On March 30, 2022, the SEC’s Division of Examinations (Division or EXAMS) issued its examination priorities for 2022. The Division highlighted the following five areas of focus relevant to private fund sponsors:
- Private Funds. EXAMS will assess whether private fund advisers’ policies and procedures are reasonably designed to prevent violations of the Investment Advisers Act of 1940 (Advisers Act), including breaches of an adviser’s fiduciary duties in violation of the Advisers Act’s antifraud provisions. The Division will also review risks, including a focus on the effectiveness of advisers’ compliance programs and related oversight practices, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks and controls around material nonpublic information. Private fund advisers’ portfolio strategies, risk management and investment recommendations and allocations, as well as conflicts and disclosures around these areas, will also be a focal point of examinations. Additionally, the Division will review the practices, controls and investor reporting around risk management and trading for private funds with signs of systemic importance.
- ESG. EXAMS will focus on ESG-related advisory services of private fund advisers, including whether such advisers are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures and practices designed to prevent violations of federal securities laws in connection to ESG-related disclosure and portfolio management processes and practices. The Division will also review the voting of client securities with specific analysis around whether such votes align with advisers’ ESG-related disclosures and mandates as well as whether there have been any misrepresentations of ESG factors considered or incorporated into portfolio selections.
- Standards of Conduct. EXAMS will address standards of conduct issues for private fund advisers, with an emphasis on how such advisers are satisfying their fiduciary duties under the Advisers Act to act in the best interests of investors and not to place their own interests ahead of such investors’ interests.
- Information Security and Operational Resiliency. EXAMS will review private fund advisers’ practices designed to prevent interruptions to mission-critical services and to protect investor information, records and assets. The Division will specifically assess whether advisers have taken appropriate measures to: safeguard customer accounts and prevent account intrusions; oversee vendors and service providers; address malicious email activities (e.g., phishing or account intrusions); respond to certain cybersecurity incidents (e.g., ransomware attacks); identify and detect red flags related to identity theft; and manage operational risk as a result of a dispersed workforce. EXAMS will also review advisers’ business continuity and disaster recovery plans, with a focus on the impact of climate risk and substantial disruptions to normal business operations.
- Emerging Technologies and Crypto-Assets. EXAMS will examine private fund advisers that use developing financial technologies to assess whether the unique attendant risks of such activities are addressed by such advisers’ compliance programs. Such examinations will specifically focus on advisers that are (or claim to be) offering new products and services or employing new practices to understand whether: (i) operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; (ii) advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and (iii) controls take into account the unique risks associated with such practices. Additionally, EXAMS will review the custody arrangements of advisers engaged with crypto-assets as well as the related offer, sale, recommendation, advice and trading of such assets.
While the Division will allocate significant resources to the examination of the above themes, the scope of any examination is determined through a risk-based approach and may analyze a number of factors in addition to the aforementioned priorities.