SEC Exam Priorities for 2023 | Oberheiden P.C.

Find Out What Companies and Investment Firms Need to Know about the SEC’s Exam Priorities for 2023

Each year, the U.S. Securities and Exchange Commission (SEC) publishes its annual examination priorities. This report typically comes out in March—which is early enough for companies and investment firms to adapt for much of the year, but too late to allow for advance planning.

But, as many of the SEC’s Exam Priorities carry over from one year to the next, when preparing for 2023, the SEC’s 2022 Examination Priorities Report remains instructive. With this report as a backdrop, and with insights gained from the SEC’s enforcement activity throughout the year, here is our forecast of the SEC’s examination priorities for 2023:

Anticipated SEC Exam Priorities for 2023

Information about the SEC’s likely exam priorities for 2023 can be gleaned from various sources. These include: (i) last year’s examination priorities, (ii) the SEC’s enforcement activity during 2022, and (iii) the SEC’s Report on Objectives for Fiscal Year 2023.

1. Based on Last Year’s Examination Priorities

For 2022, the SEC identified examination priorities in three broad categories. Along with the Commission’s “Significant Focus Areas,” these included focus areas related to investment advisory services and securities broker-dealers and exchanges:

A. Significant Focus Areas

The SEC’s Significant Focus Areas are among the most noteworthy exam priorities for company founders, executives, directors, investment advisers, and broker-dealers. Significant Focus Areas from 2022 that are likely to remain SEC Exam Priorities for 2023 include:

  • Private Funds – Private funds have long been an enforcement priority for the SEC due to their combination of opacity and risk. Private fund managers and registered investment advisers (RIAs) will need to prioritize compliance in all areas in order to avoid unwanted consequences from SEC examinations targeting private funds.

  • Environmental, Social, and Governance (ESG) Investing – ESG investing has exploded in popularity in recent years. As this area remains popular and is a common focus for new and unsophisticated investors, we expect the SEC to maintain its focus here in 2023.

  • Regulation Best Interest (Reg BI) – While 2023 will be the fourth calendar year for Reg BI, compliance remains inconsistent at best across the broker-dealer industry. As the SEC continues working to promote compliance with Reg BI’s four main “Obligations,” we expect to see a high volume of investigations in this area during 2023 as well.

  • Information Security and Operational Resiliency – Cybersecurity is another consistent priority for the SEC. As the threats to companies, firms, exchanges, and retail investors continue to proliferate, we expect that the SEC—along with other agencies—will be placing increased emphasis on cybersecurity compliance in the years to come.

  • Emerging Technologies and Digital Assets (Including Cryptocurrency) – As the SEC continues to shape its framework around the cryptocurrency realm, it is contending with various other emerging technologies and digital asset trends as well. Digital assets aren’t going away any time soon, and this means that the SEC will need to continue to make this area a priority.

B. Investment Adviser and Investment Company Examination Program

The SEC’s Investment Adviser and Investment Company Examination Program is a core component of its compliance enforcement regime. Under this program, the SEC focuses on priorities including, “marketing practices, custody and safety of client assets, valuation, portfolio management, brokerage and execution, conflicts of interest, and related disclosures.”

When conducting exams of RIA firms and investment companies, the SEC has also historically focused on issues such as:

  • Whether the firm or company has adopted appropriate oversight practices to mitigate any heightened risks, such as ensuring additional supervision of RIAs with disciplinary histories and effectively managing compliance across multiple branch offices.

  • Whether the firm or company has correctly calculated management fees, appropriately refunded prepaid fees for terminated accounts, and correctly calculated and documented other client fees and expenses.

  • Examining firms and companies without recent examination histories, including newly-registered firms with no examination history.

