The Division of Examinations of the U.S. Securities and Exchange Commission (“SEC”) recently issued its investment adviser examination priorities in 2023. See https://www.sec.gov/files/2023-exam-priorities.pdf.

With respect to federally registered investment adviser firms (also referred to as “RIAs” in this article), the SEC has identified the following areas of concern which pose heightened risks to investors and the integrity of the U.S. capital markets and consequently will prioritize these areas of focus during examinations of RIAs.

New Marketing Rule – The SEC will assess RIAs’ compliance with the SEC’s new marketing rule including the following:
- Whether an RIA has adopted and implemented written policies and procedures that are reasonably designed to prevent violations of the new Marketing Rule; and
- Whether an RIA has a reasonable basis for believing (a) it will be able to substantiate material statements of fact and (b) satisfied with the requirements for performance advertising, testimonials, endorsements and third-party ratings.
RIAs to Private Funds– The SEC will continue to focus on the following issues associated with an RIA to a private fund:
- 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 of private equity funds;
- Compliance with the new Marketing Rule, including performance advertising, testimonials and endorsements;
- Policies and practices regarding the use of alternative data and compliance with Advisers Act Section 204A; and
- Compliance with SEC’s Custody Rule including timely delivery of audited financials and selection of permissible auditors.
High Risk Private Funds – The SEC will also focus on RIAs to private funds with specific risk characteristics such as the following:
- 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;
- 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 (SPACs); and
- Private funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds.
Fiduciary Duty – The SEC will continue to prioritize during examinations whether an RIA is meeting its fiduciary duty.
- Dual RIAs/BD and IARs/RRs – The SEC specifically identified continued concern about dually licensed RIAs/BDs and RIAs with supervised persons who are dually licensed as IARs/RRs.
- Conflicted Investment Advice – Examinations (especially for dual registrants) by the SEC will continue to focus upon the following:
  - Investment advice and recommendations with regard to products, investment strategies, and account types;
  - Disclosures made to investors and whether such disclosures include all material facts relating to the conflicts of interest associated with the advice and recommendations;
  - Processes for making best interest evaluations, including those for reviewing reasonably available alternatives, evaluating costs and risks, and identifying and addressing conflicts of interest;
  - Factors considered in light of the investor’s investment profile, including investment goals and account characteristics, and
  - Whether the conflicts of interest disclosures are sufficient such that a client can provide informed consent to the conflict.
- Types of Investments – The SEC may concentrate on advice or recommendations regarding:
  - Complex products, such as derivatives and leveraged exchange-traded funds (ETFs), exchange-traded notes (ETNs), and other exchange-traded products (ETPs);
  - High cost and illiquid products, such as variable annuities and non-traded REITs;
  - Proprietary products;
  - Unconventional strategies that purport to address rising interest rates; and
  - Microcap securities.
- Types of Clients/Accounts – SEC may also focus on recommendations or advice to certain types of investors or account recommendations:
  - Seniors;
  - Retirement Savers;
  - IRA Rollovers; and
  - 529 Plans.
- Economic Incentives – The SEC will seek to identify the economic incentives that an RIA and its supervised persons have to recommend products, services, or account types.
  - The SEC will focus on revenue sharing arrangements, use of services from affiliates, and proprietary products.
  - As part of this inquiry, SEC will focus on the following questions.
    - Does the RIA have written policies and procedures for identifying conflicts of interest?
    - Are the compliance policies and procedures sufficiently tailored to the RIA’s business model, compensation structure, and product menu and customer base?
    - How does the RIA manage conflicts of interest (i.e., mitigate, eliminate)?
- Hedge Clauses – The SEC will review whether RIAs have client agreements that purport to waive or limit their standard of conduct through the use of hedge clauses.
Form CRS – The SEC will incorporate compliance with Form CRS/Form ADV Part 3 requirements (e.g., delivering to retail investors, filing via IARD system and posting to public website) into its examinations of RIAs.
Custody/Valuation/Management/Execution – The SEC will review compliance programs and disclosures related to
- Custody and safekeeping of client assets,
- Valuation,
- Portfolio management, and
- Brokerage and execution.
Fees – The SEC will review for compliance issues and the oversight and approval process related to RIA fees and expenses, including:
- The calculation of fees; and
- Excessive fees.
Alternative Revenue Sources/Cash Sweep – The SEC will review conflicts of interest associated with alternative ways that an RIA may try to maximize revenue, including revenue earned on clients’ bank deposit sweep programs.
Text Messaging – SEC will review policies and procedures for retaining and monitoring electronic communications.
Due Diligence of 3rd Party Service Providers – The SEC will examine policies and procedures of RIAs for selecting and using third-party service providers.
Never Examined/Not Recently Examined – The SEC will prioritize RIAs that have never been examined including new firms and those that have not been examined for several years.
ESG – The SEC will focus on ESG-related advisory services of RIAs including whether (a) funds are operating in the manner set forth in their disclosures, (b) ESG products are appropriately labeled, and (c) recommendations of such products for retail investors are made in investors’ best interest.
Information Security & Operational Resiliency – Ensuring RIAs are safeguarding client information and assets pursuant to regulations S-P and S-ID will be a continued priority for the SEC.
- The SEC will focus on cybersecurity policies and procedures, governance practices, and responses to cyber-related incidents. While reviewing the policies and procedures, the SEC will ask the following questions.
  - Are policies and procedures reasonably designed to safeguard customer records and information?
  - Has the location of customer records been properly disclosed to the SEC?
- The SEC will look at a RIA’s practices to prevent account intrusions and safeguard customer records and information.
- The SEC will focus on the cybersecurity issues associated with the use of third-party vendors.
- The SEC will review upon whether there has been an unauthorized use of third-party providers (e.g., transition assistance when departing RIA personnel attempt to migrate client information to another firm).
- The SEC will assess RIA’s operational resiliency planning and consider/address climate-related risks.
Crypto
- The SEC will assess whether RIA involved with crypto or crypto-related assets: (1) met and followed its fiduciary duty when making recommendations, referrals, or providing investment advice; and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.
- The SEC will focus on new or never before examined registrants offering crypto or crypto-related assets.
Emerging Financial Technology – For RIAs that employ digital engagement practices and related tools/methods, the SEC will assess whether:
- Recommendations were made or advice was provided (e.g., through the use of social media marketing and social trading platforms);
- Representations are fair and accurate;
- Operations and controls in place are consistent with disclosures made to investors;
- Any advice or recommendations are in the best interest of the investor taking into account the investor’s financial situation and investment objectives; and
- Risks associated with such practices are considered, including the impact these practices may have on certain investors, such as seniors.

