) was released last week. At least the timing was an improvement over last year, when the priorities were not released until late March and well into the examination year. The 2023 focus list is not exactly a surprise based upon recent Staff speeches and rulemaking initiatives. It provides written confirmation of what the industry has suspected the SEC will pursue with its exams in 2023. Both RIAs and funds are on the hit list this year. Further, in conjunction with releasing its priorities, the SEC may feel the need to achieve its highest number of exams conducted over an examination year. See our recent BoardRoom post “Inside the mind of the SEC”
According to the priorities, EXAMS will specifically focus on the following areas during private fund examinations:
- Conflicts of Interest
- Calculation and allocation of fees and expenses
- Post-commitment period fees
- Valuation practices
- New Marketing Rule
- Use of alternative data and Code of Ethics
- Custody Rule compliance
The Staff even went so far as to state the types of private funds it plans to visit, such as:
- Leveraged funds.
- Private funds managed along-side BDCs
- Private equity funds with shared vendors among client companies
- Private funds with hard to value assets such as crypto and real estate
- Funds that invest in SPACs
- Funds involved in adviser-led secondaries, such as stapled secondaries and continuation funds.
Other areas of interest to the SEC examiners this year include general RIA and fund concerns for retail investors, which include:
- Standards of Conduct under Reg BI and Form CRS disclosures
- ESG focused funds
- Data security and cybersecurity in relation to Reg S-P and Reg S-ID
- Crypto and digital assets
- Electronic communications
- Third party service providers
Almost all investment advisers and funds have some considerations regarding the above-listed items. Several areas noted above also have proposed rules related to them which shows that EXAMs is playing a role in support of those proposed rules. It appears that EXAMS and the Division of Investment Management (“IM”) are working together to identify and enforce non-compliance with the Investment Advisers Act and Investment Company Act (of 1940) in the fund and RIA space. Firms should especially review their compliance management practices in relation to these areas and gear up quickly to prepare for a possible SEC exam in 2023.
View the Division of Examinations “2023 Examination Priorities”
