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SEC Announces 2023 Examination Priorities



On February 7, 2023, the Securities and Exchange Commission’s Division of Examinations (“DOE”) announced its examination priorities for 2023 (“2023 Examination Priorities”) (available here). Examination priorities, which are released annually, provide investors and registrants with transparency into those areas that DOE believes bring heightened risks to investors, registrants and to the integrity of the U.S. capital markets.  The “four pillars” of DOE’s mission remains the same, to (1) promote compliance, (2) prevent fraud, (3) monitor risk and (4) inform policy.
DOE uses a risk-based process to identify both the entities to examine and the scope of areas to examine to improve industry risk management practices and compliance with the federal securities laws.  It conducts targeted examinations and also responds to emerging events that may pose significant risks to investors and the markets.

Annual Priorities

DOE’s annual examination priorities involve significant input from stakeholders within and outside of the SEC, including information gathered through examinations, communications with other regulators, comments and tips received from investors and regulated entities, industry publications and representatives of state securities regulators and investor groups.
In fiscal year 2022, DOE examined approximately 15% of the registered investment adviser population, and with respect to broker-dealers, DOE completed over 360 examinations, and together with the Financial Industry Regulatory Authority (“FINRA”), examined nearly half of the approximately 3,500 registered broker-dealers.
In fiscal year 2022, firms returned more than $50 million to investors in response to DOE’s examinations.  DOE also made numerous referrals to the Division of Enforcement.  These referrals resulted in numerous enforcement actions, including the SEC’s first action alleging violations of Regulation Best Interest (“Reg BI”), the first action involving a broker-dealer for allegedly violating the municipal advisor registration rule, settled actions involving registered investment advisers and broker-dealers for deficiencies in programs to prevent customer identity theft under Regulation S-ID, and settled several actions involving advisers to private funds, for custody rule violations under the Investment Advisers Action of 1940 (the “Advisers Act”).

These are DOE’s 2023 Examination Priorities:

I. Notable New and Significant Focus Areas
A. Compliance with Recently Adopted Rules Under the Advisers Act and Investment Company Act of 1940 (the “Company Act”)
B. Registered Investment Advisers to Private Funds
C. Standards of Conduct: Reg BI, Fiduciary Duty, and Form CRS
D. Environmental, Social and Governance Investing
II. Information Security and Operational Resiliency
III. Crypto Assets and Emerging Financial Technology
IV. Investment Advisers and Investment Companies
A. Focus Areas for Examinations of Registered Investment Advisers
B. Focus Areas for Registered Investment Companies, including Mutual Fundsand ETFs
V. Broker-Dealer and Exchange Examination Program
A. Broker-Dealer and Exchange Examination Program
B. Broker-Dealers
C. National Securities Exchanges
D. Security-Based Swap Dealers
E. Municipal Advisors
F. Transfer Agents
VI. Clearance and Settlement
VII. Regulation Systems Compliance and Integrity
VIII. FINRA and Municipal Securities Rulemaking Board (“MSRB”)
IX. Anti-Money Laundering
X. The London Interbank Offered Rate (“LIBOR”) Transition

The stated priorities that drive many of DOE’s examinations are neither static nor exhaustive.  DOE will leverage data available to it to monitor and identify potentially problematic activities.  DOE also will conduct examinations on new and emerging risks, products and services, market events and investor concerns.

DOE 2023 Examination Priorities

I. Notable New
A. Compliance with Recently Adopted Rules under the Advisers Act and the Company Act  

Advisers Act Rule 206(4)-1 (Marketing Rule)
The SEC’s updates to the Marketing Rule are largely intended to standardize the approach of advisers to advertising and cash solicitations.  DOE, among other things, will assess whether registered investment advisers (“RIA”s)  have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by advisers and their supervised persons of the Marketing Rule, including performance advertising and compensated testimonials and endorsements.  DOE also will review whether RIAs have complied with the substantive requirements of the Marketing Rule that require RIAs to have a reasonable basis for believing they will be able to substantiate material statements of fact and requirements for performance advertising, testimonials, endorsements and third-party ratings.
Company Act Rule 18f-4 (Derivatives Rule)
 When examining registered investment companies (“RIC”s), DOE will examine their use of derivatives. DOE, among other things, will examine whether they have adopted and implemented policies and procedures reasonably designed to manage the funds’ derivatives risks and prevent violations of the Derivatives Rule.  DOE also will examine whether funds have adopted and implemented a derivatives risk management program and appropriate board oversight, to make certain that disclosures concerning the fund’s use of derivatives are not “incomplete, inaccurate or potentially misleading.”
Company Act Rule 2a-5 (Fair Valuation Rule)
DOE, among other things, will assess compliance by funds and their boards with new requirements for “determining fair value, implementing board oversight duties, setting record keeping and reporting requirements, and permitting the funds’ board to designate valuation designees to perform fair value determinations subject to oversight by the board.”  DOE also will review whether funds have made adjustments to their valuation methodologies, compliance policies and procedures, governance practices, service provider oversight, and/or reporting and recordkeeping. 