On Thursday, February 23, 2023, Bryan Hill, President of RIA Compliance Consultants, Inc., will review the U.S. Securities and Exchange Commission’s published investment adviser examination priorities for 2023 and detail best practices related to these priority areas of focus. During the webinar, Bryan will highlight NASAA’s examination of sweep results for state registered investment advisers. Please click upon the following link to purchase a seat to this webinar: https://www.ria-compliance-consultants.com/product/2023-investment-adviser-exam-priorities/

The following are previous posts of RIA Compliance Consultants, Inc. related directly or indirectly to the topics discussed in this blog post.

Colorado’s 2023 Investment Adviser Examination Priorities (2/12/2023)
SEC Announces 2021 Examination Priorities for RIAs (3/15/2021)
2019 SEC Examination Priorities (12/27/2018)
Colorado Provides Investment Advisers with Guidance on Disclosing PPP Loans (5/18/2020)

Related Resources

RIA Compliance Consultants has also developed several sample forms and checklists to assist an investment adviser firm in preparing for an examination.

General Disclosure

The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. Investment adviser examinations by a securities regulator are not limited to the examination priorities listed above. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s rules and published guidance for more details about the topics referenced above. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.

SEC Issues Investment Adviser Exam Priorities for 2023

February 16, 2023

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General Disclosure