On October 16, 2023, the Securities and Exchange Commission (SEC) released its 2024 Exam Priorities, outlining critical focus areas for the coming year.
“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”
“Continuing to make our 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,” said Division of Examinations’ Director Richard R. Best. “We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year.”
In this blog, we’ll break down some of the key areas of note for SEC-regulated firms. To review the exam priorities in full, visit the SEC’s website.
2024 SEC Exam Priorities: Key highlights and information
Within their 2024 Exam Priorites, the SEC segmented its priorities by firm type, which included:
- Investment Advisers
- Investment Companies
- Broker-Dealers
- Self-Regulatory Organizations
- Clearing Agencies
- Other Market Participants
In addition, the SEC highlighted areas of risk likely to impact firms across the financial landscape.
Investment Advisers
The category of investment advisers was broken down into examinations of investment advisers and examinations of investment advisers to private funds:
- Investment Advisers: “Examining for advisers’ adherence to their duty of care and duty of loyalty obligations remains a priority for the Division…The Division remains focused on advisers’ compliance programs, including whether their policies and procedures reflect the various aspects of the advisers’ business, compensation structure, services, client base, and operations, and address applicable current market risks. The Division’s review of advisers’ annual reviews of the effectiveness of their compliance programs is an important part of assessing whether the advisers’ conflicts of interests are addressed in the advisers’ compliance programs, including those conflicts created by the advisers’ business arrangements or affiliations and related to adviser and registered investment company fees and expenses.”
- Investment Advisers to Private Funds: “Advisers to private funds remain a significant portion of the SEC-registered investment adviser population. The Division will continue to focus on advisers to private funds and prioritize specific topics, such as: portfolio management risks present when there is exposure to recent market volatility and higher interest rates, adherence to contractual requirements regarding limited partnership advisory committees or similar structures, private fund fees and expenses, due diligence practices, conflicts/controls/disclosures, compliance with Advisers Act requirements and reporting on Form PF.”
Investment Companies
“Examinations of registered investment companies often include assessing, among other things, their compliance programs and fund governance practices, disclosures to investors, and accuracy of reporting to the SEC. In assessing registered investment companies’ compliance programs and governance practices, the Division will review boards’ processes for assessing and approving advisory and other fund fees, particularly for funds with weaker performance relative to their peers. In addition, the Division will review registered investment company valuation practices, particularly for those addressing fair valuation practices (e.g., implementing board oversight duties, setting recordkeeping and reporting requirements, and overseeing valuation designees), and, as applicable, will assess the effectiveness of registered investment companies’ derivatives risk management and liquidity risk management programs.”
Broker-Dealers
The examination priorities specific to Broker-Dealers included:
- Regulation Best Interest: “Examinations will focus on those recommended products that are: (1) complex, such as derivatives and leveraged ETFs; (2) high cost, such as variable annuities; (3) illiquid, such as nontraded REITs and private placements; (4) proprietary; and (5) microcap securities. Examinations may also focus on recommendations to certain types of investors, such as older investors and those saving for retirement or college.”
- 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.
- Broker-Dealer Financial Responsibilities Rule: “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.”
- Broker-Dealer 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.”
Self-Regulatory Organizations
The SEC’s Exam Priorities identified three subcategories of self-regulatory organizations:
- National Securities Exchanges: “Examinations will focus on whether national securities exchanges are meeting their obligations to enforce compliance with self-regulatory organization rules and the federal securities laws. Specifically, examinations will focus on exchange order handling and exchange surveillance, investigation, and enforcement programs to detect and discipline member firm violations. In addition, examinations will focus on exchange oversight of regulatory service agreements.”
- Financial Industry Regulatory Authority: “The Division conducts risk-based oversight examinations of FINRA. It selects areas within FINRA to examine through a risk assessment process designed to identify those aspects of FINRA’s operations important to the protection of investors and market integrity, including FINRA’s implementation of investor protection initiatives such as Regulation Best Interest and Form CRS. The analysis is informed by collecting and analyzing extensive information and data, regular meetings with key functional areas within FINRA, and outreach to various stakeholders, including industry and investor groups. Based on the outcome of this risk assessment process, the Division conducts inspections of FINRA’s major regulatory programs.”
- Municipal Securities Rulemaking Board: “The Municipal Securities Rulemaking Board (MSRB) regulates the activities of brokerdealers that buy, sell, and underwrite municipal securities, and municipal advisors. The MSRB establishes rules for municipal broker-dealers (including registered municipal securities dealers) and municipal advisors, supports market transparency by making municipal securities trade data and disclosure documents available, and conducts education and outreach regarding the municipal securities markets. The Division, along with FINRA and the federal banking regulators, conducts examinations of registered firms to assess compliance with MSRB rules, and applicable federal securities laws. The Division also applies a risk assessment process, similar to the one it uses to oversee FINRA, including outreach to various stakeholders, to identify areas to examine at the MSRB.”