B. RIAs to Private Funds

DOE will focus on private fund RIAs’ conflicts of interest, calculation and allocation of fees and expenses, compliance with the new Marketing Rule, policies, and practices regarding the use of  alternative data, and compliance with the Custody Rule (which requires that advisers that have custody of client funds or securities, maintain those assets with broker-dealers, banks or other qualified custodians, and provide timely delivery of audited financials).  In addition, DOE will focus on RIAs to private funds with specific risk characteristics, including highly-leveraged private funds, private funds managed side-by-side with business development companies (“BDC”s), private equity funds that use affiliated companies and advisory personnel to provide services to their fund clients and underlying portfolio companies, private funds that hold certain hard-to-value investments, private funds that invest in or sponsor Special Purpose Acquisition Companies (“SPAC”s) and private funds involved in adviser-led restructurings.

C. Standards of Conduct: Reg BI, Fiduciary Duty and Form CRS

Reg BI for broker-dealers and the fiduciary standard for investment advisers include an obligation "to act in a retail investor’s best interest and not to place the firm’s or its financial professionals’ interests ahead of the investor’s interest."

DOE will continue to examine broker-dealers and RIAs for compliance with their applicable standard of conduct.  These examinations will continue to focus on investment advice, recommendations and strategies, whether disclosures made to investors include “all material facts” relating to the conflicts of interest associated with the advice and recommendations, processes for making best interest evaluations, and factors considered in light of the investor’s investment profile.  Also, in the case of RIAs, DOE will review whether the conflicts of interest disclosures are sufficient such that a client can provide informed consent to the conflict.

Examinations may focus on advice or recommendations regarding complex products, high cost and illiquid products, proprietary products, unconventional strategies and microcap securities.  Examinations also may focus on recommendations or advice to senior investors, those saving for retirement and specific account recommendations.

DOE will seek to understand the economic incentives that a firm and its financial professionals have to make recommendations so they can mitigate or eliminate conflicts of interest with retail investors.  These economic incentives may include revenue sharing, commissions, or other “incentivizing revenue arrangements.”  Examinations will review whether firms have customer or client agreements that purport to “inappropriately” waive or limit their standard of conduct.

DOE will continue to review broker-dealer and RIA compliance  with Form CRS, which requires that firms deliver their relationship summaries to new, prospective and existing investors file their relationship summary with the SEC, and post the current relationship summary on the firm’s public website, if the firm has one.

D.Environmental, Social and Governance (“ESG”) Investing

DOE will continue its focus on ESG-related advisory services and fund offerings, including whether the funds are operating in the manner set forth in their disclosures.  DOE will assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in investors’ best interest.
II. Information Security and Operational Resiliency

DOE will review firms’ practices to prevent interruptions to “mission critical” services and to protect investor information.  Given the heightened risks and concerns related to cybersecurity, DOE examinations will focus on firms’ policies and procedures, governance, practices and responses to cyber-related incidents, including a review as to whether they are reasonably designed to safeguard customer records and information (both information residing in registrants’ systems and stored through a third-party provider), and whether the location of such records has been disclosed to the SEC.  DOE will focus on cybersecurity issues, associated with third-party vendors, firms’ visibility into the security and integrity of third-party products and services, and whether there has been unauthorized use of third-party providers.

III. Crypto Assets and Emerging Financial Technology

DOE will conduct examinations of broker-dealers and RIAs offering new products and services or employing new  practices to meet the demands of compliance and marketing and to service investor accounts (for example, on-line brokerage services, internet advisers, and automated investment tools and trading platforms, including RIAs referred to as “robo-advisers”).  Given the disruptions caused by recent financial distress among crypto asset market participants, DOE will continue to monitor and examine potentially impacted or affected firms.  Examinations will focus on recommendations and advice regarding and trading in crypto or crypto-related assets and will assess whether their standards of care were met, and their compliance, disclosure and risk managed practices updated when making recommendations or providing investment advice. 

