E XC H A N G E C O M M I S S I O N

U.S. SECURITIES AND

E XC H A N G E C O M M I S S I O N

2022

EXAMINATION PRIORITIES

Division of Examinations

DISCLAIMER: This statement represents the views of the staff of the Division of Examinations. It is not a rule,

regulation, or statement of the U.S. Securities and Exchange Commission (SEC). The Commission has neither approved

nor disapproved its content. This statement, like all staff guidance, has no legal force or effect: it does not alter or

amend applicable law, and it creates no new or additional obligations for any person. This document was prepared by

the Division of Examinations and is not legal advice.

CONTENTS

Division of Examinations’ Leadership Message.......................................................................................... 1

Fiscal Year 2021................................................................................................................................... 3

A Word About “Compliance”............................................................................................................... 6

Final Notes........................................................................................................................................... 8

DIVISION OF EXAMINATIONS – 2022 EXAMINATION PRIORITIES........................................................... 9

I. Significant Focus Areas.................................................................................................................. 11

A. Private Funds......................................................................................................................... 11

B. Environmental, Social, and Governance (ESG) Investing.................................................... 12

C. Standards of Conduct: Regulation Best Interest, Fiduciary Duty, and Form CRS............... 13

D. Information Security and Operational Resiliency................................................................. 15

E. Emerging Technologies and Crypto-Assets......................................................................... 16

II. Investment Adviser and Investment Company Examination Program.......................................... 17

A. Registered Investment Advisers ........................................................................................... 17

B. Registered Investment Companies, Including Mutual Funds and ETFs.............................. 18

III. Broker-Dealer and Exchange Examination Program.................................................................... 19

A. Microcap, Municipal, Fixed Income, and Over-The-Counter Securities............................... 19

B. Broker-Dealer Operations..................................................................................................... 20

C. National Securities Exchanges............................................................................................. 20

D. Security-Based Swap Dealers (SBSDs) ............................................................................... 21

E. Municipal Advisors................................................................................................................ 21

F. Transfer Agents...................................................................................................................... 21

IV. Clearance and Settlement Examination Program......................................................................... 22

V. Regulation Systems Compliance and Integrity.............................................................................. 22

VI. FINRA............................................................................................................................................ 23

VII. MSRB........................................................................................................................................... 24

VIII. The London Inter-Bank Offered Rate (LIBOR) Transition........................................................... 24

IX. Anti-Money Laundering................................................................................................................. 25

X. Conclusion..................................................................................................................................... 26

2022 EXAMINATION PRIORITIES | 1

DIVISION OF EXAMINATIONS’ LEADERSHIP MESSAGE

The Division of Examinations is pleased

to share our examination priorities

for fiscal year (FY) 2022. Last year,

we acknowledged two important

exam milestones, the elevation of the

Office of Compliance Inspections

and Examinations to the Division of

Examinations and the 25th anniversary

of a stand-alone examination program.

This year, we mark another important

milestone – a decade of publishing the

Division’s examination priorities.

Richard R. Best

Acting Director

Joy G. Thompson

Acting Deputy Director

The annual publication of our examination priorities furthers the SEC’s mission and aligns

with the Division’s four pillars to promote and improve compliance, prevent fraud, monitor

risk, and inform policy. The examination priorities have taken on greater prominence over

the years and have become an important tool for the examination program. The publication

of the examination priorities provides investors and registrants transparency into those areas

we believe bring heightened risks to investors, registrants, and the markets.

If you were to review the Division’s first priorities from February 2013, you might notice its

relative brevity. But upon closer inspection, you would see that many of today’s priorities

address topics and themes similar to those that the examination program was prioritizing in

2013, and likely many years in between. These perennial priorities represent fundamental

obligations under the federal securities laws and are frequently at the core of SEC-registrant

operations. For example, the 2013 priorities included a focus on high risk areas such as

conflicts of interest, disclosures of fees and expenses, safety of investor and client assets,

sales practices, and oversight of systemically important and similarly situated organizations

that are essential to the fair and orderly operation of our markets. And although the word

“cyber” was not used until 2014, risks related to data compromises were highlighted as well

as what has become a perennial focus on addressing the impact and governance surrounding

the use of new and emerging technologies across registrant types.

2 | U.S. SECURITIES AND EXCHANGE COMMISSION

Not all priorities are perennial, however. Each year, in developing our examination priorities,

we engage in a deliberative process across the SEC to identify the areas we believe exhibit

the highest risks to investors and the markets or are trending in that direction. Some

areas take on more or less prominence in our examinations as the markets, technology,

regulation, services provided to investors, and investor preferences evolve. However, it is

important to note that as our priorities evolve, it does not mean we are no longer conducting

examinations in areas not specifically noted in our priorities. Published priorities are not

exhaustive, nor do they represent the only areas we will consider in assessing and identifying

examination candidates.

Underpinning the last decade of published priorities is the desire to be transparent about

the heightened risks that we see, to highlight many of the areas examinations will focus

on in the year ahead, and ultimately to protect investors, prevent fraud, and promote and

improve compliance. We hope that firms' leadership, including those in compliance, legal,

risk, and information security, across the financial services industry will review the priorities

and consider their firms' operations and internal controls in these higher-risk areas to avoid

potential compliance weaknesses or failures.

2022 EXAMINATION PRIORITIES | 3

Fiscal Year 2021

The Division completed 3,040 examinations in FY21, a 3% increase from FY20 and

about on par with pre-Covid-19 pandemic examination totals in FY19. In addition to

examinations, the staff conducted hundreds of registrant outreach meetings to monitor

several very significant market events, including the volatility in the equity and options

markets in early 2021 that touched on several of our program areas. And although

numbers are just part of the story, underpinning the great exam numbers for FY21 is the

continued perseverance of the staff of the Division and their unwavering commitment to

the SEC’s and the Division’s mission to protect investors. We are incredibly proud of the

staff’s continued efforts this past year to perform meaningful examinations remotely while

contending with the on-going impacts of the Covid-19 pandemic.

