Episode 96: How The 2022 SEC Exam Priorities will Affect Your Firm

On episode 96 of the CCO Buzz podcast, Tina Mitchell, Managing Director of Consultation Services, discusses the 2022 SEC Exam Priorities.

(GUITAR INTRO)

CCO Buzz: Welcome back to the CCO Buzz. Sorry, we took a bit of a breather for the Form ADV deadlines, hopefully you didn’t miss us too much in the short break. Whew, it certainly has been quite the start to the year, especially with all the new proposed rules that have come out. But the SEC did take it’s time when coming out with the 2022 Examination Priorities. So much, that the team at Core Compliance was eagerly waiting for the arrival so we could unpack what regulatory focus the industry has in store for 2022.

Today we’re joined by Managing Director of Consultation Services Tina Mitchell. She’s here to discuss her latest article, “SEC 2022 Exam Priorities – Learn How They Will Affect Your Compliance Program” and to provide a little more understanding and application to what’s in store for firms this year.

With that, let’s begin…

Tina, the 2022 examination priorities made their debut quite late this year, wouldn’t you say?

Tina Mitchell: Oh indeed. Our team was waiting eagerly for their arrival. And with all the newly proposed rules and guidance provided by the SEC lately, we weren’t surprised by the five significant focus areas they listed, which actually are Private Funds, ESG Investing, Standards of Conduct, Information Security and Operational resiliency, Emerging Technologies and Crypto-Assets.

And notably, these were topics that were subjects of Risk Alerts the SEC issued in 2021.

CCO Buzz: I knew those five topics sounded familiar. Being that they’ve provided guidance in the past, in your article you provide readers with a bit more insight regarding the five topics.  Do you mind sharing a bit with CCO Buzz listeners?

Tina Mitchell: Of course.

So I’ll start with Private Funds. This topic’s really no stranger to the priorities list, but it’s definitely receiving heightened interest due to the continued growth in assets being invested in private funds.  Private Fund advisers need to anticipate a higher level of scrutiny when it comes to their fee calculations, the fees and expenses they charge, custody issues, disclosures, and overall compliance and risk management.

So for ESG investing, the SEC is looking at whether a firm has expanded their ESG offerings and/or applying such criteria to its investments. So within the Priorities, the report highlights a focus for advisers and funds on terminology, use, accuracy of disclosures, proxy voting practices, and much more.

Now regarding the Standards of Conduct, which covers Regulation Best Interest, Fiduciary Duty, and Form CRS – firms really need to be cognizant of the effectiveness of their compliance programs, including the testing and training protocols they have. The focus for this exam priority is being applied to broker-dealers, investment advisers and dually registered firms.

The area of information security and operations resiliency continues to be a strong focus of the SEC.  Cybersecurity is the number one topic in this arena, as attested by the amount of guidance the regulators have issued.  In addition to cybersecurity, the priorities report outlines the SEC’s focus for the information security and operation resiliency, which covers the effectiveness of a firm’s current protocols that cover certain areas that can affect business continuity, compliance with Reg S-P and S-ID (which is identity theft), performing due diligence of services providers, and managing risk due to remote working.

And then, last but not least, is Emerging Technologies and Crypto-Assets. It’s really no surprise that there’s  growing focus and interest, as “robo-advisers” and “digital assets” have become more and more prevalent in the securities industry over recent years. The heightened focus actually covers, among other things, whether firms have considered and addressed the applicable risks within their compliance programs surrounding new offerings, products, and services, the implementation of new practices, such as fractional shares, “Finfluencers”, and digital engagements.

CCO Buzz: Wow, thank you for the high-level summary. Is there more about the SEC exam priorities report that you would like to share with our listeners?

Tina Mitchell: Actually, yes.  Within the introduction of this year’s report, the SEC discussed the “commonalities of resilient compliance programs” that they had found during recent routine exams, which they outlined as inclusivity, change management, and reviews and testing.

CCO Buzz: Hmmm, that sounds interesting. Do you mind shedding a bit of light on how firms can implement these commonalities?

Tina Mitchell: Sure. Let’s look at inclusivity.  Basically, it means to include. And we all know compliance is a culture and not just the CCO’s responsibility. Therefore, I think CCOs and compliance personnel need to have regular meetings and on-going dialog with senior management and appropriate staff, as the continued flow of important information is really a must. The component of change management covers the need to adequately address the change within the regulatory landscape as well as business strategies. CCOs need to have foresight and initiative to ensure their firm’s compliance program truly addresses the nuances of the industry and the firm’s business.

And then the third consideration is review and testing, which of course should already be a conditioned behavior within a firm. The review and testing performed though, should be diversified and formulated based on risks and conflict areas.  In addition, CCOs really should routinely assess their testing and review protocols to determine the continued effectiveness, as it helps ensure a strong compliance program.

CCO Buzz: What a great way to end our discussion on the examination priorities. I think firms have a lot to focus on during Q2 in order to get prepared for an SEC exam. Thank you so much for joining us today, Tina. But before we go, is there anything else you’d like to add?

Tina Mitchell: There is. The exam priorities are just the tip of the iceberg when it comes to regulatory activity in 2022. As an example, by the end of Q1 of this year, the SEC had already issued 14 proposed rules, and 7 of them, if adopted, will impact investment advisers with certain business practices, especially private fund advisers.

CCO Buzz: At Core Compliance, we find that staying abreast of the latest news and updates of the industry is integral to our client’s success.  Knowing how to navigate and drive compliance solutions is how we empower our clients so they can stay focused on their business. For more information about our services or for questions about the examination priorities and the regulatory horizon of 2022, contact the team at Core Compliance at www.corecls.com or at 619.278.0020. Thank you!

 

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