SEC’s Division of Examination priorities reflect changing face of finance

The Securities and Exchange Commission’s Division of Examinations has unveiled its examination priorities for 2022, reflecting the growing trend towards an increasingly conscious and digital financial landscape.

The 5 priorities appear to mark a shift away from more traditional examination and enforcement areas, focussing instead on issues that are becoming increasingly important to both consumers and investors alike. Richard Best, Acting Director at the Division of examinations announced the annual priorities, adding that:

“In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades – such as protecting retail investors. Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.”

The 5 priorities have been established by assessing the cumulative feedback of examination staff about where they see risks emerging in the coming year. They set a blue-print for the Divisions focus but are not the only areas in which it will focus for 2022. The 5 priorities are:

1. Private funds

The Division will sharpen its focus on registered investment advisers (RIAs) who manage private funders – focussing in particular on fiduciary duties, compliance programs, investment risk disclosures, fees and expensive and controls around material non-public information, among other things.

2. Environmental, social and governance (ESG) investing

Following on from its increased activity in 2021, the Division will continue to address the scope of ESG-related advisory services, investment products, exchange-traded funds and private fund offerings. In particular, the Division will focus on issues surrounding greenwashing – namely whether advisers and funds are accurately disclosing their ESG investing approaches and whether they have put policies, procedures and practices in place to prevent violations of regulation for ESG-disclosures. 

3. Retail investor space

The Division is keen to ensure that retail investors and working families are receiving financial advice that is in their best interest. They will enact this by focussing in particular on conduct issues for broker -dealers and RIAs. The Division will look to regulations including Regulation Best Interest and the Advisers Act fiduciary standard and ensure advisers are not placing their own interests ahead of those of retail investors.

4. Information security and operational resiliency

Operational resiliency is set to feature heavily on the agendas of global regulators this year, and the SEC’s Division of Examinations is no exception. In particular, the Division will be looking at the practices of financial institutions to ensure they are equipped to prevent interruptions to mission-critical services. It will also ensure that businesses have processes in place to protect investor information, records and assets, as well as reviewing business continuity and disaster recovery plans – with a particular focus on climate risk.

5. Emerging technologies and crypto-assets

As ever, emerging technology is a double-edged sword, posing as much risk as it does opportunity. The Division’s priorities acknowledge this and will be looking at broker dealers and RIAs that use emerging technology to ensure that any risks have been properly assessed and considered. Examinations will focus on firms that are offering new products (or employing new practices) to assess whether their operations and controls are consistent with the conduct owed to investors, the disclosures that have been made, and other regulatory obligations.

For crypto, the Division will be keeping a keen eye on market participants that are engaging with crypto and will continue to review the custody arrangements for such assets.

CUBE comment

Regulatory priorities are always interesting for myriad reasons. Not only do they provide a blue-print for the areas that firms should be particularly focussed on, but they provide a lens into the inner workings of regulators. As we mentioned, the priorities are selected by taking information and consensus from Division of Examination employees to generate a cross-section of what matters, and what’s being seen. In the past, these priorities have been laser-focussed on issues pertaining to, for example, market infrastructure, AML, or Information Security. This year, the SEC is clearly seeing a marked shift towards issues that transcend finance alone – climate change, increased transparency, and accountability for example. All of this points to a changing society and a regulator willing to be flexible in navigating that change.

The Division’s priorities will likely be on compliance teams’ radars already – those that are failing to take action for climate-related disclosures or crypto are already falling behind. But, as is made clear, businesses should be taking steps to proactively ensure their house is in order – especially where processes and procedures for info assets and operational resilience is concerned. These are areas in which the cost of non-compliance goes far beyond a regulatory slap on the wrist. As the adage goes, fail to plan – plan to fail.

Make sure you’re meeting regulatory priorities and obligations – speak to CUBE.