During FY21, the Division issued more than 2,100 deficiency letters. Through these

letters, we have our most direct impact improving and promoting compliance and

investor protection and addressing market risk. Most firms, as a result of the deficiency

letters we issue, take steps to remediate the staff’s findings. Frequently, remediation

includes implementing changes to policies and procedures so they are more effective,

updating regulatory filings so they are more clear and responsive, or improving the

quality of disclosures made to investors to be more transparent. Deficiency letters have

also prompted some firms to return fees and other charges back to investors and make

corrections in how they were calculating those fees. To date, our FY21 examinations

prompted firms to return more than $45M to investors. The Division also made more

than 190 referrals of its examination findings to the Division of Enforcement. As we move

further into FY22, we anticipate there will be more money returned to investors, and there

will be additional referrals to Enforcement resulting from our FY21 examinations.

The Investment Adviser/Investment Company (IA/IC) Examination Program, the Division’s

largest program, completed more than 2,200 examinations of investment advisers in

FY21, an increase from both FY20 and FY19. It also completed over 125 examinations of

investment company complexes. In addition to the number of exams, an important metric

is the percentage of SEC-registered investment advisers we examine each year. As the

primary and often only regulator responsible for the oversight of this cohort of registrants,

4 | U.S. SECURITIES AND EXCHANGE COMMISSION

we closely track our coverage ratio and have targeted it to be 15% for the past several

years. This year, the Division examined approximately 16% of RIAs, compared to 15% in

FY20 and FY19. Although there was a slight increase in the coverage percentage in FY21,

we will likely soon have to lower our annual coverage target as the growth in the number

of RIAs continues to grow at a rate that far outpaces staffing increases. In FY21, we saw

some of the fastest year-over-year growth ever, with a net addition of approximately

900 RIAs. And over the last five years, the number of RIAs has increased 20%, from

approximately 12,250 to over 14,800.

The growth in the numbers of RIAs does not fully capture the increasing complexity of

the asset management industry, and the resulting increased complexity of the compliance

issues and risks covered by our examinations. For instance, the number of RIAs with

AUM over $10 billion has increased by 30% in the past five years alone, and total AUM

is now over $113 trillion, itself a nearly 70% increase from five years ago. In addition,

approximately 60% of RIAs are affiliated with other financial industry firms, and more

than 35% manage a private fund.

The Division’s Broker-Dealer and Exchange Examination Program continued to conduct

examinations focused on broker-dealers’ compliance with Regulation Best Interest,

wrapping up its initial exams to look for good faith compliance and kicking off the second

phase of examinations with additional review of effectiveness of policies and procedures

and transaction testing. In addition to the oversight of broker-dealers, BDX conducts

examinations of municipal advisors, national securities exchanges, and transfer agents.

The program completed nearly 450 examinations of these registrants in FY21.

The FINRA and Securities Industry Oversight (FSIO) Examination Program completed

more than 115 examinations of FINRA in FY21, including examinations of key FINRA

oversight areas, and held frequent monitoring meetings with FINRA on various aspects of

its operations to assess and identify risk areas in these operations.

The Clearance and Settlement Examination Program conducted 15 examinations of

clearing firms, including critically important work around the Systemically Important

Financial Market Utilities (or SIFMUs). And our Technology Controls Program (TCP)

completed 81 examinations, including examinations of entities subject to Regulation

Systems Compliance and Integrity (SCI), RIAs and broker-dealers.

2022 EXAMINATION PRIORITIES | 5

The Division also maintained its focus on transparency and support of compliance through

outreach events and publications. Division staff participated in more than 150 conferences

and outreach events, including a national outreach event for municipal advisors in October

and regional outreach events for IA and IC compliance officers. We continued to maintain

a steady pace of issuing Risk Alerts throughout the year as well. In FY21, the Division

published nine Risk Alerts across a variety of topics. These Risk Alerts are designed to

raise awareness of compliance and industry risks and are meant to encourage firms to

think about their own policies and procedures in particular areas. The FY21 Risk Alerts

include:

• Observations from Examinations of Investment Advisers: Supervision, Compliance

and Multiple Branch Offices

• Investor Adviser Compliance Programs

• Observations from Examinations of Broker-Dealers and Investment Advisers:

Large Trader Obligations

• Executive Order on Securities Investments that Finance Communist Chinese

Military Companies

• The Division of Examinations' Continued Focus on Digital Asset Securities

• Compliance Issues Related to Suspicious Activity Monitoring and Reporting at

Broker-Dealers

• The Division of Examinations’ Review of ESG Investing

• Observations from Examinations of Investment Advisers Managing Client Accounts

that Participate in Wrap Fee Programs

• Observations Regarding Fixed Income Principal and Cross Trades by Investment

Advisers from an Examination Initiative

We intend to continue publishing Risk Alerts, providing observations from examinations

and alerting the industry to potentially new compliance and market risks. We take our role

to promote compliance to mean that part of our job is to raise awareness of compliance

risks and share practices that aided an effective compliance strategy.

6 | U.S. SECURITIES AND EXCHANGE COMMISSION

A Word About “Compliance”

With our name change last year to the Division of Examinations, some have speculated

that the removal of “compliance” from the Division’s name was intended to deemphasize

our long-standing focus on, and commitment to, promoting compliance and to

empowering compliance officers. Rest assured, that is not the case.

The importance of improving and promoting compliance remains at the forefront of the

Division’s work. We engage with Chief Compliance Officers and compliance staff routinely

on each examination. In addition, we have continued to look for opportunities to engage

with compliance professionals and the compliance community through various outreach

initiatives. For example, as noted above, we conduct several national and regional

compliance outreach programs each year for a variety of registrant types, and publish our

priorities, Risk Alerts and other reports to provide transparency on many areas directly

tied to compliance.

While many registrants demonstrate the value and importance they place on compliance,

far too often we examine registrants where that is not the case. In last year’s leadership

message we highlighted compliance engagement across business lines, knowledgeable Chief

Compliance Officers, and firm principals’ commitment to compliance. It bears repeating–

compliance officers must be empowered and receive support in the form of resources and

a tone from the top that recognizes their contributions. Senior officers and executives

empower compliance and compliance officers through their words and actions.

Another characteristic of an effective compliance program is resiliency, which has never

been more apparent as we all continue to address pandemic-related change. Compliance

programs and the written policies and procedures that embody them should be developed

and designed to continue to be effective and withstand changes in, for example, market

conditions, investor demand, key personnel, and registrant services or lines of business.

