SEC Releases Exam Priorities for Fiscal Year 2024
Recently, the SEC released their Exam Priorities for 2024, and showed no sign of slowing down. The Commission released their report several months ahead of their typical schedule and signaled they will increase their onsite examinations.
The SEC’s areas of focus will include core risk areas such as fiduciary duty, conflict of interest, and the new Marketing Rule, among other emerging areas of risk like cybersecurity and new technologies.
Here are our major takeaways:
Investment Advisers:
The SEC will focus on advice provided to clients, particularly senior investors and retirement savers, with an emphasis on complex products, high-cost and illiquid products, and unconventional strategies.
The SEC will also focus on processes for determining how advice is in the client's best interest, such as initial and ongoing suitability determinations, best execution, and evaluating costs and risk.
The SEC will pay particular attention to economic incentives and conflicts of interest, as well as disclosures related to conflicts of interest.
Specific areas of focus include:
Marketing practices such as Form ADV disclosures, books and records, performance, and testimonials;
Compensation arrangements, including fiduciary obligations, fee breakpoint calculations, and alternative ways of maximizing revenue;
Valuation assessments for illiquid assets;
Safeguarding assessments such as controls protecting non-public information;
Disclosure assessments for the accuracy and completeness of regulatory filings;
Selection and use of third-party service providers;
Oversight of dispersed offices;
Obtaining informed consent from clients on material changes to their agreements
Private Fund Advisers:
A major area of SEC scrutiny accelerates, including:
Portfolio management risks present when exposed to market volatility and higher interest rates;
Adherence to contractual requirements regarding limited partnership advisory committees or similar structures;
Accurate calculation and allocation of private fund fees and expenses;
Due diligence practices, specifically for prospective portfolio companies;
Conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of service providers;
Compliance with the custody requirements, including Form ADV reporting, timely completion of private fund audits, and distribution of private fund audited financial statements.
Risk Areas of Focus Affecting Various Market Participants:
Information security and operational resiliency to prevent business interruptions and protect investor information by ensuring comprehensive: Internal controls; Oversight of third-party vendors; Governance practices; and Responses to cyber-related incidents.
Crypto assets and emerging financial technology such as: Online solutions servicing online accounts; Automated investment tools and advice; Artificial intelligence; Trading algorithms; Alternative sources of data. Examinations will focus on the offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets or related products.
Regulation Systems Compliance and Integrity (SCI) and whether SCI entities have reasonably designed policies and procedures to ensure the security of the SCI systems, including the physical security of the systems housed in data centers.
Anti-money laundering: whether broker-dealers and certain RICs are: (1) Tailoring their AML program to their business model and associated AML risks; (2) Conducting independent testing; (3) Establishing an adequate customer identification; (4) Meeting their SAR filing obligations; and (5) reviewing P&Ps for oversight of applicable financial intermediaries.
CCG’s Conclusion
In an ever-changing regulatory landscape, preparation is key. The SEC’s release of the 2024 Examination Priorities serves as a reminder of the volume, velocity, and complexity of the new regulation promulgation.
The Chenery Compliance team is here to help you navigate these changes and ensure your firm is prepared for an eventual SEC exam.
If you're looking to enhance your compliance program, contact us to learn more about how we can help you!