SEC Division Of Examinations – 2023 Examination Priorities
The U.S. Securities and Exchange Commission (the “SEC”) Division of Examinations (the “Division”) recently published its 2023 examination priorities. The priorities are largely similar to the 2022 priorities, but with a heightened focus on the following:
The compliance date for the new Marketing Rule was November 4, 2022. The new marketing rule substantially revised the old marketing policy.
The Division will assess whether RIAs have adopted and implemented written policies and procedures to conform with the new Marketing Rule. The Division will also review whether RIAs have complied with the core requirements of the Marketing Rule, including the requirement that RIAs have a reasonable basis for believing they will be able to substantiate material statements of fact and requirements for performance advertising, testimonials, endorsements and third-party ratings.
Derivatives Rule (Investment Company Act of 1940 (the “Investment Company Act”) - Rule 18f-4)
The Derivatives Rule provides a comprehensive approach to the regulation of registered funds’ use of derivatives and certain other transactions. In connection with these rules, the SEC amended Rule 6c-11 under the Investment Company Act to allow leveraged or inverse exchange-traded funds (“ETFs”) to operate without obtaining an order of exemption.
If a fund relies on the Derivatives Rule, the Division will, (1) assess whether registered investment companies, including mutual funds (other than money market funds), exchange-traded funds (ETFs) and closed-end funds, as well as business development companies (“BDCs”), have adopted and implemented policies and procedures designed to manage the funds’ derivatives risks and to prevent violations of the Derivatives Rule; and (2) review for compliance with Rule 18f-4, including the adoption and implementation of a derivatives risk management program, board oversight, and whether disclosures concerning the fund’s use of derivatives are incomplete, inaccurate or potentially misleading.
The Fair Valuation rule establishes requirements for fund boards' obligation to determine the fair value in good faith. As part of the rule, the fund's board may designate a "valuation designee", which could be the fund's investment adviser, for some or all of the fund's investments, as long as the valuation designee is subject to the board's oversight. In conjunction with Rule 2a-5, the committee also adopted Rule 31a-4, which requires funds or their advisers to maintain appropriate documentation to support fair value determinations.
The Division will : (1) assess funds’ and fund boards’ compliance with the new requirements for determining fair value, implementing board oversight duties, setting recordkeeping and reporting requirements, and permitting the funds’ board to designate valuation designees to perform fair value determinations subject to oversight by the board; and (2) review whether adjustments have been made to valuation methodologies, compliance policies and procedures, governance practices, service provider oversight, and/or reporting and recordkeeping.
RIAs to Private Funds
The Division will focus on RIAs to private funds with specific risk characteristics, such as: highly-leveraged private funds, private funds managed side-by-side with BDCs, private equity funds that use affiliated companies and advisory personnel to provide services to their fund clients and underlying portfolio companies; and private funds that hold certain hard-to-value investments, such as crypto assets and real estate-connected investments, with an emphasis on commercial real estate, private funds that invest in or sponsor Special Purpose Acquisition Companies; and private funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds.
In particular, the Division will focus on private fund RIAs’:
conflicts of interest;
calculation and allocation of fees and expenses, including the calculation of post-commitment period management fees and the impact of valuation practices at private equity funds;
compliance with the new Marketing Rule, including performance advertising and compensated testimonials and endorsements, such as solicitations;
policies and practices regarding the use of alternative data and compliance with Advisers Act Section 204A; and
Compliance with the Advisers Act Rule 206(4)-2 (Custody Rule), where applicable, including timely delivery of audited financials and selection of permissible auditors.
ESG Investing
The Division will continue its focus on ESG-related advisory services and fund offerings, including whether the funds are operating in the manner set forth in their disclosures, and whether ESG products are appropriately labeled.
Crypto Assets and Emerging Financial Technology
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 on-line solutions to meet the demands of compliance and marketing and to service investor accounts (e.g., on-line brokerage services, internet advisers, and automated investment tools and trading platforms).
Examinations of registrants will focus on the offer, sale, or recommendation of, advice regarding and trading in crypto or crypto-related assets.
If you have any questions about this alert, or any other regulatory matters, do not hesitate to reach out to: Daniel Viola (Partner – Head of the Regulatory group) at 212.573.8038 or via email at dviola@sadis.com or to Vartika Naithani at 212.573.8148 or via email at vnaithani@sadis.com.