A well-designed and resilient compliance program and compliance staff should be able to

adjust, pivot, and address a range of conditions and scenarios.

In performing examinations, we have observed several commonalities of resilient

compliance programs.

Inclusivity

The primary responsibility to develop and maintain a compliance program may be

with the Chief Compliance Officer and others in a compliance department, but for

most firms the foundation of a resilient compliance program requires participation

2022 EXAMINATION PRIORITIES | 7

and input across all business and operational lines. Staff from across a firm

working in collaboration with compliance can bring additional expertise and

diverse perspectives to the development of a compliance program and the design

of effective controls. Additional benefits, including a sense of shared ownership

and greater attention to implementation, can also result from an inclusive

approach to compliance.

Change Management

A well thought out and well-designed compliance program will be flexible enough

to adjust to known variables in operations and business, but will also have

established processes in place to monitor effectiveness and to pivot or be updated

when appropriate. As we have all experienced over the last couple of years,

significant unanticipated events can occur as well as more incremental change that

can compound over time or across operational lines, causing once effective policies

and procedures or controls to become weak or ineffective. Compliance programs

and related policies and procedures are not “set it and forget it” endeavors, and

having a process in place to address new compliance risks and challenges is critical

to resiliency.

Reviews and Testing

Periodic review and testing of policies and procedures is necessary to ensure the

on-going adequacy and effectiveness of a compliance program. As the Commission

has noted in the context of investment adviser compliance programs, reviews

should consider compliance matters that arose previously, changes in business

activities, and regulatory changes. Testing is also critical, as it provides a means

to affirm that policies and procedures are operating as designed and to ensure the

detection of outlier events or unusual patterns. An effective testing program, such

as one that includes testing on a routine periodic basis at set intervals, when certain

transactions occur, and over extended periods to look for patterns or emerging

trends, deployed in conjunction with periodic reviews, significantly contributes to

the on-going resiliency of a compliance program.

We fully anticipate that our focus on compliance, support of compliance, and compliance

empowerment will continue and we look forward to continued engagement with the

compliance community in the year to come.

8 | U.S. SECURITIES AND EXCHANGE COMMISSION

Final Notes

Perhaps the most significant storyline of FY21 for the Division was the continued impact

of the Covid-19 pandemic on us and the financial services industry generally. As we look

back on the Division’s results from the previous year and plan for the new initiatives and

focus areas for the year to come, the theme of resiliency again comes to mind. Specifically,

the resiliency of the Division’s systems and controls, the resiliency of our operating posture

and capacity, but most importantly, the resiliency of the 1000 plus person staff that make

up the examination program. Their tenacity, commitment to mission and public service,

and collaborative spirit is really the crowning achievement for the year. We are certain

many firms share a similar sentiment for their own employees and the resiliency they have

demonstrated.

Finally, the past year has brought change to the Division. We established the Office

of Security-Based Swaps to carry out the Division’s oversight responsibilities for

security-based swaps entities registered with the Commission, including security-based

swaps dealers, and to coordinate and collaborate with our colleagues in the Division

of Trading and Markets and other offices and divisions as part of the newly launched

Security-Based Swaps Joint Venture. We examined registrants for compliance for several

new regulations, including amendments to Regulation NMS Rule 606 and the Investment

Company Liquidity Risk Management Program Rule. And last, there was change in

the senior leadership ranks of the Division with the departure of Director Pete Driscoll,

Acting Director and Chief Counsel Dan Kahl, Deputy Director and co-head of the IA/IC

examination program Kristin Snyder, and head of the Clearance and Settlement program

Dan Gregus. We thank them for their service, and are fortunate that there are many great

leaders in the Division to fill these gaps, including Joy Thompson, Natasha Greiner, and

Lourdes Caballes who are currently leading as Deputy Director, co-head of the IA/IC

examination program, and head of the Office of Clearance and Settlement, respectively.

The Division’s contact information can be found at https://www.sec.gov/contactinformation/sec-directory. If you suspect or observe activity that may violate the federal

securities laws or otherwise operates to harm investors, please notify SEC staff at https://

www.sec.gov/tcr. We welcome engagement between our staff and members of the public,

and we appreciate hearing from the industry about new and emerging risk areas, products,

and services.

The Division of Examinations (Division or EXAMS) prioritizes examination of certain

practices, products, and services that it believes present potentially heightened risks to

investors or the integrity of the U.S. capital markets. Examinations of these priority areas

are grounded in our four pillars: promoting compliance, preventing fraud, identifying and

monitoring risk, and informing policy. Collectively, examinations and our other efforts,

including publication of Risk Alerts and industry and investor outreach, are designed to

support the SEC’s mission to protect investors, facilitate capital formation, and maintain

fair, orderly, and efficient markets.

The Division will prioritize examinations of several significant focus areas that pose

unique or emerging risks to investors or the markets, as well as examinations of core and

perennial risk areas. Their importance to investors and the markets, coupled with the

seriousness and frequency of observations in prior years’ examinations, demonstrate the

need for the Division to remain vigilant in these areas. And while all of the areas identified

below are critical, this list of priorities is not comprehensive and these will not be the

only issues the Division addresses in examinations, Risk Alerts, and industry and investor

outreach. The Division continues to be flexible so that examinations may also cover new

and exigent risks to investors and the marketplace as they arise.

Division of Examinations

2022

EXAMINATION

PRIORITIES

I. SIGNIFICANT FOCUS AREAS

A. Private Funds

More than 5,000 SEC-registered investment advisers (RIAs), totaling over 35% of

all RIAs, manage approximately $18 trillion in private fund assets deployed in a variety

of investment strategies in various fund types, including hedge funds, private equity

funds, and real estate funds. These private funds frequently have significant investments

from state and local pensions with working family beneficiaries, charities, and

endowments. The size and complexity of these RIAs vary widely from, for example, an

adviser with a small closely-held private fund to an adviser managing hundreds of billions

of dollars across multiple types of funds and strategies. In the past five years, there has

been a 70% increase in the assets managed by advisers to private funds.

