2022 Examination Priorities Report, Schemes and Mind Maps of Lease Finance and Investment Banking

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U. S. S E C U R I T I E S A N D

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

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.

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. 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. Richard R. Best Acting Director Joy G. Thompson Acting Deputy Director

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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.

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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.

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, 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 Division of Examinations

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 their own interests ahead of retail investors’ interests. Examinations will include assessments of practices regarding consideration of alternatives ( e.g. , with regard to potential risks, rewards, and costs), management of conflicts of interest ( e.g. , incentive practices that favor certain products or strategies over others), trading ( e.g. , RIA best execution obligations), disclosures ( e.g. , disclosures provided in Form ADV and Form CRS and made pursuant to Regulation BI), account selection ( e.g. , brokerage, advisory, or wrap fee accounts), and account 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. DID YOU KNOW? 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 their own interests ahead of retail investors’ interests.

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 continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations. As the Division described last year, these efforts build on previous examinations and outreach in this area. In some cases, particularly in regard to systemically important registrants, 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. DID YOU KNOW? The Division will again be reviewing registrants’ business continuity and disaster recovery plans, with particular focus on the impact of climate risk and substantial disruptions to normal business operations.

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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 using developing financial technologies to review whether the unique risks these activities present were considered by the firms when designing their regulatory compliance programs. 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, “Finfluencers,” or digital engagement practices) to assess 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. 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 crypto- asset 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. DID YOU KNOW? The Division will conduct examinations of broker-dealers and RIAs that are using developing financial technologies to review whether the unique risks these activities present were considered by the firms when designing their regulatory compliance programs.