The SEC has released its list of exam priorities for 2024, providing helpful insight to compliance staff at investment advisory firms and broker-dealers. The 26-page release outlines a significant number of priorities that will be focused on during next year’s examinations. To help narrow down the list, we’ve pulled the top six exam priorities from the announcement you should focus on for the year.
1. Examination of Investment Advisers
Marketing practice assessments for whether advisers, including advisers to private funds, have:
- adopted and implemented reasonably designed written policies and procedures to prevent violations of the Advisers Act and the rules thereunder including reforms to the Marketing Rule;
- appropriately disclosed their marketing-related information on Form ADV; and
- maintained substantiation of their processes and other required books and records.
The Division is also focused 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.
Following the trend of recent years, the Division will continue to prioritize examinations of advisers who have never been examined, including recently registered advisers, and those who have not been examined for several years.
2. Investment Companies
Fees and expenses and reviewing whether registered investment companies have adopted effective written compliance policies and procedures concerning the oversight of advisory fees and implemented any associated fee waivers and reimbursements. A particular focus will be on:
- charging different advisory fees to different share classes of the same fund;
- identical strategies offered by the same sponsor through different distribution channels but that charge differing fee structures;
- high advisory fees relative to peers; and
- high registered investment company fees and expenses, particularly those of registered investment
companies with weaker performance relative to their peers.
Examinations will also review the boards’ approval of the advisory contract and registered investment company fees.
Examinations may also cover the associated registered investment companies’ or business development companies’ procedures for, and oversight of, derivative valuations.
Regulation Best Interest. As part of the examinations, the Division will evaluate whether the broker-dealer has established, maintained, and enforced written policies and procedures reasonably designed to achieve compliance with the areas described above as well as with Regulation Best Interest as a whole. This analysis will include considering whether the written policies and procedures are reasonably designed based on the costs, risks, and rewards of the securities and investment strategies that the broker-dealer recommends to customers.
Form CRS. The Division’s examinations will review the content of a broker-dealer’s relationship summary, such as how the broker-dealer describes: (1) the relationships and services that it offers to retail customers; (2) its fees and costs; and (3) its conflicts of interest, and whether the broker-dealer discloses any disciplinary history. These examinations will also evaluate whether broker-dealers have met their obligations to file their relationship summary with the Commission and deliver their relationship summary to retail customers.
BD Financial Responsibilities. Examinations will focus on broker-dealer compliance with the Net Capital Rule and the Customer Protection Rule and related internal processes, procedures, and controls. Areas of review will include fully paid lending programs and broker-dealer accounting for certain types of liabilities, such as reward programs, point programs, gift cards, and non-brokerage services, and will also assess broker-dealer credit, interest rate, market, and liquidity risk management controls to assess whether broker-dealers have sufficient liquidity to manage stress events.
BD Trading Practices. Examinations will cover broker-dealer equity and fixed-income trading practices. In particular, examinations will review compliance with (1) Regulation SHO, including the rules regarding aggregation units and locate requirements; (2) Regulation ATS, and whether the operations of alternative trading systems are consistent with the disclosures provided in Forms ATS and ATS-N; and (3) Exchange Act Rule 15c2-11.
During examinations of wholesale market makers, examinations may include quote generation, order routing and execution practices, market data ingestion, regulatory controls, and risk management.
4. Municipal Advisors
Examinations will continue to review whether municipal advisors have met their fiduciary duty obligation to clients, particularly when providing advice regarding
- method of sale; and
- structure of municipal securities.
Examiners will review whether municipal advisors are complying with their obligations to document municipal advisory relationships and disclose conflicts of interest and requirements related to registration, professional qualification, continuing education, recordkeeping, and supervision
NOTE: Examinations of solicitor municipal advisors during the second half of the fiscal year 2024 will focus on compliance with the new MSRB Rule G-46, which takes effect March 1st, 2024.
5. Crypto Assets and Emerging Financial Technology
The Division will focus on broker-dealers and advisers offering new products and services or employing new practices, particularly technological and online solutions that service online accounts aimed at meeting the demands of compliance and marketing.
The Division remains focused on certain services, including
- automated investment tools;
- artificial intelligence;
- trading algorithms or platforms; and
- the risks associated with the use of emerging technologies and alternative sources of data.
6. Anti-Money Laundering
The Division will continue to focus on AML programs to review whether broker-dealers and certain registered investment companies are:
- appropriately tailoring their AML program to their business model and associated AML risks;
- conducting independent testing;
- establishing an adequate customer identification program, including for beneficial owners of legal entity customers; and
- meeting their SAR filing obligations.
Examinations of certain registered investment companies will also review policies and procedures for oversight of applicable financial intermediaries.
Additionally, the Division will review whether broker-dealers and advisers are monitoring Office of Foreign Assets Control sanctions and ensuring compliance with such sanctions.
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