Home Private Equity 2023 SEC Exam Priorities | King & Spalding

2023 SEC Exam Priorities | King & Spalding

King & Spalding

On February 7, the Division of Examinations of the Securities and Exchange Commission (the “Division”) published its 2023 Examination Priorities (the “Exam Priorities”).1 The Exam Priorities indicate a particular Staff examination focus on registered investment advisers (“RIAs”) generally, and private fund advisers specifically, highlighting certain areas where enhanced Staff scrutiny is anticipated, including the Marketing Rule.

The emphasis on private funds in the Exam Priorities echoes the SEC’s increased focus on private funds, including through the Private Funds reform rules adopted in August,2 and two Form PF-related proposals (one of which has already been adopted,3 and with the joint SEC-CFTC Form PF proposal pending), among other more generally applicable Investment Advisers Act rule proposals (including RIA outsourcing and custody).

Focus on RIAs to Private Funds

The Division states that it expects to focus increasingly on considerations for RIAs providing advisory services to private funds. The Exam Priorities note an 80% increase in the gross assets of private funds in the past five years, which as of the date of the Exam Priorities exceeded $21 trillion. These statements echo a general focus of the current SEC on private markets and private funds.

Specifically, the Division highlights the following areas of focus for examinations of RIAs to private funds:

  • 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 Advisers Act Section 204A (Prevention of Misuse of Nonpublic Information); and
  • compliance with the Advisers Act Rule 206(4)-2 (Custody Rule).

In addition, the Division notes that it expects to focus on private fund managers with specific risk aspects in the coming years, including specifically:

  1. highly-leveraged private funds,
  2. private funds managed side-by-side with business development companies (BDCs),
  3. private equity funds that use affiliated companies and advisory personnel to provide services to their fund clients and underlying portfolio companies,
  4. private funds that hold certain hard-to-value investments, such as crypto assets and real estate-connected investments, with an emphasis on commercial real estate,
  5. private funds that invest in or sponsor special purpose acquisition companies (SPACs), and
  6. private funds involved in adviser-led restructurings, including stapled secondary transactions and continuation funds.4

Compliance with Recently Adopted Rules

The Marketing Rule5

Among other rules and regulations, the Exam Priorities note that future examinations will assess fund managers’ compliance with the new Marketing Rule, the compliance date of which was November 4, 2022. The SEC has consistently emphasized compliance with advertising and solicitation rules as crucial to prevent fraudulent and deceptive practices within the private funds industry. The Exam Priorities state that in future examinations, the Division will evaluate both a firm’s substantive compliance with the Marketing Rule, as well as whether a firm’s written policies and procedures ensure that its marketing materials are accurate, clear and do not mislead investors. The Division also notes that a firm’s ability to substantiate material statements and advertising data will be assessed during future examinations. We have seen a particular Staff emphasis on its January 2023 FAQ guidance regarding net performance presentation requirements for individual assets.6

Cybersecurity and Data Protection

The Division noted that it will be increasingly focused on identifying and addressing vulnerabilities in data protection safeguards given the volatility of the global economy and the rising occurrence of cybersecurity attacks, noting in particular the increased use of ransomware.

Private fund managers will face scrutiny regarding their ability to safeguard investor data and sensitive information, as well as their readiness to counter cyber threats. The Division noted that their focus during examinations will be on whether written policies around cybersecurity are “reasonably designed to safeguard customer records and information—both information residing in registrants’ systems and stored through a third-party provider—as well as whether the location of such records has been properly disclosed to the Commission, where required.”

Having written policies governing both the proper procedures to prevent cyberattacks, as well as to respond properly in the event a data security breach occurs, will be a key focus in future examinations. The Division also highlights that compliance does not stop in-house; ensuring the proper protocols are in place with third-party products and service providers will also be assessed.

ESG Investing

The Exam Priorities also note that there is an increased investor demand for investments incorporating environmental, social and governance (ESG) criteria. In future examinations, the Division intends to evaluate whether fund managers are operating consistently with the ESG initiatives included in their marketing materials and whether such initiatives are in the investors’ best interests.


The Division’s Exam Priorities indicate a particular Staff focus on private fund managers in examinations, and gives important messaging about where Staff may focus in upcoming examinations. We encourage RIAs to review the Exam Priorities in detail.

This article is not exhaustive of the topics included in the Exam Priorities, and readers should review the full report for important details

1 2023 Examination Exam Priorities, U.S. Securities and Exchange Commission, Division of Examinations, February 7, 2023, https://www.sec.gov/files/2023-exam-priorities.pdf.

2 K&S Client Alert, SEC Adopts Private Fund Reform Rules, available at https://www.kslaw.com/news-and-insights/sec-adopts-private-fund-reform-rules.

3 K&S Client Alert, SEC Adopts Amendments to Form PF, available 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 focus on continuation funds is also present in the Form PF amendments adopting release. K&S Client Alert, SEC Adopts Amendments to Form PF, available 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.

6 https://www.kslaw.com/news-and-insights/sec-staff-addresses-net-performance-presentation-requirements-for-single-investments-under-marketing-rule

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