The Securities and Exchange Commission’s Division of Examinations (EXAMS) published its report on 2023 Examination Priorities on February 7, 2023. The 2023 Examination Priorities¹ continue to reflect an examination program that is vigorous and broad in its focus, with special attention paid to newly implemented regulatory changes and the standards of conduct for investment advisers and broker-dealers. The 2023 Examination Priorities broadly identify the same major themes as in 2022 that impact investment advisers, investment companies, broker-dealers and particular products such as private funds and those that rely on London Inter-Bank Offered-Rate (LIBOR), but several priorities are new or expanded such as a focus on the recently adopted derivatives rule, fair valuation rule and marketing rule. While EXAMS tends to carry forward major themes from year-to-year, this year’s priorities feature a number of new and newly emphasized areas of focus.

Many of these newer focus areas are centered on recently adopted rules and on the current policy initiatives of Chair Gary Gensler. For example, investment advisers should expect scrutiny of marketing activities, particularly related to substantiation of material statements of fact and performance reporting, where examiners are likely to rigorously apply recent guidance from the Division of Investment Management related to gross and net figures. Similarly, investment companies should anticipate questions concerning the use of derivatives and fair valuation practices. For investment advisers to private funds, EXAMS repeats familiar themes related to conflicts of interest and expense allocation but adds priorities related to leverage, hard-to-value assets, affiliated servicers, Special Purpose Acquisition Companies (SPACs) and investment adviser-led secondaries. The priorities also include a focus on side-by-side management of private funds and business development companies (BDCs), suggesting that examiners may ask about compliance with co-investment orders. For broker-dealers, EXAMS will focus on conflicts of interest in order routing and execution that may affect retail investors and compliance with Regulation SHO.

Footnotes

1) 2023 Examination Priorities, SEC Division of Examinations (Feb. 7, 2023). All statements in this OnPoint as to the intent or plans of EXAMS are based on the text of the 2023 Examination Priorities. At times, this OnPoint tracks the 2023 Examination Priorities without the use of quotation marks