2022 EXAMINATION PRIORITIES | 11

The Division of Examinations (Division or EXAMS) prioritizes examination of certain

practices, products, and services that it believes present potentially heightened risks to

investors or the integrity of the U.S. capital markets. Examinations of these priority areas

are grounded in our four pillars: promoting compliance, preventing fraud, identifying and

monitoring risk, and informing policy. Collectively, examinations and our other efforts,

including publication of Risk Alerts and industry and investor outreach, are designed to

support the SEC’s mission to protect investors, facilitate capital formation, and maintain

fair, orderly, and efficient markets.

The Division will prioritize examinations of several significant focus areas that pose

unique or emerging risks to investors or the markets, as well as examinations of core and

perennial risk areas. Their importance to investors and the markets, coupled with the

seriousness and frequency of observations in prior years’ examinations, demonstrate the

need for the Division to remain vigilant in these areas. And while all of the areas identified

below are critical, this list of priorities is not comprehensive and these will not be the

only issues the Division addresses in examinations, Risk Alerts, and industry and investor

outreach. The Division continues to be flexible so that examinations may also cover new

and exigent risks to investors and the marketplace as they arise.

I. SIGNIFICANT FOCUS AREAS

A. Private Funds

More than 5,000 SEC-registered investment advisers (RIAs), totaling over 35% of

all RIAs, manage approximately $18 trillion in private fund assets deployed in a variety

of investment strategies in various fund types, including hedge funds, private equity

funds, and real estate funds. These private funds frequently have significant investments

from state and local pensions with working family

beneficiaries, charities, and endowments. The size and

complexity of these RIAs vary widely from, for example,

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an adviser with a small closely-held private fund to

In the past five years, there has been a

an adviser managing hundreds of billions of dollars

70% increase in the assets managed by

across multiple types of funds and strategies. In the past

advisers to private funds.

five years, there has been a 70% increase in the assets

managed by advisers to private funds.

12 | U.S. SECURITIES AND EXCHANGE COMMISSION

Given the significance of examination findings over the past several years, and the size,

complexity, and significant growth of this market, the Division will continue to prioritize

our focus on RIAs to private funds. Examinations will review issues under the Investment

Advisers Act of 1940 (Advisers Act), including an adviser’s fiduciary duty, and will assess

risks, including a focus on compliance programs, fees and expenses, custody, fund audits,

valuation, conflicts of interest, disclosures of investment risks, and controls around

material nonpublic information (MNPI).

Specifically, EXAMS will continue to review: (1) the calculation and allocation of fees

and expenses, including the calculation of post-commitment period management fees and

the impact of valuation practices at private equity funds; (2) the potential preferential

treatment of certain investors by RIAs to private funds that have experienced issues with

liquidity, including imposing gates or suspensions on fund withdrawals; (3) compliance

with the Advisers Act Custody Rule, including the “audit exception” to the surprise

examination requirement and related reporting and updating of Form ADV regarding

the audit and auditors that serve as important gate-keepers for private fund investors;

(4) the adequacy of disclosure and compliance with any regulatory requirements for cross

trades, principal transactions, or distressed sales; and (5) conflicts around liquidity, such as

RIA-led fund restructurings, including stapled secondary transactions where new investors

purchase the interests of existing investors while also agreeing to invest in a new fund.

The Division will also review private fund advisers’ portfolio strategies, risk management,

and investment recommendations and allocations, focusing on conflicts and disclosures

around these areas. This will include, for example, review of private funds’ investments

in Special Purpose Acquisition Companies (SPACs), particularly where the private fund

adviser is also the SPAC sponsor. In addition, EXAMS will review the practices, controls,

and investor reporting around risk management and trading for private funds with indicia

of systemic importance, such as outsized counterparty exposure or gross notional exposure

when compared to similarly situated firms.

B. Environmental, Social, And Governance (ESG) Investing

RIAs and registered funds are increasingly offering and evaluating investments that

employ ESG strategies or incorporate certain ESG criteria, in part to meet investor

demand for such strategies and investments. There is a risk that disclosures regarding

portfolio management practices could involve materially false and misleading statements

or omissions, which can result in misinformed investors. This risk may be compounded

by: (1) the lack of standardization in ESG investing terminology (e.g., strategies that are

referred to as sustainable, socially responsible, impact investing, and environmental, social,

2022 EXAMINATION PRIORITIES | 13

and governance conscious, which incorporate ESG criteria); (2) the variety of approaches

to ESG investing (e.g., a portfolio may be labeled as ESG because of consideration of ESG

factors alongside traditional financial, industry-related, and macroeconomic indicators,

among others; other portfolios may use ESG factors as the driving or main consideration

in selecting investments; or some portfolios engage in impact investing seeking to

achieve measurable ESG impact goals); and (3) the failure to effectively address legal and

compliance issues with new lines of business and products.

The Division will continue to focus on ESG-related advisory services and investment

products (e.g., mutual funds, exchange-traded funds (ETFs), and private fund offerings).

Such reviews will typically focus on whether RIAs and registered funds are: (1) accurately

disclosing their ESG investing approaches and have adopted and implemented policies,

procedures, and practices designed to prevent violations of the federal securities laws

in connection with their ESG-related disclosures, including review of their portfolio

management processes and practices; (2) voting client securities in accordance with

proxy voting policies and procedures and whether the votes align with their ESG-related

disclosures and mandates; or (3) overstating or misrepresenting the ESG factors considered

or incorporated into portfolio selection (e.g., greenwashing), such as in their performance

advertising and marketing.

C. Standards of Conduct: Regulation Best Interest, Fiduciary Duty, and Form CRS

The Division will continue to address standards of conduct issues for broker-dealers and

RIAs, with reviews focused on how they are satisfying their obligations under Regulation

BI and the Advisers Act fiduciary standard to act in

the best interests of retail investors and not to place

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their own interests ahead of retail investors’ interests.

