By Robert D. Conca, Partner of Shustak Reynolds & Partners, P.C. posted on Wednesday, November 1, 2023.

Robert D. Conca

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 121)
Email: [email protected]

On October 16, 2023, the SEC’s Division of Examinations issued its annual Examination Priorities (“Exam Priorities”) for fiscal year 2024.[1]  The timing of the 2024 Exam Priorities, published just eight months after the release of the exam priorities for 2023, aligns the announcement more closely with the start of the SEC’s fiscal year [2], which the SEC hopes will better inform investors and registered firms of the key risks, trends, and examination on which the SEC will focus in 2024.[3] Given the shorter interval since the last priorities, the SEC acknowledged that several focus areas from 2023 remain as 2024 priorities. [4] The Exam Priorities are categorized into three primary subjects, which are summarized below. [5]

A.     Registered Investment Advisers (“RIAs”)

The Exam Priorities listed for RIAs include topics that should be familiar to any adviser with a dedication to compliance.  After reminding RIAs of their fiduciary responsibility to act in the best interest of clients, the SEC listed RIA priorities, which include:

• Advice relating to complex products (e.g. derivatives, leveraged ETFs);
• High cost and illiquid products (e.g. variable annuities, REITs);
• Suitability;
• Best Execution
• Disclosure and Handling of Conflicts of interest, including those relating to adviser and representative compensation/ economic incentives;
• Adequacy of disclosures;
• Compliance Policies & Procedures[6];
• Marketing;
• Fee Calculation and Valuation; and
• Obtaining client consent when changing advisory agreements.

B.      Private Funds[7]

Like in recent years, the SEC will continue its focus on advisers to private funds, which comprise a significant portion of the RIA population.  In addition to how private funds disclose conflicts of interest, the SEC listed the following focus areas:

• Portfolio management risks, especially where funds experience poor performance, significant withdrawals, and valuation issues, more leverage, and/or illiquid assets;
• Adherence to contractual requirements regarding advisory committees/ advisory boards;
• Calculation and allocation of fund fees and expenses (both fund-level and investment-level), and valuation;
• Due diligence;
• Side-by-side management and related conflict disclosures;
• Form ADV reporting;
• Timeliness of fund audits; and
• Form PF Policies and Procedures.

C.     Broker-Dealers

For registered broker-dealers, the SEC identified the following focus areas for 2024:

• Regulation Best Interest;
• Form CRS;
• Broker-Dealer Financial Responsibility Rules including the Net Capital Rule and the Customer Protection Rule, and related internal processes and procedures; and
• Trading practices.

D.     Information Security and Operational Resiliency

In this section of the Exam Priorities, the SEC emphasizes the needs for RIAs and broker-dealers to control information security and cyber environments (among other things) and to ensure business continuity.  SEC examinations will continue to review a registrant’s actions and processes relating to: (1) oversight of vendors, (2) governance practices, (3) response to cyber events (including ransomware attacks); and (4) training of personnel in these important areas. 

E.      Crypto Assets and Emerging Financial Technologies

Noting a continued increase in crypto assets and new financial technology (“FinTech”), the SEC will focus on registrants offering new FinTech or other technological products and services, automated investment advice and artificial intelligence, trading algorithms, and mobile applications,

Specific crypto areas mentioned in the Exam Priorities include advice regarding crypto assets; initial and ongoing diligence of crypto products, suitability and older investors; compliance and custody practices regarding crypto asset wallets and valuation procedures, risk disclosures, and technological risks associated with the use of blockchain and distributed ledger technology.

Conclusion

While the annual examination topics provide insight into immediate areas of interest to the SEC, registered firms still need a smartly designed, comprehensive, and risk-based compliance program that is tailored to a registrant’s business. The specific circumstances and timing of any examination will vary based on the firm; however, the goal is the same for all firms – to demonstrate that the firm's compliance program continues to reasonably and effectively identify and prevent compliance issues from occurring.

The priorities summarized herein are not exhaustive, and they do not represent the only areas the SEC will consider in assessing a firm’s regulatory compliance. Designing and implementing a compliance program and preparing for regulatory examinations are critical to the success of any advisory business. We can help.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.

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