The Division of Examinations of the Securities and Exchange Commission (SEC) recently announced its areas of focus for 2022. The Division takes a risk-based approach to its examinations, typically focusing on areas that are of major potential risk to investors. In an effort to maintain the integrity of US capital markets, several areas will be highlighted this year.
Private Funds
One of the biggest areas of focus will be registered investment advisors, usually shortened to RIAs. These are professionals who manage private funds. In particular, the SEC is going to pay attention to the Advisers Act, which mandates that advisors have a fiduciary duty to their clients. The division is going to take a look at compliance programs, expenses, fees, conflicts of interest, and disclosures of investment risk. The division will also take a closer look at individual portfolio strategies and resource allocations as they relate to the best interests of clients and investors.
ESG
ESG has been a growing area of focus during the past few years, and the SEC is going to take a closer look at this area. This includes private fund offerings, exchange-traded funds, and mutual funds. Specifically, the SEC wants to know whether funds and companies in this area are accurately disclosing their investing approach. The SEC wants to make sure that organizations have adopted practices, procedures, and policies that prevent them from violating securities laws. The voting methods used for client securities will also be under the microscope this year.
Retail Investors
The SEC will take a closer look at broker-dealers this year, ensuring that working families and retail investors are receiving recommendations that are in their best interests. The SEC will analyze whether broker-dealers are meeting obligations put forth under the Advisers Act and Regulation Best Interest. Broker-dealers are supposed to act in the best interests of their clients and not put their own interests first. The SEC will take a look at the management of conflicts of interest, account selection, and trading disclosures to make sure all rules and regulations are being followed.
Information Security
Information security will only continue to become more important, and the SEC wants to make sure that all firms have taken appropriate steps to safeguard the accounts of their customers to prevent accounts from being hacked. Account intrusion, phishing scams, email viruses, and ransomware attacks are of particular interest this year. Furthermore, the SEC wants to make sure that all companies have a business continuity plan in place, which includes appropriately backing up their data for restoration during an emergency.
Looking to the Future
The SEC believes that these are areas that are of major importance to institutional investors and working families. Therefore, many of its resources are going to be focused on these areas. It will be interesting to see if the SEC discovers anything that needs to be changed or addressed. Anyone with questions or concerns about SEC rules or regulations should rely on their securities counsel for guidance.
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