The Division will continue to address

Examinations will include assessments of practices

standards of conduct issues for brokerregarding consideration of alternatives (e.g., with regard

dealers and RIAs, with reviews focused

to potential risks, rewards, and costs), management of

on how they are satisfying their obligations

conflicts of interest (e.g., incentive practices that favor

certain products or strategies over others), trading

under Regulation BI and the Advisers

(e.g., RIA best execution obligations), disclosures (e.g.,

Act fiduciary standard to act in the best

disclosures provided in Form ADV and Form CRS and

interests of retail investors and not to

made pursuant to Regulation BI), account selection (e.g.,

place their own interests ahead of retail

brokerage, advisory, or wrap fee accounts), and account

investors’ interests.

conversions and rollovers. For both broker-dealers and

RIAs, examinations will focus on the effectiveness of

compliance programs, testing, and training that are designed to support retail investors

and working families receiving recommendations and advice in their best interests.

14 | U.S. SECURITIES AND EXCHANGE COMMISSION

Broker-dealer examinations will review firms’ recommendations and sales practices

related to SPACs, structured products, leveraged and inverse exchange traded products

(ETPs), REITs, private placements, annuities, municipal and other fixed income securities,

and microcap securities. Examinations will review practices, policies, and procedures

concerning the evaluation of cost and reasonably available alternatives as they relate to

recommendations of these products being in the investor’s best interest. Examinations

will also evaluate the compensation structures for financial professionals, including the

conflicts created by such structures, and may focus examinations on the sales of securities

by financial professionals that are highly compensated.

RIA examinations will focus on whether advisers are acting consistently with their

fiduciary duty to clients, looking at both duties of care and loyalty, including best

execution obligations, financial conflicts of interest and related impartiality of advice,

and any attendant client disclosures. Focus areas include: (1) revenue sharing

arrangements; (2) recommending or holding more expensive classes of investment products

when lower cost classes are available (e.g., RIAs that recommend no transaction fee

mutual fund share classes that have 12b-1 fees in wrap fee accounts where the RIA may

be responsible for paying transaction fees); (3) recommending wrap fee accounts without

assessing whether such accounts are in the best interests of clients, including the impact

of the move to zero commissions on certain types of securities transactions by a number

of broker-dealers; and (4) recommending proprietary products resulting in additional or

higher fees. Such reviews also will include an assessment of the adequacy of RIAs’:

(1) compliance policies and procedures designed to address conflicts and ensure advice

in the best interest of clients, including the cost of investing; and (2) disclosures to enable

investors to provide informed consent.

Dually registered RIAs and broker-dealers remain an area of interest for the Division, as

do affiliated firms with financial professionals who service both brokerage customers and

advisory clients. The focus areas of such examinations will be similar to those addressed

above, but with particular emphasis on potential conflicts of interest present at these

firms, including with regard to account recommendations and allocation of investments

across different accounts. For example, examinations will include a focus on: (1) the sale

or recommendation of high fee products; (2) the sale or recommendation of proprietary

products of the firms or their affiliates; (3) incentives for financial professionals to place

their own or their firms’ interests ahead of customers/clients (e.g., transactions that reduce

costs to the adviser and increase expenses borne by the client); and (4) compensation

structures that inappropriately influence investment recommendations. The Division will

review whether these firms have implemented written policies and procedures to effectively

2022 EXAMINATION PRIORITIES | 15

mitigate and address conflicts and to minimize the risk of, and monitor for, misaligned

incentives that may result in recommendations and advice to retail investors, such as

seniors and working families that is not in their best interest.

D. Information Security and Operational Resiliency

Applying information security controls is critical to ensuring business continuity.

Vigilant protection of data is also critical to the operation of the financial markets and

the confidence of its participants. Failing to prevent unauthorized access, use, disclosure,

disruption, modification, inspection, recording or destruction of sensitive records may have

consequences that extend beyond the firm compromised to other market participants and

retail investors. Accordingly, the Division will review broker-dealers’ and RIAs’ practices

to prevent interruptions to mission-critical services and to protect investor information,

records, and assets.

Specifically, EXAMS will continue to review whether firms have taken appropriate

measures to: (1) safeguard customer accounts and prevent account intrusions, including

verifying an investor’s identity to prevent unauthorized account access; (2) oversee vendors

and service providers; (3) address malicious email activities, such as phishing or account

intrusions; (4) respond to incidents, including those related to ransomware attacks;

(5) identify and detect red flags related to identity theft; and (6) manage operational risk

as a result of a dispersed workforce in a work-from-home environment. In the context of

these examinations, the Division will focus on, among other things, broker-dealers’ and

RIAs’ compliance with Regulations S-P and S-ID, where applicable.

The Division will again be reviewing registrants’ business

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continuity and disaster recovery plans, with particular

The Division will again be reviewing

focus on the impact of climate risk and substantial

disruptions to normal business operations. As the Division

registrants’ business continuity and disaster

described last year, these efforts build on previous

recovery plans, with particular focus on

examinations and outreach in this area. In some cases,

the impact of climate risk and substantial

particularly in regard to systemically important registrants,

disruptions to normal business operations.

examinations will account for certain climate related risks.

The scope of these examinations will include a focus on

the maturation and improvements to business continuity and disaster recovery plans over

the years as well as these registrants' resiliency as organizations to anticipate, prepare for,

respond to, and adapt to both sudden disruptions and incremental changes stemming from

climate-related situations.

16 | U.S. SECURITIES AND EXCHANGE COMMISSION

E. Emerging Technologies and Crypto-Assets

The Division has observed a significant increase in the number of RIAs choosing to provide

automated digital investment advice to their clients (often referred to as “robo-advisers”),

continued growth in the use of mobile apps by broker-dealers, and a proliferation of the

offer, sale, and trading of crypto-assets. The Division will

conduct examinations of broker-dealers and RIAs that are

DID YOU KNOW?

using developing financial technologies to review whether the

The Division will conduct examinations

unique risks these activities present were considered by the

of broker-dealers and RIAs that are

firms when designing their regulatory compliance programs.

using developing financial technologies

to review whether the unique

RIA and broker-dealer examinations will focus on firms

that are, or claim to be, offering new products and services

or employing new practices (e.g., fractional shares,

considered by the firms when designing

“Finfluencers,” or digital engagement practices) to assess

their regulatory compliance programs.

whether: (1) operations and controls in place are consistent

with disclosures made and the standard of conduct owed to

investors and other regulatory obligations; (2) advice and recommendations, including by

algorithms, are consistent with investors’ investment strategies and the standard of conduct

owed to such investors; and (3) controls take into account the unique risks associated with

such practices.

risks these activities present were

Examinations of market participants engaged with crypto-assets will continue to review

the custody arrangements for such assets and will assess the offer, sale, recommendation,

advice, and trading of crypto-assets. In particular, EXAMS will review whether market

participants involved with crypto-assets: (1) have met their respective standards of

conduct when recommending to or advising investors with a focus on duty of care and

the initial and ongoing understanding of the products (e.g., blockchain and cryptoasset feature analysis); and (2) routinely review, update, and enhance their compliance

practices (e.g., crypto-asset wallet reviews, custody practices, anti-money laundering

reviews, and valuation procedures), risk disclosures, and operational resiliency practices

(i.e., data integrity and business continuity plans). In addition, the Division will conduct

examinations of mutual funds and ETFs offering exposure to crypto-assets to assess,

among other things, compliance, liquidity, and operational controls around portfolio

management and market risk.

