On October 21, 2024, the Securities and Exchange Commission (SEC) Division of Examinations announced its Examination Priorities. The exam priorities focus on six different types of market participants subject to SEC regulation or oversight, as well as four risk areas impacting many market participants.
Market Participants:
- Investment Advisers
- Investment Companies
- Broker-Dealers
- Self-regulatory organizations (SROs)
- Clearing Agencies
- Other market participants include municipal advisors, security-based swap dealers, transfer agents, security-based swap execution facilities, and funding portals.
Risk Areas:
- Information security and operational resiliency
- Crypto assets and emerging financial technology
- Regulation systems compliance and integrity (SCI)
- Anti-money laundering (AML)
- Investment Advisers
SEC will continue to prioritize advisers’ adherence to their duty of care and duty of loyalty obligations to clients. The focus will be on:
- Investment advice provided to clients about products, investment strategies, and account types and whether that advice satisfies the fiduciary obligations owed to clients.
- Dual registrants and advisers with affiliated broker-dealers. Among other areas, the SEC will review the appropriateness of account selection practices, disclosures to clients regarding the capacity in which recommendations are made, and whether and how advisers adequately mitigate and fairly disclose conflicts of interest and
- The impact of conflicts of interest on providing impartial advice and best execution, with consideration given for non-standard fee arrangements.
SEC will continue evaluating the effectiveness of advisers’ compliance programs pursuant to Rule 206(4)-7 under the Investment Advisers Act of 1940. As well as focus on investment advisers to private funds. Key areas of focus include but are not limited to:
- Fiduciary obligations of advisers that outsource investment selection and management.
- Disclosures and fiduciary duty considerations for strategies that may be sensitive to market volatility and/or interest rate changes (e.g., commercial real estate, illiquid assets, and private credit), with particular focus on advisers to private funds that are experiencing poor performance and/or hold more leverage or difficult-to-value assets.
- Accuracy of calculations and allocations of private fund fees and expenses.
- Conflicts, controls, and disclosures regarding the use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, investments held by multiple funds, and use of affiliated service providers.
- Compliance with recently adopted SEC rules, including amendments to Form PF and the updated rules that govern investment adviser marketing.
- Investment Companies
SEC will focus on the evaluation of registered investment company compliance programs, fund governance practices, disclosures to investors, and accuracy of reporting to the SEC. Specific examination focus areas may include:
- Assessment of fees and expenses, and any associated waivers and reimbursements.
- Oversight of affiliated and third-party service providers.
- Portfolio management practices and disclosures for consistency with claims about investment strategies, fund filings, and marketing materials.
- Issues associated with market volatility.
- Broker-Dealers
SEC will evaluate whether broker-dealers have established, maintained, and enforced written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest (BI), Form CRS, financial responsibility rules, and trading practices. Focus areas will include but not be limited to:
- Recommendations to retail customers and compliance with Regulation BI.
- Recommendations regarding products, investment strategies, and account types and whether the broker has a reasonable basis to believe the recommendation is in the best interest of the customer and does not place the broker’s interests ahead of the customer’s interests.
- Conflicts of interest disclosures and conflict identification, mitigation, and elimination practices.
- Processes for reviewing reasonably available alternatives.
- Factors relating to clients’ investment profiles (e.g., investment goals and account characteristics).
SEC will scrutinize SRO compliance with rules governing operations, enforcement activities, and fulfillment of regulatory duties.
- Clearing Agencies
SEC will examine, at least once annually, each clearing agency designated as systemically important.
- Other Market Participants
SEC focus areas for other market participants include but are not limited to:
- Compliance with fiduciary duty obligations, recordkeeping, and registration requirements.
- Security-based swap dealers’ compliance with obligations under Regulation SBSR, capital, margin, and segregation requirements.
- Transfer agent processing, safeguarding of funds and securities, and regulatory filings.
- Funding portals’ compliance with recordkeeping requirements and written policies and procedures that are reasonably designed to achieve compliance with federal securities laws.
Risk Areas
SEC will continue its focus on registrants’ information security practices and their operational resiliency, including data loss prevention, access controls, account management, responses to cyber-related incidents, and alternative trading systems’ safeguards to protect confidential trading information.
SEC will also assess cybersecurity risks and resiliency goals associated with the use of third-party services, particularly where such services are used without the IT department’s approval, knowledge, or oversight.
For broker-dealers and investment advisers, the SEC will assess firms’ practices to prevent account intrusions and safeguard customer records and information.
SEC will focus on companies’ use of emerging technologies and alternative sources of data (e.g., automated investment tools, artificial intelligence, and trading platforms) and examine firms that use digital investment advisory services and related methods.
SEC will focus on the offer, sale, recommendation, advice, trading, and other activities involving crypto assets that are offered and sold as securities (e.g., spot bitcoin or ether exchange-traded products). Among other measures, exams will review whether registrants:
- Adhere to applicable standards of conduct when advising clients regarding crypto assets.
- Have sufficient initial and ongoing understanding of these products, particularly where investors are retail-based and investments involving retirement assets.
- Routinely review, update, and enhance their compliance practices with respect to crypto asset wallet reviews, custody practices, Bank Secrecy Act compliance, valuation procedures, risk disclosures, and operational resiliency.
SEC will evaluate whether SCI entities (e.g., exchanges and clearinghouses) have implemented policies and procedures to ensure the security and resiliency of their systems and meet Regulation SCI requirements. Exams will evaluate SCI entities’ operational risk management, business continuity planning, and incident response capabilities to uphold market stability.
SEC will examine whether broker-dealers and certain registered investment companies:
- Have AML programs tailored to address the risks associated with the firm’s location, size, and activities.
- Conduct independent testing.
- Establish adequate customer identification programs.
- Meet suspicious activity report filing obligations.
- Monitor Office of Foreign Assets Control sanctions.
Registered entities should take note of these priorities when assessing their compliance programs to ensure such programs address the SEC focus. If you have any questions on these priorities or your compliance framework contact info@cadienmayersconsulting.com.
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