Close Close
ThinkAdvisor
SEC-Exams-AdobeStock-640x640 image of skyline with a notebook and computer screen and judicial balances symbol on top

Regulation and Compliance > Federal Regulation

SEC Highlights Exam Priorities for 2024

By Thomas D. Giachetti

X
Your article was successfully shared with the contacts you provided.

The Securities and Exchange Commission’s Division of Examinations recently released its 2024 priorities, identifying the key risks and topics for the coming year. The SEC publishes these priorities to encourage firms to focus compliance efforts on these areas. 

The below is not an exhaustive list of what might be focused on during an examination. Entity history, operations, services, products offered and other risk factors are all within scope. I sat down with colleague Thomas Kellerman to learn more about the SEC’s announced priorities. 

RIA Exams

Advisors must be aware that investment advice regarding complex, illiquid and unconventional products will be scrutinized as well as advice suited for older investors saving for retirement.

Also, processes for determining that investment advice is provided in clients’ best interest will be reviewed. Examinations will address how advisors mitigate conflicts of interests and allocate investments to certain accounts, such as wrap fee, non-taxable and brokerage commission.

In particular, examination focus will include marketing practice assessments for whether advisors have: (1) 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; (2) appropriately disclosed their marketing-related information on Form ADV; and (3) maintained substantiation of their processes and other required books and records.

Marketing reviews of disseminated advertisements (hypothetical performance, third-party ratings, testimonials) will continue to take place.

Critical compliance should also be centered around compensation arrangement assessments focusing on: (1) fiduciary obligations of advisors to their clients, particularly with respect to the advisors’ receipt of compensation for services or other material payments made by clients and others; (2) alternative ways that advisors try to maximize revenue, such as revenue earned on clients’ bank deposit sweep programs; and (3) fee breakpoint calculation processes, particularly when fee billing systems are not automated.  

Attention will be paid to safeguarding assessments of advisors’ controls to protect clients’ material non-public information, particularly when multiple advisors share office locations, have significant turnover of investment adviser representatives or use expert networks.

There will also be disclosure assessments to review the accuracy and completeness of regulatory filings, including Form CRS, with a particular focus on inadequate or misleading disclosures and registration eligibility. 

Examinations of Private Fund Advisors

Thomas further advised that the SEC will be looking at the following when reviewing private fund advisors: 

  • The portfolio management risks present when there is exposure to recent market volatility and higher interest rates. This may include private funds experiencing poor performance, significant withdrawals and valuation issues, and private funds with more leverage and illiquid assets. 
  • Adherence to contractual requirements regarding limited partnership advisory committees or similar structures, including adhering to any contractual notification and consent processes.
  • Accurate calculation and allocation of private fund fees and expenses (both fund-level and investment-level), including valuation of illiquid assets, calculation of post-commitment-period management fees, adequacy of disclosures, and potential offsetting of such fees and expenses. 
  • Conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers. 
  • Compliance with Advisers Act requirements regarding custody, including accurate Form ADV reporting, timely completion of private fund audits by a qualified auditor and the distribution of private fund audited financial statements.

All Registrants

All registrants should be aware that the compliance date for recently adopted rules shortening the standard settlement cycle for most broker-dealer transactions to one business day after the trade date is May 28.

Regardless of the type of advisor, cybersecurity, crypto assets and their associated products and services, and anti-money laundering programs continue to be a perennial SEC focus. 

(Image: Adobe Stock)

Thomas D. Giachetti

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.