On Tuesday, February 7, the Division of Examinations of the U.S. Securities and Exchange Commission released its 2023 Examination Priorities. Private fund sponsors and managers should pay attention to the Priorities for two primary reasons:

  • Specific, Near-Term Guidance: Compliance officers and senior operations management should incorporate any applicable forward-looking information into their compliance and operational reviews.
  • Broader Insight: The Priorities can also serve as a window for all senior management into the ongoing comprehensive reset of private fund regulation by the SEC.

Specific, Near-Term Guidance.

As usual, the Priorities seek to provide an advance look at areas that will be prioritized by the staff of the Division of Examinations (EXAMS) in the coming year, which—for private fund managers and sponsors—include:

  • Standards of Conduct. The Priorities set the stage for a continued focus on how a manager implements its fiduciary duties. Managers and sponsors should expect the EXAMS staff to look at the formulation of their fiduciary duty in client agreements and disclosure documents, as well as—where applicable—detailed inspections of their Form CRS and its Regulation Best Interests policies. A closely related area of interest is the use of hedge clauses (provisions that purport to excessively reduce or waive a sponsor's or manager's fiduciary duty) in client agreements, which was the subject of a widely reported enforcement case last year. In addition, the Priorities confirm that the EXAMS staff will continue to be focused on conflicts of interest, including whether conflicts disclosures are implemented in a manner that demonstrates either express or implied informed client consent (this topic is of particular importance because conflicts related cases involving private fund managers are also a top priority for the SEC's Enforcement Division1).
  • The New Marketing Rule. In sweep and broader examinations that include Marketing Rule compliance, the Priorities state that EXAMS will assess not only whether covered advisers have implemented general policies and procedures adequate to comply with the new rule, but also whether managers and sponsors have complied with the specific substantive requirements of the Marketing Rule. This review can focus on several aspects of the Marketing Rule, including how a sponsor or manager satisfies the "substantiation" (of material statements of fact included in an "advertisement") requirement. In advising clients who have received Marketing Rule-related requests in recent exams, we can confirm that the EXAMS staff is genuinely interested in this area.
  • Electronic Communications. It has been widely reported that a sweep review of a number of investment advisers by the SEC Enforcement Division, focused on so-called "off-channel communications," is underway.2 Although this matter is not directly referenced in the Priorities, a statement that EXAMS intends to review "policies and procedures for retaining and monitoring electronic communications" was included.
  • Alternative Data. While many industry players thought that the "spotlight" focus on alternative data in examination would dim, the Priorities highlight alternative data as a continuing focus area.3 Fund managers and sponsors employing alternative data in their research processes should consider reviewing the types of data their firms are using and what steps are taken around its use.
  • Valuation and Fee Calculations. The focus on fees and expenses will continue with a focus not only on the calculation and allocation of fees and expenses, but also on valuation practices. Given the challenges that many areas of the economy have endured during the past 12 months, this will likely not come as a surprise. Managers might consider preparing, in advance, a presentation for regulators and investors on the valuation process and its checks and balances.
  • Environmental, Social and Governance Investing. ESG investing will continue to be a focus. While there are a number of ESG-related proposals pending for advisers and public companies, recent exam experience in this area has centered on testing whether ESG-related statements in marketing materials and policies accurately reflect an adviser's practices; compliance personnel should consider making this a primary focus of any ESG modules in a policies and procedures review.
  • Custody of Client Assets. Compliance with the Custody Rule is also listed as a priority, but in the context of digital assets and crypto securities that could be considered to be assets covered by that rule (i.e., "client funds or securities"). A proposal on the SEC's agenda is anticipated to expand the Custody Rule, so managers should expect examination teams to look at compliance with the current Custody Rule and—at least to some degree—with an eye toward the rule's anticipated future expansion.
  • Other Focus Areas. The private funds focus areas in the Priorities also include cybersecurity, cryptocurrencies and digital assets, as well as the use and selection of third-party service providers.

Broader Insight.

The Priorities also provide an opportunity to assess the directional thrust of the SEC's vision of regulation of the private funds industry.

Statements from Chairman Gensler in a speech earlier this month and in a February 2022 video evidence a desire of more of a role for the SEC in the indirect economic relationship between a fund sponsor and the sophisticated, experienced institutional investors in a private fund, with a goal of fostering more "transparency," "competition" and "efficiency."

However, the Priorities—especially when read alongside the Private Fund Advisers, Outsourcing and other rulemaking proposals—may well indicate that, in spirit at least, the SEC will have a seat at the table when a fund manager or sponsor is drafting, amending, interpreting or applying the terms of an investment management agreement or other client or investor agreement. This increasing transformation in the regulatory landscape, including with respect to the private nature of sponsor-investor dynamics, should be a key part of any compliance and business reviews, and is just as important to an adviser's business as the specific areas of examination interest. This will not only help managers and sponsors limit future SEC exam deficiencies – it can also mitigate their risk of being caught up in enforcement actions that often arise out of exam referrals or enforcement "sweeps" targeting risk areas identified through the SEC's exam program (all of which have become more prevalent under the current administration).


1. An overview of recent SEC enforcement cases involving private fund managers can be found here. Other focus areas for the SEC's Enforcement Division, which track the 2023 EXAMS priorities, include valuation, fees and expenses, and ESG disclosure related violations.

2. A letter to the SEC from a number of trade associations on this matter is linked here.

3. Our most recent alert on the alt-data sweep is here and we shared our thoughts on seminal alt-data cases here and here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.