SEC Releases 2023 Examination Priorities

The SEC releases its examination priorities every year to provide insight into potential risk areas that might impact investors. Along with the usual focus on compliance with policies and procedures, client suitability standards, etc., the SEC also highlights specific industry concerns related to the current landscape and new or updated regulation. 

Here are three issues that we believe the SEC will prioritize this year: A focus on the new Derivatives Rule, the ever-expanding role of ESG, and the effect of staff attrition in smaller registered investment advisers (RIA) companies. 

“The Great Resignation” and RIA Staff Attrition

The pandemic has brought on many changes in our lives, and one of the biggest changes has been with people working remotely. Firms have struggled, and continue to struggle, with aligning company policies around returning to the office with employees’ desire to work remotely. Many workers have quit their jobs during the pandemic and may even prioritize the option to work remotely when looking for new jobs. Some companies have rolled out hybrid models where employees come to the office for a certain number of days. 

One of the more unique 2023 exam priorities is the SEC’s attention to the impact of staff attrition, particularly in smaller organizations, largely due to the COVID-19 pandemic and return-to-work policies. Employee turnover is a struggle for all firms to manage, but the SEC is particularly interested in how this turnover may be impacting controls and risk management protocols. 

SEC Continues Its Focus on ESG

Environment, Social, and Governance (ESG) products and offerings continue to be a point of interest for the SEC. In its 2023 examination priorities announcement, the SEC stated that it will continue to “assess whether ESG products are appropriately labeled and whether…such products…are made in the investors’ best interests.” The SEC released proposals in May 2022 to crack down on “greenwashing,” where funds overstate their sustainability claims.

As ESG programs continue to expand, ensuring compliance is an ongoing risk for firms to manage. Using adequate compliance rules within an order management system is a piece of the puzzle, as well as compliance teams testing and monitoring their ESG policies, just like any other policy and procedure.

Derivatives Risk Management Program: Is Your Firm Up to Date?

The Derivatives Rule was introduced in August 2022, but it’s uncertain how many firms are fully up to date on this rule requirements. This is obviously of interest to the SEC, and it should come as no surprise that the Derivatives Rule is included in the SEC exam priorities.

Under the new rule, firms must adopt a written derivatives risk management program if their derivatives positions exceed 10% of net asset value. Smaller RIAs especially may be impacted as adhering to this rule requires hiring a derivatives risk manager to oversee this program, relying upon stress testing, as well as new monitoring and testing requirements. Firms can expect the SEC to home in on these programs to assess if they are following this new rule.

IMP has experience managing multiple facets of derivatives use by asset managers and can help you navigate these compliance issues. Talk to us about how we can help you gain efficiencies with your compliance programs.