2022 EXAMINATION PRIORITIES | 17

II. INVESTMENT ADVISER AND INVESTMENT COMPANY

EXAMINATION PROGRAM

A. Registered Investment Advisers

DID YOU KNOW?

During a typical examination, the Division reviews the

During a typical examination, the Division

compliance programs of RIAs in one or more of the

reviews the compliance programs of

following core areas: marketing practices, custody and

RIAs in one or more of the following core

safety of client assets, valuation, portfolio management,

areas: marketing practices, custody and

brokerage and execution, conflicts of interest, and related

safety of client assets, valuation, portfolio

disclosures. The Division will assess whether policies and

management, brokerage and execution,

procedures are reasonably designed to prevent violations

conflicts of interest, and related disclosures.

of the Advisers Act and its rules, including breaches of

the RIA’s fiduciary duty in violation of the antifraud

provisions. Additionally, EXAMS will review compliance

programs to examine whether they address that: (1) investment advice is in each client’s

best interest; (2) oversight of service providers is adequate; and (3) sufficient resources exist

to perform compliance duties. In addition, to the extent that firms are using alternative

data or data gleaned from non-traditional sources as part of their business and investment

decision-making processes, reviews will include examining whether RIAs, including RIAs

to private funds and registered funds, are implementing appropriate compliance and

controls around the creation, receipt, and use of potentially MNPI.

As part of its assessment of the effectiveness of a compliance program, the Division will

review whether the firm has implemented oversight practices to mitigate any heightened

risks. For example, whether RIAs: (1) employing individuals with prior disciplinary

histories implemented heightened oversight practices for these individuals; (2) migrating

from the broker-dealer business model reviewed whether recommendations to transition

investor accounts to advised accounts were in the clients’ best interests; and (3) operating

from multiple branch offices have appropriately adapted their compliance programs to

oversee the activities in their branches.

The Division will also continue to focus on RIA disclosures and other issues related to

fees and expenses. In particular, EXAMS will concentrate on issues associated with:

(1) advisory fee calculation errors, including, but not limited to, failure to adjust

management fees in accordance with investor agreements; (2) inaccurate calculations

of tiered fees, including failure to provide breakpoints and aggregate household accounts;

and (3) failures to refund prepaid fees for terminated accounts or pro-rated fees for

onboarding clients.

18 | U.S. SECURITIES AND EXCHANGE COMMISSION

As in previous years, the Division prioritizes RIAs and registered funds that have never

been examined, including recently registered firms, and those that have not been examined

for a number of years. Typically, these examinations focus on firms’ compliance programs.

B. Registered Investment Companies, Including Mutual Funds and ETFs

The Division will continue to prioritize examinations of registered investment companies,

including mutual funds and ETFs, given their importance to retail investors. The Division

typically reviews certain perennial focus areas during its assessments of registered funds’

compliance programs and governance practices. Perennial areas include, among other

topics, disclosures to investors, accuracy of reporting to the SEC, compliance with the

new rules and exemptive orders (including ETF rules and

exemptive orders for non-transparent, actively managed

DID YOU KNOW?

ETFs, and custom baskets). As part of its review of registered

Perennial areas include, among

funds’ LRMPs, the Division will consider whether the

other topics, disclosures to investors,

programs are reasonably designed to assess and manage

accuracy of reporting to the SEC,

the funds’ liquidity risk and review the implementation of

required liquidity classifications, including firms’ oversight of

compliance with the new rules and

third party service providers.

exemptive orders (including ETF

rules and exemptive orders for non-

Certain types of registered funds, portfolio investments, and

fund practices will be prioritized. Examples of the types

and custom baskets).

of funds include: (1) money market funds, which remain

an important part of the registered fund industry to retail

and institutional investors for cash management and will be reviewed for compliance

with applicable requirements, including stress-testing, website disclosures, and board

oversight; and (2) business development companies, which will undergo reviews of their

valuation practices, marketing activities, and conflicts of interest with underlying portfolio

companies. The Division’s focus on portfolio investments will include examinations of

mutual funds investing in private funds to assess risk disclosure and valuation issues.

EXAMS will also prioritize examinations of certain fund practices, including a focus

on advisory fee waivers to assess the sustainability of services for firms that provide

such waivers, and trading activities of portfolio managers that may be designed to inflate

fund performance.

transparent, actively managed ETFs,

2022 EXAMINATION PRIORITIES | 19

III. BROKER-DEALER AND EXCHANGE EXAMINATION PROGRAM

A. Microcap, Municipal, Fixed Income, and Over-The-Counter Securities

The Division remains committed to deterring microcap fraud, or fraud in connection with

securities of companies with a market capitalization under $250 million. The Division will

continue to prioritize examinations of broker-dealers for compliance with their obligations

in the offer, sale, and distribution of microcap securities. Focus areas for examinations

will include: (1) transfer agent handling of microcap distributions and share transfers;

(2) broker-dealer sales practices and their consistency with Regulation BI; and (3) brokerdealer compliance with certain regulatory requirements, including the locate requirement

of Regulation SHO, penny stock disclosure rules (i.e., Rules 15g-2 through 15g-6 of the

Securities Exchange Act of 1934 (Exchange Act)), and the obligation to monitor for and

report suspicious activity and other anti-money laundering (AML) obligations.