Examinations also will focus on firms that employee “digital engagement practices” to assess whether recommendations were made or advice was provided, representations were fair and accurate, operations and controls that are in place are consistent with disclosures made to investors, advice or recommendations were in the best interest investors, and risks associated with such practices were considered.

IV. Investment Advisers and Investment Companies
A. Focus Areas for Examinations of RIAs

DOE will remain focused on whether RIA operations  and compliance practices have adopted and considered current market factors, such as those that might impact valuation and the accuracy of the regulatory filings.  During a typical examination, DOE will review the compliance programs and related disclosures of RIAs in “core” areas, including custody and safekeeping of client assets, valuation, portfolio management, brokerage and execution, conflicts, compliance, the oversight and approval process related to RIA fees and expenses (including calculation of fees), and alternative ways an RIA may try to maximize revenue (including revenue earned on clients’ bank deposit sweep programs).  DOE also will review RIA policies and procedures for retaining and monitoring electronic communications and selecting and using third-party service providers.  As in previous years, DOE will prioritize RIAs that have never been examined, including recently registered firms, and those that have not been examined for a number of years.
B. Focus Areas for RICs, including Mutual Funds and ETFs
Given their importance to retail investors, DOE will prioritize examinations of RICs, and will focus on their compliance programs and governance practices, disclosures to investors, and accuracy of reporting to the SEC.  DOE will focus on the fiduciary obligations of RIAs to RICs with respect to their receipt of compensation for services, or other material payments.  DOE will continue to evaluate fund boards’ processes for assessing and approving advisory and other fund fees.  DOE also will assess the effectiveness of funds’ derivatives risk management programs and liquidity risk management programs.

DOE also will focus on funds with specific characteristics, such as: turnkey funds, mutual funds that converted to ETFs, non-transparent ETFs, loan-focused funds, and medium and small fund complexes that have experiences excessive staff attrition. DOE also will monitor the proliferation of volatility-linked and single-stock ETFs.

As with RIA examinations, DOE will prioritize RICs that have never been examined, including recently registered firms, and those that have not been examined in a number of years.

V. Broker-Dealer and Exchange Examination Program
A. Broker-Dealers

DOE examinations of broker-dealers will focus on compliance and supervisory programs generally, including those for electronic communications, and related the recordkeeping.  DOE will continue to prioritize the examination of broker-dealers that hold customer cash and securities for compliance with the Customer Protection Rule and the Net Capital Rule and also will assess broker-dealer credit, market, and liquidity risk management controls to ensure that firms have sufficient liquidity to manage stress events.

DOE will continue to examine broker-dealer trading practices and will assess broker-dealer conflicts of interest in order routing and execution that may negatively affect retail investors and compliance with Regulation SHO.  DOE also will examine the operations of alternative trading systems for compliance and for consistency with their disclosures.

With respect to municipal securities, DOE will continue to focus on their fairness of pricing, compliance with confirmation disclosure requirements, and municipal securities dealer and municipal underwriter compliance with obligations related to municipal issuer disclosure.  DOE also will continue to focus on issues specific to over-the-counter securities and microcap securities, such as the requirement that broker-dealers refrain from publishing quotations for an issuer’s securities when current issuer information is not publicly available and on compliance with the penny stock disclosure rules.  DOE also will seek to identify whether firms may be involved in the illegal distribution of unregistered securities.

B. National Securities Exchanges
DOE will examine the national securities exchanges to assess whether they are meeting their obligations to monitor, investigate and enforce member and listed company compliance with self-regulatory organization rules and the federal securities laws.

C. Security-Based Swap Dealers (“SBSD”s)

DOE examination of SBSDs will continue to focus on whether they have implemented policies and procedures and related to compliance with SBS rules generally, and whether they are meeting their obligations to “accurately report SBS transactions.”

D. Municipal Advisors

DOE will continue to examine whether municipal advisors have met their fiduciary duty to their clients.  DOE will examine whether municipal advisors have complied with MSRB rules, which establish the “core standard of conduct and duties” applicable to municipal advisors, and whether they have disclosed conflicts of interest and have met their relationship documentation, registration, professional qualification and supervision requirements.