C. Broker-Dealer and Exchange Examination Program

With regard to broker-dealers and exchanges, the SEC’s exam priorities tend to be broad-based—focused on ensuring compliance generally rather than prioritizing any individual areas. This is due to the substantial risks facing investors when their broker-dealers engage in fraudulent or non-compliant practices and when exchanges fail to do their part to ensure a fair, safe, and open securities market. With that said, for 2023 we expect the SEC to focus on many of the areas discussed above when conducting exams under its Broker-Dealer and Exchange Examination Program, including private fund and ESG investing, Reg BI compliance, and effectively managing cyber threats.

2. Based on the SEC’s Enforcement Activity During 2022

The SEC bases its exam priorities in large part on its enforcement activity from the prior year. As a result, reviewing the SEC’s enforcement actions from 2022 can give us insight into the Commission’s likely exam priorities for 2023. While the SEC pursues dozens of enforcement actions each month, in 2022 we have seen trends of the SEC focusing its enforcement resources in areas including:

  • Cryptocurrency fraud schemes

  • Investment fraud schemes targeting retail investors

  • RIA and broker-dealer fraud involving excessive fees, account churning, and other prohibited practices

  • Corporate, RIA firm, investment company, and broker-dealer financial reporting and disclosure violations

  • Insider trading, unregistered offerings, and other corporate securities law violations

As you can see, many of these enforcement trends overlap with the SEC’s stated exam priorities for 2022. This is typical; and, while the SEC will likely identify some new exam priorities for 2023, we anticipate that these areas will all remain near the top of the Commission’s enforcement radar next year.

3. Based on the SEC’s Report on Objectives for Fiscal Year 2023

Another source of insight regarding the SEC’s exam priorities for next year is the Commission’s Report on Objectives for Fiscal Year 2023. This report identifies several policy agendas for FY 2023—and, here too, there is overlap with the SEC’s previously-identified priorities. Specifically, the SEC’s Report on Objectives for Fiscal Year 2023 identifies the following as agenda items for the fiscal year that began on October 1, 2022:

The report states that the SEC has identified these areas (among others) as priorities for 2023, “[a]fter discussions with numerous knowledgeable parties, both inside and outside the Commission, and after due consideration.” However, the report also notes that, “[a]s in past years, other issues are likely to arise that will require the attention of the [SEC].” As a result, while these are likely to be among the SEC’s exam priorities for 2023, companies, firms, and individuals that are subject to the SEC’s oversight will need to maintain comprehensive SEC compliance in order to avoid unwanted scrutiny.

FAQs: Understanding and Addressing the SEC’s Exam Priorities for 2023

How Important Is It for Companies and Firms to Focus on the SEC’s Exam Priorities?

It is very important for companies and firms that are subject to the SEC’s enforcement jurisdiction to focus on the Commission’s exam priorities. When the SEC publicly identifies an enforcement priority, it expects companies and firms to take note, and those that don’t risk being deemed negligent (or worse) for failing to establish and maintain compliance.

What Are the Risks of “Failing” an SEC Examination?

Failing an SEC examination can have various consequences. Most immediately, the SEC can take administrative action in response to companies’ and firms’ non-compliance—including registration suspension. In many cases, failed SEC exams can lead to follow-on investigations as well, and these inquiries can carry the risk of civil or criminal penalties.

Does the SEC Target Violations Outside of its Examination Priorities in a Given Year?

Yes. While the SEC identifies various exam priorities each year, it continues to pursue enforcement in all areas. This includes pursuing enforcement based on whistleblower claims and referrals from other state and federal agencies, as well as pursuing enforcement based on the SEC’s own analytics and market surveillance efforts.

How Can Companies and Firms Address the SEC’s Exam Priorities for 2023?

To proactively address the SEC’s exam priorities, companies and firms should work with their outside counsel to ensure that their compliance programs are both up-to-date and being implemented effectively. An incomplete or ineffective compliance program is a red flag for the SEC, and a deficient compliance program will almost always lead to enhanced scrutiny.

Do Companies and Firms Need to Engage Outside Counsel for SEC Compliance?

Due to the complexity of SEC compliance and the risks of failing an SEC examination, all companies and firms that are subject to the SEC’s oversight should engage experienced outside counsel.