On February 2, 2023, the Securities and Exchange Commission’s Division of Examinations announced its examination priorities for 2023, which focus significantly on advisers to private funds. The Division of Examinations will conduct examinations with a view to ensuring compliance with new rules that apply to investment advisers, with an emphasis on investor protection.
Advisers to Private Funds. The Division has identified and will continue to target certain practices commonly employed by registered investment advisers to private funds that it deems inconsistent with the public interest and investor protection. There will be increased emphasis on advisers’ fiduciary duties to clients, conflicts of interest, fees and expenses, custody, compliance policies and procedures and marketing materials. Examinations in 2023 also will focus on advisers’ investment strategies, investment recommendations and allocations, risk management and related disclosure.
Marketing Rule. The Division has telegraphed its intent to test compliance with the new Marketing Rule under the Investment Advisers Act, as well as whether registered investment advisers have adopted and implemented written compliance policies and procedures that are designed to prevent violations of the new rule.
ESG. With the proliferation of investment advisers and funds purporting to execute an ESG strategy, the Division will continue to scrutinize advisers and their funds to determine whether their products are labeled appropriately and whether recommendations of investment products to retail investors are in the investors’ best interest.
Retail Investors. Compliance with Regulation Best Interest will once again be a key element in examinations of investment advisers in 2023, in light of the Division’s stated objective of determining whether investment advisers are placing the interests of retail investors ahead of their own. The Division indicated it will review investment recommendations and alternatives, conflicts of interests and other matters to determine how investment advisers are satisfying their fiduciary and other obligations to retail investors under the Investment Advisers Act and Regulation Best Interest.
Information Security. The Division will review investment advisers’ information security and business continuity protocols to prevent interruptions of critical services to clients and to protect client information. Cybersecurity and other issues related to the use of third party product and service providers, including whether registered investment advisers have sufficient information regarding the security of those third party products and services, will be assessed.
Emerging Technologies and Crypto Assets. The recommendation, offer and sale of crypto or crypto-related assets continues to be a concern of the Division and other regulators and will be tested against fiduciary standards imposed on investment advisers. During examinations of registered investment advisers, the Division also will determine whether the advisers are satisfying their obligations to review, assess, document and update relevant compliance disclosure and risk management policies and practices.
Preparation is Key. It is critical for registered investment advisers to prepare in advance for examinations. Although the Division has listed its priorities for 2023 examinations, other issues may be targeted during your examination. Don’t be caught flat-footed. Now is the time for advisers to private funds to schedule a compliance review to prepare for the next examination.
The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney you regularly work with or Kimberly Mann, Co-Chair of our Investment Funds Practice.
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