SEC Division of Examinations: 2024 Priorities

The SEC 2024 examination highlight Investment Advisors and Investment Companies, both public and private funds, with a specific emphasis directed towards reviews of fiduciary standards, risk management best practices, and adherence with stated guidance.

• Fiduciary Obligations – Investment Advisor’s adherence to their fiduciary obligations to their clients is the first and largest point the SEC focused on. This includes following all rules related to investment advice to clients, monitoring and adhering to regulations covering conflicts of interest, disclosures made to investors, and the economic incentives of investment advisors which may impact recommendations made to investors. Regarding investment companies, “The Division continues to prioritize examinations of registered investment companies, including mutual funds and ETFs, due to the importance to retail investors, particularly those saving for retirement”. Specifically, exams will prioritize fund governance practices including disclosures to investors, board processes for assessing and approving advisory and other fund fees and valuation practices. 
• Risk Management – As part of their duty to clients, Investment Advisors must also adhere to Risk management best practices. Specific risks called out by the SEC include market volatility, interest rate portfolio risk, and risks related to the valuation of illiquid assets. For investment Companies, exam focuses will include derivative risk management and liquidity risk management processes. 
• Specific Rule and Guidance Adherence – The SEC has also highlighted the focus exams will have on defined reporting requirements. This includes compliance with the Advisors Act Requirements and reporting on Form PF for Private Funds. Investment Companies will also be examined for the accuracy of their reporting to the SEC. 

Below are some of the regulations broker-dealers need to comply with, along with best practices expected to be maintained to keep and enhance the trust and confidence of investors. 

• Regulation Best Interest – Regulation Best Interest establishes the standard of conduct for broker dealers at the time they recommend to a retail customer a securities transaction or investment strategy. These recommendations will be related to the customer’s best interests and how the broker dealer has acted in those best interests. Examinations will target specific items such as what complex products were offered (such as derivatives and leveraged ETFs), the variable annuities recommended, and any illiquid recommendations made such as nontraded REITs and private placements. Additionally, particular emphasis will also be on the types of investors such as older investors and those saving for college or retirement.  

• Form CRS – Form CRS and its related rules require SEC-registered investment advisers and SEC-registered broker-dealers (together, “firms”) to deliver to retail investors a brief customer or client relationship summary that provides information about the firm. The focus areas will be reviewing the CRS content, specifically (1) the relationships and services 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. 

• Broker-Dealer Financial Responsibility Rules – The focus will be on broker-dealer compliance with the Net Capital Rule and the Customer Protection Rule and related internal processes, procedures and controls. 

• Broker-Dealer Trading Practices – The focus will cover broker-dealer equity and fixed income trading practices.  For example, 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. 

National Securities Exchanges – The focus will be 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 (“FINRA”) – The focus for FINRA examinations is to continue to conduct risk-based oversight exams. 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.

Municipal Securities Rulemaking Board – The Municipal Securities Rulemaking Board regulates the activities of broker-dealers that buy, sell, and underwrite municipal securities, and municipal advisors. The focus will be to continue to conduct examinations of registered firms to assess compliance with MSRB rules, and applicable federal securities laws. The Division also applies a risk assessment process, including outreach to various stakeholders, to identify areas to examine at the MSRB. 

Key areas of focus in fiscal year 2024 include risk management of liquidity, models and model validation, margin systems, third-party service providers, operations, and the internal audit function. The Division consults with the Federal Reserve Board each year on the scope and methodology of the Commission’s Dodd-Frank examinations, as required by that Act, and routinely consults with the Commission’s Division of Trading and Markets concerning risks it observes in its supervisory role over the above clearing agencies.

• Municipal Advisors – New MSRB Rule G-46, which became effective on March 1, 2024, was designed to establish the core standards of conduct for solicitor municipal advisors, which include disclosure of conflicts of interest and documentation of client relationships, among other things. Examinations of solicitor municipal advisors during the second half of fiscal year 2024 will focus on compliance with new MSRB Rule G-46. 

• Securities Based Swap Dealers – There will be a focal point on whether security-based swap dealers have implemented policies and procedures related to compliance with security-based swap rules and are meeting their obligations under Regulation SBSR to accurately report security-based swap transactions to security-based swap data repositories.  Another question to answer will be 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. The Examinations will also emphasize 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. 

Due to emerging financial technology, some risk areas for various market participants include Cybersecurity, Crypto Assets and related products, and Compliance with AML and Systems Integrity.

• Information Security and Operational Resiliency – Due to the proliferation of cybersecurity attacks, the SEC will continue to review broker-dealers’ and advisers’ practices impacting mission critical services and especially those that protect investor information, records and assets. 

• Crypto Assets and Emerging Financial Technology – 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 will be a primary focus pertaining to the security of crypto asset securities. 

• Regulation Systems Compliance and Integrity – An area of focus for Regulation Systems Compliance and Integrity (SCI) compliant entities is the evaluation of whether policies and procedures of SCI entities are reasonably designed to ensure the security of the systems, including the physical security of the systems housed in data centers  

• Anti-Money Laundering – The emphasis on AML programs continues to be geared towards: (1) appropriately tailoring AML programs 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; (4) meeting their SAR filing obligations; and (5) monitoring Office of Foreign Assets Control sanctions and ensuring compliance with such sanctions. 

The SEC will continue to allocate significant resources to ensure it can continue to conduct examinations that are geared towards existing and emerging risks, products and services, market events and investor concerns.

Sia Partners is committed to helping its clients prepare for regulatory examinations by assessing their programs, developing accountability documentation, and implementing controls.  As the regulators continue to increase their scrutiny, it’s important to ensure a robust and optimized framework is in place to remain compliant and decrease risk. With a team of former regulators, industry professionals, and skilled consultants, Sia Partners is ready to assist firms with the full regulatory risk management cycle, from exam preparation to remediation to large scale implementation, and beyond.