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Regulation

Private Funds, ESG, Crypto Among SEC’s Priorities in 2022             

The regulator released its annual report identifying the greatest risks facing investors and the markets.
By Michael Katz

The Securities and Exchange Commission said it will focus in 2022 on private funds, environmental, social, and governance investing, and crypto assets, among other priorities.

The regulator’s Division of Examinations released its annual Examination Priorities Report for 2022, in which it identifies the areas it believes present the highest risks to investors and the markets. The SEC said it completed more than 3,000 examinations in fiscal year 2021, a 3% increase from the previous year, and conducted hundreds of registrant outreach meetings to monitor significant market events, such as the volatility in the equity and options markets in early 2021.

“In this time of heightened market volatility, our priorities are tailored to focus on emerging issues, such as crypto-assets and expanding information security threats, as well as core issues that have been part of the SEC’s mission for decades,” Richard Best, the SEC’s acting director of the Division of Examinations, said in a statement. “Our priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs.”

Private Funds

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One of the SEC’s focuses for the year will be on registered investment advisers who manage private funds. It said it will review advisers’ fiduciary duty, compliance programs, fees and expenses, as well as conflicts of interest, disclosures of investment risks, and controls regarding material nonpublic information.

The regulator also plans to review the portfolio strategies, risk management, investment recommendations, and allocations of private fund advisers, with an emphasis on conflicts and disclosures regarding those areas.   

ESG

ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings, will also be a major focus of the SEC this year. In particular, the regulator wants to know whether investment advisers and registered funds are accurately disclosing ESG investing approaches, and whether they have controls in place to prevent securities laws violations regarding ESG-related disclosures.

The SEC also said it will review companies’ proxy voting policies and procedures to see if their votes align with their ESG-related disclosures and mandates, and if there are any misrepresentations of the ESG factors considered or incorporated into their portfolios.

Crypto Assets, Emerging Technologies

The SEC will conduct examinations of broker/dealers and advisers using crypto assets and emerging financial technologies to review whether they considered the potential risks involved when designing their compliance programs.  The Division of Examinations will review whether market participants involved in digital assets have met their standards of conduct when recommending to or advising investors, and whether they regularly update their compliance practices.

“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,” said the SEC in its report.

It said the examinations will focus on firms that claim to have new products, services, and practices to determine whether they are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations.

The SEC said the scope of any examination is determined through a risk-based approach that includes analysis of a firm’s history, operations, services, products offered, and other risk factors.

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Home > News > Risk > Wall Street Expects a Slowdown, Not a Recession, But …
Risk

Wall Street Expects a Slowdown, Not a Recession, But …

The one skunk at the picnic is pessimistic Deutsche Bank, which sees trouble ahead.
By Larry Light



Yogi Berra, the baseball great and off-beat social commentator, said it well: “I never make predictions, especially about the future.” Wall Street, however, can’t help itself from issuing economic auguries—and its consensus is reassuring, with one jarring exception.

Forecasts about the economy, while problematic, give people a glimpse of what to expect in their lives and investments—amid a world today beset by war, a persistent pandemic, waning government aid, high inflation, and climbing interest rates.

The outlooks distill all the bad news with the good news, such as low unemployment, strong corporate earnings, large household savings, and small debt loads. Weighing the good and the bad has resulted in an overwhelming consensus of investment firms and other economic observers that the U.S. won’t slip into a recession anytime soon (meaning this year or next), and will instead only experience a growth slowdown.

Which makes Deutsche Bank’s recent raspberry of a prediction all the more discordant. The prognostication makes it the first major bank thus far to spy a recession on the horizon. David Folkerts-Landau and Peter Hooper say in a report that the U.S. will fall into a recession next year, with all the usual lousy woes. They foresee the jobless rate, for instance, rising to 4.9% in 2023, from 3.6% most recently. Their culprit: the Federal Reserve and its tightening regimen.

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Despite Fed Chair Jerome Powell’s plan to bring the economy in for a “soft landing,” in his parlance, Deutsche Bank believes that higher interest rates will choke the economy. They think the Fed will end up shrinking its balance sheet by almost $2 trillion by next year, which is in line with most projections.

But by mid-2023, Deutsche Bank expects the federal fund rate to be 3.5%, which is almost a full percentage point above what the Fed estimates. The Fed will proceed with several half-point rate hikes in its next three meetings, which means the rate escalation will be front-loaded, Deutsche Bank states.

“Our call for a recession in the U.S. next year is currently way out of consensus,” Folkerts-Landau and Hooper contend. “We expect it will not be so for long.”

Indeed, a versus only 15% who anticipate one in 2022.

Officially, however, major investment firms are calling for a deceleration of growth, but not a recession, traditionally defined as two negative quarters in a row. Goldman Sachs Group’s take on this question is that an economic slump is “far from inevitable,” because, among other things, consumers are “flush” with cash.

Morgan Stanley has a kindred view. Inflation will slap the public with an average $1,600 hit to household consumption this year—yet the fat savings will offset that, it maintains. What’s more, although commodity price boosts (mainly food and gasoline) are vexing, they are sitting at far lower relative levels than in the 1980s, 2006, and 2012, the firm argues.

And Bank of America says that “slower-than-expected real GDP growth—not a recession—is our operating base case for the U.S. over the next 12 to 18 months.” Tailwinds such as companies’ massive inventory rebuilding and a fading pandemic will prevail, BofA declares.

The Conference Board crystallizes the slower-but-not-bad viewpoint. Economic growth will be 3.0% this year and 2.3% in 2023, the organization avers. That compares with last year’s heady 5.7% expansion.

Related Stories:

How Escalating Inflation Can Produce a Recession

Will the Fed’s Just-Started Tightening Squelch the Stock Market?

What It Would Take for Powell to Get His Soft Landing

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