States and local governments issue debt securities, referred to as municipal securities

or municipal bonds, to finance a wide variety of public projects. Timely and accurate

municipal issuer disclosure is vitally important to investors and the markets for these

securities. The Division will examine the activities of broker-dealers, underwriters, and

municipal advisors to assess whether these firms are meeting their respective obligations,

as and to the extent applicable, in relation to municipal issuer disclosure.

In addition, the Division will examine broker-dealer trading activity in fixed income

securities with a focus on sales practices; best execution obligations; fairness of pricing,

mark-ups and mark-downs, and commissions; and

confirmation disclosure requirements, including

DID YOU KNOW?

disclosures relating to mark-ups and mark-downs.

The Division’s focus on products and

services will also include the sale of

The Division’s focus on products and services will also

over-the-counter securities and whether

include the sale of over-the-counter securities and whether

broker-dealers recommending these

broker-dealers recommending these securities are meeting

securities are meeting their obligations

their obligations under Regulation BI. Examinations will

under Regulation BI.

also assess compliance with revised Exchange Act Rule

15c2-11, which generally requires broker-dealers to refrain

from publishing quotations in a quotation medium for an

issuer’s security when current issuer information is not publicly available (among

other requirements).

20 | U.S. SECURITIES AND EXCHANGE COMMISSION

B. Broker-Dealer Operations

Broker-dealers that hold customer cash and securities have a responsibility to ensure that

those assets are safeguarded in accordance with the Customer Protection Rule and the Net

Capital Rule. Examinations of broker-dealers will continue to focus on compliance with

these rules, including the adequacy of internal processes, procedures, and controls, and

compliance with requirements for borrowing fully paid and excess margin securities from

customers. Examiners may also assess broker-dealer funding and liquidity risk management

practices to assess whether firms have sufficient liquidity to manage stress events.

The Division will continue to examine broker-dealer trading practices. Examinations will

focus on broker-dealer compliance with best execution obligations in a zero commission

environment and compliance with Exchange Act Rule 606 order routing disclosure rules.

The Division will continue to review potential conflicts of interest in order routing, such as

conflicts arising from payment for order flow, including wholesaler payments or exchange

rebates, and the possible effect any conflicts of interest may have on order routing decisions

and best execution obligations. Examinations will also focus on large trader reporting

obligations and broker-dealer compliance with Regulation SHO, including the rules

regarding aggregation units and locate requirements.

The Division will also examine the operations of certain alternative trading systems

for compliance with Regulation ATS, and in particular focus on consistency with their

disclosures provided in Form ATS-N.

As in previous years, EXAMS will prioritize the review of firms that are engaged in activities

that appear to require broker-dealer registration and those that may be involved in the illegal

distribution of unregistered securities to ensure investors are receiving the benefits of the

federal securities laws.

C. National Securities Exchanges

National securities exchanges provide marketplaces for facilitating securities transactions

and, under the federal securities laws, serve as self-regulatory organizations responsible for

enforcing compliance by their members with the federal securities laws and rules and the

exchanges’ own rules. The Division will examine the national securities exchanges to assess

whether they are meeting their obligations under the federal securities laws and will focus

on exchange regulatory programs to detect and discipline violations, and participation in

National Market System (NMS) Plans. Examinations may also assess and compare any

exchange advisory services offered to issuers regarding ESG initiatives.

2022 EXAMINATION PRIORITIES | 21

D. Security-Based Swap Dealers (SBSDs)

The compliance date for registration of SBSDs and

several other SBSD requirements was October 6, 2021.

Initial examinations of these new registrants will focus

on the policies and procedures related to compliance

with the security-based swap rules generally (e.g., trade

acknowledgement and verification, recordkeeping and

reporting, and risk management requirements).

DID YOU KNOW?

The compliance date for registration

of SBSDs and several other SBSD

requirements was October 6, 2021.

E. Municipal Advisors

The Division will examine whether municipal advisors have met their fiduciary duty and

conflict disclosure obligations to municipal entity clients. The Division will also examine

whether municipal advisors have satisfied their registration, professional qualification,

continuing education, and supervision requirements.

F. Transfer Agents

The Division will continue to examine transfer agents’ core functions: the timely

turnaround of items and transfers, recordkeeping and record retention, safeguarding of

funds and securities, and filing obligations with the Commission. Examination candidates

will include, among others, never-before-examined transfer agents and transfer agents that

service microcap or municipal bond issuers, use novel technologies (e.g., blockchain or

online crowdfunding portal applications), or engage in significant paying agent activity.

22 | U.S. SECURITIES AND EXCHANGE COMMISSION

IV. CLEARANCE AND SETTLEMENT EXAMINATION PROGRAM

The Division will conduct, as required by Title VIII of the Dodd-Frank Act, at least one

risk-based examination of each clearing agency designated as systemically important and

for which the SEC serves as the supervisory agency. These examinations will focus on

core risks, processes, and controls and will cover the specific areas required by statute,

including the nature of clearing agencies’ operations and assessment of financial and

operational risk. Additionally, the Division will conduct risk-based examinations of other

registered clearing agencies which have not been designated as systemically important. The

Division will also examine both groups of clearing agencies for compliance with the SEC’s

Standards for Covered Clearing Agencies, which are rules that require covered clearing

agencies to, among other things, have policies and procedures that address maintaining

sufficient financial resources, protecting against credit risks, managing member defaults,

and managing operational and other risks.

In addition, EXAMS will conduct risk-based examinations of SEC-registered clearing

agencies to: (1) determine whether their respective risk management frameworks

comply with the Exchange Act, and serve the needs of their members and the markets

they serve; (2) assess the adequacy and timeliness of their remediation of prior deficiencies,

including, for example, the role of senior leadership in the remediation process; and

(3) examine other risk areas identified in collaboration with the SEC’s Division of Trading

and Markets and other regulators. Areas of focus may include margin, counterparty credit

risk, disclosure framework, governance, recovery and wind-down, default management,

liquidity risk management, and project management, among other things.

