On October 16th, SEC’s Division of Examinations (the “Division”) announced its examination priorities for fiscal year 2024. According to the Division, continuing to make examination priorities public increases transparency into the examination program and encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors. This year, the Division noted that, due to the shorter interval between risk alert publications between 2023 and 2024, several initiatives and focus areas from 2023 remain as 2024 priorities.
Examination Priorities
Examination of Investment Advisers
Examination priorities for 2024 are focused on SEC-registered investment advisers. The Division will continue to focus on advisers’ adherence to their duty of care and duty of loyalty obligations, specifically with regard to (i) investment advice provided to clients with regard to products, investment strategies, and account types; (ii) processes for determining that investment advice is provided in clients’ best interest; (iii) economic incentives that an adviser and its financial professionals may have to recommend products, services, or account types, and; (iv) disclosures made to investors and whether they include all material facts relating to conflicts of interest associated with the investment advice sufficient to allow a client to provide informed consent to the conflict.
Adviser’s compliance programs will also continue to be an area of focus, particularly whether their policies and procedures are an accurate reflection of the various aspects of the advisers’ business. Examinations may include one or more of the following areas: (i) portfolio management processes; (ii) disclosures made to investors and regulators; (iii) proprietary trading by the adviser and the personal trading activities of supervised advisory personnel; (iv) safeguarding of client assets from conversion or inappropriate use by advisory personnel; (v) the accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction; (vi) safeguards for the privacy protection of client records and information; (vii) trading practices; (viii) marketing advisory services; (ix) processes to value client holdings and assess fees based on those valuations; and (x) business continuity plans.
With regard to compliance programs, the Division will also pay particular attention to: (i) marketing practice assessments; (ii) compensation arrangement assessments; (iii) valuation assessments; (iv) safeguarding assessments, and; (v) disclosure assessments. It will also focus on advisers’ policies and procedures for selecting and using third-party and affiliated service providers, overseeing branch offices when advisers operate from numerous or geographically dispersed offices, and obtaining informed consent from clients when advisers implement material changes to their advisory agreements.
Examination of Investment Advisers to Private Funds
The Division will continue to prioritize the following topics for advisers to private funds: (i) portfolio management risks present when there is exposure to recent market volatility and higher interest rates; (ii) adherence to contractual requirements regarding limited partnership advisory committees or similar structures; (iii) accurate calculation and allocation of private fund fees and expenses; (iv) due diligence practices for consistency with policies, procedures, and disclosures; (v) conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers; (vi) compliance with Advisers Act requirements regarding custody, and; (vii) policies and procedures for reporting on Form PF.
Registered Investment Companies
The Division continues to prioritize examinations of registered investment companies, including mutual funds and ETFs, due to their importance to retail investors, particularly those saving for retirement. Areas of examination focus may include fees and expenses and derivatives risk management assessments.
Information Security and Operational Resiliency
The Division will continue to review broker-dealers’ and advisers’ practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets. Areas of focus will be on registrants’ policies and procedures, internal controls, oversight of third-party vendors, governance practices, and responses to cyber-related incidents.
Crypto Assets and Emerging Financial Technology
The Division continues to observe the proliferation of certain types of investments, including crypto assets and their associated products and services, and emerging financial technology, such as broker-dealer mobile applications and advisers choosing to provide automated investment advice to their clients. The Division will continue to focus on broker dealers and advisers offering new products and services or employing new practices, as well as certain services, such as automated investment tools, artificial intelligence, and trading algorithms or platforms.
