On February 7, the Securities and Exchange Commission (SEC) announced its inspection priorities for the current year. The announcement began by noting that the SEC examined 15 percent of the advisers during the last fiscal year and that "increased examinations can only be achieved with significant investments in human capital and technology resources."
Priorities for the current year include checking compliance with recently adopted rules, including the new marketing rule for advisers, the new derivatives rule for registered funds and Regulation Best Interest for broker-dealers.
For private funds, in addition to traditional focuses on conflicts and fees and expenses, the inspection program will examine uses of alternative data and personal devices by advisory personnel, the custody rule, and private funds with high risk characteristics, such as: "(1) highly leveraged private funds; (2) private funds managed side-by-side with [business development companies] BDCs; (3) private equity funds that use affiliated companies and advisory personnel to provide services to their fund clients and underlying portfolio companies; (4) 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; (5) private funds that invest in or sponsor Special Purpose Acquisition Companies (SPACs); and (6) private funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds."
When advisers offer environmental, social and governance- (ESG) related advisory services and fund offerings, the SEC will focus on "whether the funds are operating in the manner set forth in their disclosures." Cybersecurity also will be a significant priority in inspections of both advisers and broker-dealers, with a "focus on firms' policies and procedures, governance practices, and response to cyber-related incidents, including those related to ransomware attacks, and broker dealers' and [registered investment advisers'] RIAs' compliance with Regulations S-P and S-ID, where applicable." Finally, issues relating to cryptocurrencies remain a high priority in the SEC's inspection program. Read the SEC's press release
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