February 15, 2023
Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; and Investment Advisers.
Quick Take: Registered funds should expect the staff of the Division of Examinations (Staff) of the Securities and Exchange Commission (SEC) to focus on the following during its examinations:
Registered advisers should expect the Staff to focus on:
Private fund advisers remain in the cross-hairs of heightened attention.
Note: Hyperlinked below are S&K materials that may be helpful in considering the topics identified by the Staff in its release.
The Staff published its annual list of examination priorities for 2023. In its release, the Staff identified a broad range of examination priorities, which covered a number of different types of market participants. The Staff highlighted four subject areas as “Notable New and Significant Focus Areas” for 2023:
The Staff will prioritize multiple focus areas specific to registered investment companies (funds). As in previous years, the Staff will continue its “perennial” focus on compliance programs, governance practices, disclosures to investors and accuracy of reporting to the SEC. This year, the Staff will again evaluate the adequacy of fund boards’ processes for evaluating and approving advisory and other fund fees. The Staff specifically noted the importance of this area for funds with weaker performance relative to peers. The Staff will also assess the effectiveness of funds’ derivatives and liquidity risk management programs.
The Staff will continue to focus on ESG-related advisory services and fund offerings, including whether a fund is operating in the manner set forth in the fund’s disclosures, as well as whether ESG-related products are appropriately labeled. The Staff also noted that it will be monitoring the growth of volatility-linked and single-stock ETFs, reviewing those funds’ disclosures, marketing, conflicts, and compliance with portfolio management disclosures.
Further, the Staff indicated that it would prioritize examining funds that fall into the following categories:
Registered Investment Advisers
The Staff will also continue to focus examinations on core areas of an investment adviser’s disclosure and compliance programs – such as custody and safekeeping of client assets, valuation, portfolio management, and brokerage and execution. Similarly, the Staff will continue to prioritize review of advisers’ fee calculations, alternative methods for generating revenue (such as bank sweep deposit programs) and collection of excessive fees.
In addition to the core focus areas listed above, the Staff will focus on an adviser’s implementation of policies relating to, and compliance with, the new Marketing Rule, as well as whether an adviser’s recommendations of ESG-related investments are made in the investor’s best interest. The Staff will also prioritize reviewing an adviser’s policies and procedures to determine whether they adequately provide for monitoring and retention of electronic communications, and whether they are reasonably designed to safeguard customer records and information from a cybersecurity perspective.
As in previous years, the Staff will prioritize advisers that have never been examined, including recently registered firms, and those that have not been examined for a number of years. These examinations typically focus on the firm’s compliance program.
Private Fund Advisers
For private fund advisers, examinations will focus on an adviser’s conflicts of interest; calculation and allocation of fees and expenses, including post-commitment period management fees and the impact of valuation practices on fees; compliance with the new Marketing Rule; policies regarding the use of alternative data and compliance with Section 204A (which is directed at preventing insider trading); and compliance with the Custody Rule (Rule 206(4)-2). The Staff confirmed it will continue to focus on the following types of private funds:
1 The term “turnkey funds” references funds that utilize a turnkey solutions provider for infrastructure purposes (i.e., to organize, operate, and service the funds, such as governance and compliance services).
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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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