On February 7, the Division of Examinations of the Securities and Trade Fee (the “Division”) revealed its 2023 Examination Priorities (the “Examination Priorities”).1 The Examination Priorities point out a specific Employees examination concentrate on registered funding advisers (“RIAs”) typically, and personal fund advisers particularly, highlighting sure areas the place enhanced Employees scrutiny is anticipated, together with the Advertising Rule.
The emphasis on personal funds within the Examination Priorities echoes the SEC’s elevated concentrate on personal funds, together with by the Non-public Funds reform guidelines adopted in August,2 and two Type PF-related proposals (considered one of which has already been adopted,3 and with the joint SEC-CFTC Type PF proposal pending), amongst different extra typically relevant Funding Advisers Act rule proposals (together with RIA outsourcing and custody).
Deal with RIAs to Non-public Funds
The Division states that it expects to focus more and more on concerns for RIAs offering advisory providers to personal funds. The Examination Priorities notice an 80% improve within the gross belongings of personal funds up to now 5 years, which as of the date of the Examination Priorities exceeded $21 trillion. These statements echo a normal focus of the present SEC on personal markets and personal funds.
Particularly, the Division highlights the next areas of focus for examinations of RIAs to personal funds:
- conflicts of curiosity;
- calculation and allocation of charges and bills;
- compliance with the brand new Advertising Rule;
- insurance policies and practices relating to the usage of different knowledge and compliance with Advisers Act Part 204A (Prevention of Misuse of Nonpublic Data); and
- compliance with the Advisers Act Rule 206(4)-2 (Custody Rule).
As well as, the Division notes that it expects to concentrate on personal fund managers with particular danger points within the coming years, together with particularly:
- highly-leveraged personal funds,
- personal funds managed side-by-side with enterprise growth firms (BDCs),
- personal fairness funds that use affiliated firms and advisory personnel to offer providers to their fund purchasers and underlying portfolio firms,
- personal funds that maintain sure hard-to-value investments, akin to crypto belongings and actual estate-connected investments, with an emphasis on business actual property,
- personal funds that spend money on or sponsor particular objective acquisition firms (SPACs), and
- personal funds concerned in adviser-led restructurings, together with stapled secondary transactions and continuation funds.4
Compliance with Just lately Adopted Guidelines
The Advertising Rule5
Amongst different guidelines and rules, the Examination Priorities notice that future examinations will assess fund managers’ compliance with the brand new Advertising Rule, the compliance date of which was November 4, 2022. The SEC has constantly emphasised compliance with promoting and solicitation guidelines as essential to stop fraudulent and misleading practices inside the personal funds trade. The Examination Priorities state that in future examinations, the Division will consider each a agency’s substantive compliance with the Advertising Rule, in addition to whether or not a agency’s written insurance policies and procedures be certain that its advertising supplies are correct, clear and don’t mislead traders. The Division additionally notes {that a} agency’s capability to substantiate materials statements and promoting knowledge shall be assessed throughout future examinations. We’ve got seen a specific Employees emphasis on its January 2023 FAQ steering relating to internet efficiency presentation necessities for particular person belongings.6
Cybersecurity and Knowledge Safety
The Division famous that will probably be more and more targeted on figuring out and addressing vulnerabilities in knowledge safety safeguards given the volatility of the worldwide economic system and the rising prevalence of cybersecurity assaults, noting particularly the elevated use of ransomware.
Non-public fund managers will face scrutiny relating to their capability to safeguard investor knowledge and delicate info, in addition to their readiness to counter cyber threats. The Division famous that their focus throughout examinations shall be on whether or not written insurance policies round cybersecurity are “moderately designed to safeguard buyer data and knowledge—each info residing in registrants’ programs and saved by a third-party supplier—in addition to whether or not the situation of such data has been correctly disclosed to the Fee, the place required.”
Having written insurance policies governing each the right procedures to stop cyberattacks, in addition to to reply correctly within the occasion a knowledge safety breach happens, shall be a key focus in future examinations. The Division additionally highlights that compliance doesn’t cease in-house; guaranteeing the right protocols are in place with third-party merchandise and repair suppliers may also be assessed.
ESG Investing
The Examination Priorities additionally notice that there’s an elevated investor demand for investments incorporating environmental, social and governance (ESG) standards. In future examinations, the Division intends to judge whether or not fund managers are working constantly with the ESG initiatives included of their advertising supplies and whether or not such initiatives are within the traders’ finest pursuits.
Conclusion
The Division’s Examination Priorities point out a specific Employees concentrate on personal fund managers in examinations, and offers essential messaging about the place Employees might focus in upcoming examinations. We encourage RIAs to evaluation the Examination Priorities intimately.
This text shouldn’t be exhaustive of the matters included within the Examination Priorities, and readers ought to evaluation the total report for essential particulars
1 2023 Examination Examination Priorities, U.S. Securities and Trade Fee, Division of Examinations, February 7, 2023, https://www.sec.gov/information/2023-exam-priorities.pdf.
2 Ok&S Shopper Alert, SEC Adopts Non-public Fund Reform Guidelines, obtainable at https://www.kslaw.com/news-and-insights/sec-adopts-private-fund-reform-rules.
3 Ok&S Shopper Alert, SEC Adopts Amendments to Type PF, obtainable at https://www.kslaw.com/news-and-insights/sec-adopts-amendments-to-form-pf-establishes-certain-event-reporting-requirements-for-private-equity-advisers-and-large-hedge-fund-advisers-among-other-obligations.
4 This concentrate on continuation funds can also be current within the Type PF amendments adopting launch. Ok&S Shopper Alert, SEC Adopts Amendments to Type PF, obtainable at https://www.kslaw.com/news-and-insights/sec-adopts-amendments-to-form-pf-establishes-certain-event-reporting-requirements-for-private-equity-advisers-and-large-hedge-fund-advisers-among-other-obligations.
5 17 CFR § 275.206(4)-1.
