The 2023 priorities letter represents only a sliver of the topics firms can expect exam teams to cover this year. In developing the priorities, SEC staff noted their outreach directly to state securities regulators and investor groups, as well as their endeavors to coordinate with foreign regulators. Staff will also ramp up their use of data analysis to monitor and identify potentially problematic activities and to scope examinations.
A handful of significant focus areas for 2023 include:
- Regulation Best Interest and Fiduciary Duty: The lines between broker-dealer and investment adviser duties and obligations continue to blur. The priorities letter is a clear sign of this, lumping both together in a combined section.
- For brokers, examinations will continue to focus on (1) recommendations regarding specific products, investment strategies, and account types; (2) whether disclosures to customers include all material facts relating to the conflicts of interest; (3) processes for making best interest evaluations, including for reviewing reasonably available alternatives, evaluating costs and risks, and identifying and addressing conflicts; and (4) the factors firms consider in relation to customers’ investor profiles.
- Broker exams will also continue to look at specific product types, including complex, high cost, illiquid, proprietary, and microcap products along with unconventional strategies that purport to address rising interest rates.
- Broker and adviser exams will also likely focus on recommendations or advice to senior investors and specific account recommendations, such as retirement account rollovers and 529 plans.
- Division staff will be reviewing how firms manage, mitigate, and eliminate conflicts. While there is no specific mention of broker payment for order flow, this is certainly in the staff’s crosshairs.
- ESG Investing: SEC staff once again identified ESG-related investments and strategies that incorporate ESG criteria as a top focus area.
- Broker-dealers should prepare to be scrutinized on ESG issues just as closely as advisers, funds, and issuers in the coming year.
- Firms will need to avoid “greenwashing” (calling an investment product or service “green” without sufficient justification). However, the staff will take its examination assessments a step further this year by analyzing whether retail recommendations of ESG products are made in investors’ best interest.
- The recent FINRA Examinations and Risk Report also identified the suitability of investment recommendations and greenwashing as key areas of FINRA focus.
- Information Security and Operational Resiliency: Now a perennial area of focus, information security and resiliency and cybersecurity are overarching considerations for Division staff.
- Examinations will focus on firms’ policies and procedures, governance practices, and response to cyber incidents.
- Broker and adviser exams will encompass compliance with Regulations S-P and S-ID, where applicable, particularly safeguarding customer records and PII on firms’ systems and stored with vendors.
- As a clear sign that the agency is strongly focused on climate-related matters, Division staff will assess systemically significant registrants’ operational resiliency planning, including efforts to consider and/or address climate-related risks.
- Firms should remain mindful and resolute regarding preventing malicious email activities, such as phishing or account intrusions; incident response, including for ransomware attacks; identity theft red flags (likely including SAR filings); and managing operational risk in light of a dispersed workforce.
- The priorities letter devotes an entire section to Reg. SCI (Systems Compliance and Integrity), particularly focused on evaluating whether exchanges, ATSs, and other SCI entities have established, maintained, and enforced written policies and procedures 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.
- Emerging Technologies and Crypto Assets: There is no need to belabor what readers already know about the SEC’s views on crypto. Separately, emerging technologies in scope for exams include review of digital engagement practices (DEPs) to assess whether (1) recommendations were made or advice was provided (e.g., through the use of social media marketing and social trading platforms); (2) representations are fair and accurate; (3) operations and controls in place are consistent with disclosures made to investors; (4) any advice or recommendations are in the best interest of the investor taking into account the investor’s financial situation and investment objectives; and (5) risks associated with such practices are considered, including the impact these practices may have on certain investors, such as seniors.
- RIA Marketing Rule and Private Fund Advisers: Our separate client alert takes a closer look at these focus areas.
These priorities will likely correspond with increased referrals to the Division of Enforcement. We will continue to monitor for these and any other updates.
Nicholas J. LosurdoPartner
Jonathan H. HechtPartner
David G. AdamsCounsel