V. REGULATION SYSTEMS COMPLIANCE AND INTEGRITY

The Commission adopted Regulation SCI to strengthen the technology infrastructure of

the U.S. securities markets. Regulation SCI entities include national securities exchanges,

registered and certain exempt clearing agencies, FINRA, MSRB, plan processors, and

alternative trading systems that meet certain volume thresholds. Among other things, these

critical market infrastructure entities must establish, maintain, and enforce written policies

and procedures reasonably designed 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.

2022 EXAMINATION PRIORITIES | 23

EXAMS will continue to evaluate whether SCI entities have established, maintained,

and enforced written policies and procedures as required. Areas of focus will include:

(1) whether the incident response policies and procedures of SCI entities are reasonably

designed, with a particular focus on ransomware; (2) the use of third-party network

infrastructure services to support critical functions; (3) policies and procedures pertaining

to the return to the workplace or further hybridization of the workplace after the extended

telework posture caused by the COVID-19 pandemic; and (4) whether SCI entities have

established reasonably designed policies and procedures to identify and mitigate software

supply chain risks, including secure code development practices of SCI entities.

VI. FINRA

FINRA oversees approximately 3,400 brokerage firms, 153,000 branch offices, and

618,000 registered representatives through examinations, enforcement, and surveillance.

In addition, FINRA, among other things, provides a forum for securities arbitration and

mediation, conducts market regulation, including by contract for a majority of national

securities exchanges, reviews broker-dealer advertisements, administers the testing and

licensing of registered persons, and operates industry utilities such as Trade Reporting

Facilities.

EXAMS conducts risk-based oversight examinations of FINRA. It selects areas within

FINRA to examine through a risk assessment process designed to identify those aspects

of FINRA’s operations important to the protection of investors and market integrity,

including FINRA’s implementation of new investor protection initiatives. The analysis is

informed by collecting and analyzing extensive information and data, regular meetings

with key functional areas within FINRA, and outreach to various stakeholders, including

broker-dealers and investor groups. Based on the outcome of this risk-assessment process,

EXAMS conducts inspections of FINRA’s major regulatory programs. EXAMS also

conducts oversight examinations of FINRA’s examinations of certain broker-dealers

and municipal advisors. From its observations during all of these inspections and

examinations, EXAMS makes detailed recommendations to improve FINRA’s programs,

its risk assessment processes, and its future examinations.

24 | U.S. SECURITIES AND EXCHANGE COMMISSION

VII. MSRB

MSRB regulates the activities of broker-dealers that buy, sell, and underwrite municipal

securities, as well as the activities of municipal advisors. MSRB establishes rules for

municipal broker-dealers (including registered municipal securities dealers) and municipal

advisors, supports market transparency by making municipal securities trade data

and disclosure documents available, and conducts education and outreach regarding

the municipal securities market. EXAMS, along with FINRA and the federal banking

regulators, conducts examinations of registered firms to assess compliance with MSRB

rules. EXAMS also applies a risk assessment process, similar to the one it uses to oversee

FINRA, to identify areas to examine at MSRB. Examinations of MSRB evaluate the

effectiveness of MSRB’s policies, procedures, and controls.

VIII. THE LONDON INTER-BANK OFFERED RATE (LIBOR) TRANSITION

The discontinuation of LIBOR could have a significant impact on the financial

markets and may present a material risk for certain market participants, including the

RIAs, broker-dealers, investment companies, municipal advisors, transfer agents and

clearing agencies overseen by the Division. Preparation for the transition away from

LIBOR is essential for minimizing any potential adverse effects associated with LIBOR

discontinuation. EXAMS will continue to engage with registrants through examinations

and outreach efforts to assess their exposure to LIBOR and their transition to an

alternative reference rate, preparations for the cessation of many LIBOR rates beginning

immediately after December 31, 2021, and the transition to an alternative reference rate,

in connection with registrants’ own financial operations, the exposures of their clients and

customers, and their obligations when recommending LIBOR-linked instruments.

2022 EXAMINATION PRIORITIES | 25

IX. ANTI-MONEY LAUNDERING

The Bank Secrecy Act requires financial institutions, including broker-dealers and

registered investment companies, to establish AML programs that are tailored to address

the risks associated with the firm’s location, size, and activities, including customers they

serve, the type of products and services offered, and the means by which those products

and services are offered. These programs must, among other things, include policies

and procedures reasonably designed to identify and verify the identity of customers and

beneficial owners of legal entity customers, perform customer due diligence (as required by

the Customer Due Diligence rule), monitor for suspicious activity, and, where appropriate,

file Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network.

SARs are used to detect and combat terrorist financing, public corruption, market

manipulation, and a variety of other fraudulent behaviors.

Given the importance of these requirements, the Division

DID YOU KNOW?

will continue to prioritize examinations of broker-dealers

The goal of AML examinations of

and registered investment companies for compliance

broker-dealers and investment

with their AML obligations in order to assess, among

companies is to evaluate whether they

other things, whether firms have established appropriate

customer identification programs and whether they

have adequate policies and procedures

are satisfying their SAR filing obligations, conducting

in place that are reasonably designed

due diligence on customers, complying with beneficial

to identify suspicious activity and illegal

ownership requirements, and conducting robust and

money-laundering activities.

timely independent tests of their AML programs. The

goal of these examinations is to evaluate whether brokerdealers and registered investment companies have adequate policies and procedures

in place that are reasonably designed to identify suspicious activity and illegal moneylaundering activities.

26 | U.S. SECURITIES AND EXCHANGE COMMISSION

X. CONCLUSION

These priorities reflect the Division’s assessment of certain risks, issues, and policy

matters arising from market and regulatory developments, information gathered

from examinations, and other sources, including tips, complaints, and referrals, and

coordination with other Divisions and Offices at the SEC as well as other regulators. While

the Division will allocate significant resources to the examination issues described herein,

it will also conduct examinations focused on and devote resources to new or emerging

risks, products and services, market events, and investor concerns. The Division welcomes

comments and suggestions regarding how it can better fulfill its mission to promote

compliance, prevent fraud, identify and monitor risk, and inform SEC policy. Our contact

information is available at https://www.sec.gov/exams. If you suspect or observe activity

that may violate the federal securities laws or otherwise operates to harm investors, please

notify SEC staff at https://www.sec.gov/tcr.

U.S. Securities and Exchange Commission

DIVISION OF EXAMINATIONS

Washington, DC