SEC Releases 2023 Examination Priorities

The U.S. Securities and Exchange Commission's (the “SEC”) Division of Examinations (the “Division”) recently released its 2023 Examination Priorities (“Examination Priorities”). As expected, the Division will continue to prioritize the operations and compliance practices of Registered Investment Advisers to private funds (“Investment Managers”). In particular, the Division will continue to focus on specific compliance and operational practices, including:  

• Managing conflicts of interest
• Fees and expenses, including the calculation of post-commitment period management fees and the impact on valuation practices on Investment Managers
• Compliance with the new Marketing Rule, including the adoption and implementation of compliance policies and procedures
• Use of alternative data
• Compliance with the Custody Rule, including the timely delivery of audited financials and the selection of permissible auditors
• Examinations of Investment managers with specific risk characteristics, such as, but not limited to SPACs, Investment Manager-led restructurings (secondary transactions and continuation 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, and Private funds that hold certain hard-to-value investments, such as crypto assets and real estate-connected investments

In addition to the Examination Priorities outlined above, two other notable areas of focus that impact a significant percentage of Investment Managers are information security and operational resiliency and ESG. 

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Information Security and Operational Resiliency

Consistent with prior years, information security and resiliency and cybersecurity are key focal areas for the Division. The Division will continue to assess whether InvestmentManagers’ practices are reasonably designed to prevent interruptions to critical services and protect investor information, including:

• Reviewing the policies and procedures, governance practices, and response to cyber-related incidents
• Evaluating measures taken to safeguard customer accounts and prevent intrusions
• Reviewing incident response plans
• Analyzing processes and procedures to oversee critical third-party vendors
• Examining measures taken to identify and detect suspicious activity

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‍ESG Investing

As climate change continues to unfold around the globe, environmental, social, and governance (ESG) concerns are increasingly driving investment decisions and capital allocations from investors. As a result, the SEC is continuing to prioritize Investment Managers’ ESG practices, including whether they are overstating or misrepresenting the ESG factors used in making investment decisions (i.e., greenwashing).

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What actions should RIAs to private funds take now?

Investment Managers should conduct a thorough review of their existing policies and procedures to ensure they adequately address the Examination Priorities relevant to their business. It is important to note that although the Examination Priorities will generally steer examinations, the Examination Priorities are not exhaustive, and the SEC can examine other areas as well. Therefore, it is critical that RIAs periodically review their policies and procedures in their entirety.  

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How Petra can help?

Petra FundsGroup’s compliance team has decades of experience managing SEC regulatory compliance programs for private investment funds. The group’s expertise enables them to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here.

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