- Private funds are a key area of concern because of their large footprint and rise to prominence. The focus on ESG investing is not a surprise given the recent spike in assets chasing this trend.
- The Division is steadfast in its pursuit of protecting retail investors and working families. It seeks to ensure that broker-dealers and RIAs are complying with Regulation Best Interest (Reg BI), fiduciary duties, and mandatory disclosure forms.
- The increase in information breaches and operational disruptions is driving the Division to protect investors and financial markets from these ever-increasing risks.
- The SEC views the boom in crypto-assets with skepticism, so the Division will be paying close attention to this asset class.
- The SEC will also focus on another area it views as potentially risky – the “gamification” of investing through smart phone apps and social media influencers.
The Bottom Line
The SEC cautions that this list of priorities is not comprehensive, and it remains flexible. A proactive approach can save companies from reputational risk, millions of dollars in fines, countless lawsuits from retail investors mirroring regulatory findings, and potential insolvency. Contact our attorneys for more information.
On March 30, 2022, the U.S. Securities and Exchange Commission’s Division of Examinations (Division) released its 2022 Examination Priorities (Report). This year, the Division plans to prioritize its examinations on the following five areas: (1) Private Funds; (2) Environmental, Social, and Governance (ESG) Investing; (3) Standards of Conduct: Regulation Best Interest, Fiduciary Duty, and Form CRS; (4) Information Security and Operational Resiliency; and (5) Emerging Technologies and Crypto-Assets.
At the top of the Division’s list is private funds. Private funds are a key area of concern for the Division because of their large footprint and rise to prominence. According to the Report, more than 5,000 SEC-registered investment advisers (RIAs) manage approximately $18 trillion in private fund assets. These assets have increased by 70 percent over the past five years. The Division plans to examine RIAs for compliance with the Investment Advisers Act of 1940 and various risks associated with fees, expenses, liquidity, and disclosures, among other risks. The Division’s focus in this area seems to be motivated by a desire to protect investors from potential risks that may not be immediately apparent when they invest in hedge funds or private equity. Given the massive growth of assets in this area, the Division may also just be following the money.
ESG investing is a renewed focus for the Division. The Division plans to concentrate on RIAs and registered funds offering ESG-related advisory services and investment products for key safeguards, including disclosures of ESG investing approaches, practices to prevent violation of the federal securities laws, compliance with proxy voting policies, and overstatement or misrepresentation of ESG factors considered in portfolio selection or stated in marketing materials. In particular, the Division highlights greenwashing as an area of concern. Greenwashing is the conveyance of a false impression or misleading information that a company’s products are environmentally friendly. The Division’s focus on ESG investing is not a surprise given the recent spike in assets chasing this trend. At its core, the Division’s concern is nothing new – it remains problematic for money managers to say they are doing one thing and then do something else.
The Division remains steadfast in its pursuit of protecting retail investors and working families. It seeks to ensure that broker-dealers and RIAs are complying with Regulation Best Interest (Reg BI), fiduciary duties, and mandatory disclosure forms, such as Forms ADV and CRS. It plans to examine the effectiveness of broker-dealers’ and RIAs’ compliance programs, training, management of conflicts of interest, and disclosures, among other metrics. The Division’s focus on the duties owed to investors by securities industry participants is not a surprise, coming as it does after the implementation of Reg BI. SEC Chair Gary Gensler has recently affirmed the Commission’s view that it is important to hold industry participants to a high standard of care. The ultimate goal here is to ensure that these retail investors receive recommendations and advice that are in their best interest.
Another priority for the Division is information security and operational resiliency. Here, the Division aims to determine whether broker-dealers, RIAs, and other registrants have practices that ensure business continuity, safeguard client data and assets, and respond to disasters. The Division will place a “particular focus on the impact of climate risk and substantial disruptions to normal business operations.” Again, this is not a surprise. As the financial world continues to move online, the risk of information breaches and operational disruptions increases. The Division’s focus here is motivated by a desire to protect investors and financial markets from these ever-increasing risks.
The Division’s final top priority is emerging technologies and crypto-assets. The Division plans to examine RIAs offering new and emerging products and services, such as crypto-assets, automated digital investment advice (robo-advisers), fractional shares, social media influencers, or any other digital engagement tool. The Division will analyze these RIAs for their compliance with disclosure laws, standards of conduct, and ability to handle other unique risks. The SEC seems to view the boom in crypto-assets with skepticism, so the Division will be paying close attention to this asset class. The Division will also focus on another area it views as potentially risky – the “gamification” of investing through smart phone apps and social media influencers. Through its focus on this area, the Division seems to be looking to protect investors from themselves, but the onus is on registered entities to be the first line of defense.
The Division has cautioned that this list of priorities is not comprehensive and it remains flexible. In addition to the high priority topics outlined above, the Report states that the Division will also focus examinations on the following entities and issues: (1) investment advisers and investment companies; (2) broker-dealers and exchanges; (3) SEC-registered clearing firms; (4) Regulation Systems Compliance and Integrity (Reg SCI); (5) oversight of FINRA; (6) oversight of the Municipal Securities Rulemaking Board; (7) the London Inter-Bank Offered Rate (LIBOR) transition; and (8) anti-money laundering.
A proactive approach at tackling these issues can save companies from reputational risk, millions of dollars in fines, countless lawsuits from retail investors mirroring regulatory findings, and potential insolvency.
With experienced and highly regarded litigators well-versed in the nuances of securities and corporate governance litigation, an established Chancery Court practice, and a keen understanding of the high stakes at play, Ballard Spahr’s Securities Enforcement and Corporate Governance Litigation Practice is equipped to lead complex securities and corporate governance litigation of any size. Our firm has the experience to identify and avoid potential obstacles in a case, a demonstrated ability to innovate, and a track record of success in the courtroom and through alternative dispute resolution. Contact us for more information.
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