Clearing Agencies
“Pursuant to Section 807 of the Dodd-Frank Act, these examinations will focus on clearing agencies’ core risks, processes, and controls and will cover the specific areas required by statute, including the nature of clearing agencies’ operations and assessment of financial and operational risk. Additionally, the Division will conduct risk-based examinations of other registered clearing agencies that have not been designated as systemically important. The Division will examine the registered clearing agencies for compliance with the Commission’s Standards for Covered Clearing Agencies, which are rules that require covered clearing agencies to have policies and procedures that address, among other things, maintaining sufficient financial resources, protecting against credit risks, managing member defaults, and managing operational and other risks.
Examinations of registered clearing agencies include both risk-based examinations and Corrective Action Reviews, and are undertaken to assess: (1) whether the clearing agencies’ respective risk management frameworks comply with the Exchange Act, and serve the needs of their members and the markets they serve; (2) the adequacy and timeliness of their remediation of prior deficiencies, including, for example, the role of senior leadership in the remediation process; and (3) other risk areas identified in collaboration with the Commission’s Division of Trading and Markets and other regulators. In addition, the Division also examines security-based swap data repositories, as well as entities operating pursuant to a Commission order exempting them from the clearing agency registration requirement under Section 17A(b)(1) of the Exchange Act.”
Other Market Participant
The other participants category was broken down into three sub-categories:
- Municipal Advisors: “Examinations will continue to review whether municipal advisors have met their fiduciary duty obligation to clients, particularly when providing advice regarding the pricing, 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.”
- Security-Based Swap Dealers: “Examinations will continue to focus on whether security-based swap dealers have implemented policies and procedures related to compliance with security-based swap rules generally and are meeting their obligations under Regulation SBSR to accurately report security-based swap transactions to security-based swap data repositories. Moreover, examinations will focus on whether security-based swap dealers are complying with applicable capital, margin, and segregation requirements and relevant conditions in Commission orders governing substituted compliance.”
- Transfer Agents: “Examinations will focus on transfer agent processing of items and transfers, recordkeeping and record retention, safeguarding of funds and securities, and filings with the Commission. Examinations will also focus on transfer agents that service certain types of issuers, including those issuing microcap and crypto asset securities, and transfer agents that use emerging technologies to perform their transfer agent functions.”
Overarching Risks
The SEC identified four areas of risk which applied to multiple firm types and, as such, should be prioritized by firms throughout the financial space.
- Information Security and Operational Resiliency: “Examinations of broker-dealers and advisers will continue to look at firms’ practices to promote cyber resiliency. Reviews will include firm practices, policies, and procedures to prevent account intrusions and safeguard customer records and information, including personally identifiable information. Additional focus will be on the cybersecurity issues associated with the use of third-party vendors, including registrant visibility into the security and integrity of third-party products and services. The Division will also review whether there has been an unauthorized use of third-party providers.”
- Crypto Assets and Emerging Financial Technology: “Examinations of registrants will focus on the offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets or related products. Specifically, reviewing whether such registrants involved with crypto assets: (1) meet and follow their respective standards of conduct when recommending or advising customers and clients regarding crypto assets, with a focus on an initial and ongoing understanding of the products, to the extent required by the applicable standard of conduct, particularly when the investors are retail-based (including older investors) and investments involve retirement assets; and (2) routinely review, update, and enhance their compliance practices (including crypto asset wallet reviews, custody practices, Bank Secrecy Act (BSA) compliance reviews, and valuation procedures), risk disclosures, and operational resiliency practices (i.e., data integrity and business continuity plans), if required. With respect to crypto assets that are funds or securities, the Division will consider whether advisers are complying with the custody requirements under the Advisers Act (Rule 206(4)-2). In addition, the Division will assess whether any technological risks associated with the use of blockchain and distributed ledger technology have been addressed…”
- Regulation Systems Compliance and Integrity: “The Division will continue to evaluate whether SCI entities have established, maintained, and enforced written policies and procedures, as required. One area of focus will include whether the policies and procedures of SCI entities are reasonably designed to ensure the security of the SCI systems, including the physical security of the systems housed in data centers, as required.”
- Anti-Money Laundering: “The Division will continue to focus on AML programs to review whether broker-dealers and certain registered investment companies are: (1) appropriately tailoring their AML program to their business model and associated AML risks; (2) conducting independent testing; (3) establishing an adequate customer identification program, including for beneficial owners of legal entity customers; and (4) meeting their SAR filing obligations. Examinations of certain registered investment companies will also review policies and procedures for oversight of applicable financial intermediaries.”
Have questions about the 2024 SEC Exam Priorities and their impact on your firm? Schedule time to speak with an expert today!