E. Transfer Agents

DOE will continue to examine transfer agent processing of items and transfers, recordkeeping and record retention, safeguarding of funds and securities, and filing with the SEC. Examinations will focus on transfer agents that service microcap and crypto asset issuers and transfer agents that use emerging technology. 

VI. Clearance and Settlement 

As required by the Dodd-Frank Act, DOE will examine, at least once annually, each clearing agency designated as “systemically important and for which the SEC serves as the supervisory agency.”  These examinations will focus on clearing agencies’ “core risks, processes, and controls and will cover the specific areas required by statute.”  DOE also will conduct risk-based examinations of other registered clearing agencies that have not been designated as systemically important.  DOE will examine all registered clearing agencies for compliance with the SEC’s Standards for Covered Clearing Agencies to make certain they have policies and procedures in place that address “maintaining sufficient financial resources, protecting against credit risks, managing member defaults, and managing operational and other risks.”  Areas of focus include, among other things, liquidity risk management, counterparty credit stress testing, governance and escalation, and the compliance function.

VII. Regulation Systems Compliance and Integrity (“SCI”)

Regulation SCI was adopted to strengthen the technology infrastructure of the U.S. securities markets.  DOE will continue to evaluate whether SCI entities have established, maintained, and enforced the required written policies and procedures to “establish, maintain, and enforce written policies and procedures reasonably designed to ensure that their systems’ capacity, integrity, resiliency, availability, and security is adequate to maintain their operational capability and promote the maintenance of fair and orderly markets.”

DOE will focus on: software development life cycles (to assess whether SCI entities  review and keep current systems development and testing methodologies); third-party dependencies (to assess whether policies and procedures are reasonably designed to ensure that SCI systems operated by third-parties on behalf of SCI entities have adequate levels of capacity, integrity, resiliency, availability and security); network segmentation (to assess whether a system if breached, would be reasonably likely to pose a security threat to SCI systems); and application programing interface (to ensure SCI systems have adequate levels of security to maintain the SCI entity’s operational capability).


DOE conducts risk-based oversight examinations of FINRA that focus on identifying “those aspects of FINRA’s operations important to the protection of investors and market integrity, including FINRA’s implementation of investor protection initiatives.” Based on the outcome of this risk-assessment process, DOE conducts inspections of FINRA’s major regulatory programs and oversight examinations of FINRA’s examinations of certain broker-dealers and municipal advisors. From its observations, DOE makes recommendations to improve FINRA’s programs, its risk assessment processes and its future examinations.

MSRB establishes rules for and regulates the activities of broker-dealers that buy, sell, and underwrite municipal securities, and municipal advisors.  Using a risk assessment process, DOE examinates registered firms to assess compliance with MSRB rules.

IX. Anti-Money Laundering (“AML”)

The Bank Secrecy Act requires financial institutions, including broker-dealers and certain RICs, to establish AML programs.  These programs, among other things, must include policies and procedures reasonably designed to identify and verify the identity of customers and beneficial owners of legal entity customers, perform customer due diligence, monitor for suspicious activity, and, where appropriate, file Suspicious Activity Reports (“SAR”s) with the Financial Crimes Enforcement Network.  SARs are used to detect and combat fraudulent behavior, including terrorist financing, public corruption and market manipulation.

DOE will continue to prioritize examinations of broker-dealers and certain RICs for compliance with their AML obligations in order to assess, among other things, “whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting ongoing due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs.”  The goal of these examinations is to evaluate whether these policies and procedures are reasonably designed to identify suspicious activity and illegal money-laundering activities.

X. LIBOR Transition

The discontinuation of LIBOR (currently scheduled for mid-2023) could have a significant impact on the financial markets and may present a material risk for RIAs, broker-dealers and other market participants.  DOE will continue to assess broker-dealer and RIA preparation for the transition away from LIBOR.



DOE’s 2023 Examination Priorities are priorities  are not exhaustive.  The current examination priorities reflect DOE’s assessment of the most significant risks, issues and policy matters arising from market and regulatory developments, information gathered from other sources and provide a roadmap for the areas on which DOE will focus during examinations it conducts in 2023.  DOE notes that in addition to the issues described above, it also will conduct examinations focused on "new or emerging risks, products and services market events and investor concerns."