Thorough Exam: SEC's Division of Examinations Announces Fiscal Year 2024 Priorities

Investment Advisers

• Advice about products, strategies and account topics – particularly including exchange-traded funds (ETFs), real estate investment trusts (REITs) and unconventional strategies like those intended to address rising interest rates – and advice on these matters to older clients and those saving for retirement
• Processes for determining that investment advice is being provided in a client's best interest (suitability, best execution, cost and risk assessment, and identifying and addressing conflicts)
• Economic incentives for advisers to recommend certain products, services or account types, including arrangements with affiliated firms
• Investor disclosure, including all material facts relating to conflicts
• Adviser compliance programs, policies and procedures, including whether they 1) reflect the various aspects of the adviser's business, compensation structure, services, client base and operations, 2) address applicable current market risks and 3) address recently enacted rules such as the Marketing Rule and updated Compliance Rule
• Advisers to private funds, with specific focus on 1) portfolio management risks around market volatility and interest rates, 2) limited partner advisory committees (LPAC) and advisory board contractual requirements for notice and consent, fee and expense calculations, and valuation of illiquid assets, 3) post-commitment period management fees and disclosure adequacy, 4) due diligence practices, 5) conflicts, controls and disclosures for private funds managed side-by-side with registered investment companies and the use of affiliate service providers, 6) custody compliance and Form ADV reporting, 7) timely completion of private fund audits and distribution of audited financial statements, and 8) policies and procedures for Form PF reporting
• Continued prioritization of never-before-examined advisers, including recently registered firms and those that have not been examined in several years

Investment Companies

• Compliance programs, fund governance practices, disclosures to investors and accuracy of SEC reporting
• Board processes for assessing and approving advisory and other fund fees, particularly for funds with weaker performance relative to peers
• Valuation practices (e.g., implementing board oversight duties, setting recordkeeping and reporting requirements, and overseeing valuation designees)
• Effectiveness of written compliance policies and procedures concerning oversight of advisory fees, fee waivers and reimbursements with a focus on 1) charging different advisory fees to different share classes of the same fund, 2) identical strategies offered by the same sponsor through different distribution channels charging different fee structures, 3) high advisory fees relative to peers, and 4) high registered investment company fees and expenses, particularly those of registered investment companies with weaker performance relative to peers
• Adoption and implementation of written policies and procedures reasonably designed to prevent violations of the fund derivatives rule (Investment Company Act Rule 18f-4)
• As with adviser examinations, continued focus on examining never-before-examined registered investment companies and those that have not been examined in a number of years

Broker-Dealers

• Compliance with Regulation BI, including written policies and procedures with an emphasis on 1) recommendations on products, investment strategies and account types, 2) conflict disclosures and mitigation practices, 3) processes for reviewing reasonably available alternatives, and 4) factors considered in light of an investor's investment profile, including investment goals and account characteristics
• Exams focused on products like 1) derivatives and leveraged ETFs, high-cost variable annuities, non-traded REITs, private placements, and proprietary and microcap securities, and 2) older investors and those saving for retirement or college
• Form CRS compliance, including on 1) the relationships and services offered to retail investors and related fees and costs, 2) conflicts, 3) whether any disciplinary history is disclosed, and 4) assessment of whether an entity has satisfied its duty to file the form and deliver a relationship summary to retail customers
• Compliance with the Net Capital Rule (Exchange Act Rule 15c3-1) and the Customer Protection Rule (Exchange Act Rule 15c3-3) and related internal processes, procedures and controls
• Equity and fixed income trading practices, including compliance with Regulation SHO, Regulation ATS and Exchange Act Rule 15c2-11

Self-Regulatory Organizations (SROs)

• National securities exchanges enforcing compliance with SRO rules and the federal securities laws, with a focus on exchange order handling, surveillance, investigation, enforcement programs for disciplining member firm violations and oversight of regulatory service agreements
• Risk-based oversight examinations of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB)

Clearing Agencies

• The SEC is required to examine, at least once annually, each clearing agency it supervises that is designated as systemically important.
• Examinations will focus on 1) core risks, processes and controls, 2) risk-based examinations will be carried out for other registered clearing agencies that have not been designated as systemically important, all including a focus on liquidity management, 3) models and model validation, and 4) margin systems, third-party service providers and internal audit.

Other Market Participants

• Municipal advisor examinations, with a focus on 1) fiduciary duty satisfaction, including documenting relationships, 2) disclosing conflicts, 3) registration, 4) professional qualifications, 5) recordkeeping, 6) supervision, and 7) compliance with new MSRB Rule G-46 following its March 1, 2024, effectiveness
• Whether security-based swap dealers have implemented policies and procedures for compliance with applicable rules and if they are meeting their obligations under Regulation SBSR

Information Security and Operational Resiliency

• Focus on efforts to prevent service interruption and to protect investor information and assets
• Policies and procedures, controls, vendor oversight, governance and incident response planning for cyber issues, including ransomware attacks and whether firms are adequately training staff on identify theft prevention, customer records and information protection
• Practices to prevent account intrusions and safeguard customer records and information, including personally identifiable information (PII), with a focus on firms with multiple offices
• Practices to promote cyber resiliency, including firm practices, policies and procedures to prevent account intrusions, safeguard information and oversee third-party vendors

Crypto Assets and Emerging FinTech

• Examinations will focus on 1) the offer, sale, recommendation of and advice about trading in crypto assets, including whether firms meet applicable professional standards, especially when advising retail investors, and 2) if firms are reviewing and enhancing compliance practices, operational resiliency and risk disclosures
• For crypto assets that are funds or securities, examinations will assess 1) if advisers are complying with custody requirements, 2) technological risks associated with the use of blockchain and distributed ledger technology, 3) whether compliance policies and procedures are reasonably designed, and 4) disclosures and risks pertaining to the security of crypto assets.
• Broker-dealers and advisers offering new products and services or employing new practices, particularly technological and online solutions that service online accounts targeting compliance and marketing, including automated investment tools, artificial intelligence (AI) and trading algorithms or platforms

Reg SCI¹

• Exams will focus on entities' written policies and procedures for adequate capacity, integrity, resiliency, availability and security to maintain operational capability and promote and maintain fair and orderly markets.
• One area of particular focus will be on the physical security of systems housed in data centers.

AML

• Focus on whether broker-dealers, advisers and certain registered investment companies are 1) appropriately tailoring AML programs to their business risk model and risks, 2) conducting independent testing of their programs, establishing an adequate customer identification program, including for beneficial owners of legal entity customers, and 3) satisfying filing obligations for Suspicious Activity Reports (SARs)
• Registered investment company exams will likely include a review of policies and procedures around oversight of financial intermediaries.
• Broker-dealers and advisers' exams will consider whether firms are monitoring Office of Foreign Assets Control (OFAC) sanctions and ensuring compliance with same.