SEC Division of Examinations Announces 2024 Priorities

The U.S. Securities and Exchange Commission’s Division of Examinations has published its key priorities regarding the examination of SEC supervised firms in 2024. Although the document covers a large range of entities under the SEC’s remit, the following text provides a brief summary of priorities concerning investment advisers, investment companies, and broker-dealers only. For examination priorities regarding other firms such as securities exchanges or municipal advisers, please refer to the enclosed document.
#### (1) Examination priorities concerning investment advisers
The Division plans to review investment advice provided to clients, particularly in relation to complex products (such as derivatives and leveraged ETFs), high-cost and illiquid products (such as variable annuities and non-traded REITs), and products with unconventional trading strategies. It will also examine advice provided to certain types of clients, such as older investors or those saving for retirement.
The Division will further assess whether advisers are adhering to their fiduciary obligations, including their duty of care and duty of loyalty. This includes examining processes for determining investment advice in clients‘ best interest, making suitability determinations, seeking best execution, evaluating costs and risks, and identifying and addressing conflicts of interest. In the context of conflicts of interest, the Division will also look into incentives that advisers and their financial professionals may have to recommend certain products, services, or account types. This includes assessing the source and structure of compensation, revenue sharing, markups, and other incentivizing revenue arrangements.
Moreover, the division will review advisers‘ compliance programs to ensure these programs are sufficient to support compliance with fiduciary obligations. This includes assessing marketing practices, compensation arrangements, valuation of illiquid assets, safeguarding of client information, and disclosure accuracy and completeness.
Finally, as far as advisers to private funds are concerned, the Division will prioritize examinations of practices concerning the management of portfolio risks, including derivative risks, adherence to contractual requirements, and the accurate calculation and allocation of fees and expenses.
#### (2) Examination priorities concerning investment companies
The Division will review whether registered investment companies have adopted effective written compliance policies and procedures concerning the oversight of advisory fees and implemented any associated fee waivers and reimbursements. It will examine firms‘ practices as regards the charging of different advisory fees to different share classes of the same fund and will closely look into cases where high advisory fees relative to peers are charged, particularly by registered investment companies with weaker performance figures.
The Division will further assess whether registered investment companies and business development companies have adopted and implemented written policies and procedures reasonably designed to prevent violations of the Commission’s fund derivatives rule (Investment Company Act Rule 18f-4). This includes reviewing the adoption and implementation of a derivatives risk management program, board oversight, and the completeness, accuracy, and potential misleading nature of disclosures regarding the use of derivatives. The Division will also review the procedures and oversight of derivative valuations.
#### (3) Examination priorities concerning broker-dealers
With respect to broker-dealers, the Division will continue to assess their compliance with Regulation Best Interest, which establishes the standard of conduct for broker-dealers when recommending securities transactions or investment strategies to retail customers. Broker-dealers must act in the best interest of their customers and cannot prioritize their own financial interests.
Examinations will further focus on the content of broker-dealers‘ relationship summaries, which provide information about the relationships, services, fees, costs, and conflicts of interest that the broker-dealer offers to retail customers. The Division will evaluate whether broker-dealers have met their obligations to file the relationship summary with the SEC and deliver it to retail customers.
Finally, the division will look into broker-dealers‘ compliance with the Net Capital Rule and the Customer Protection Rule, as well as related internal processes, procedures, and controls. Areas of review may include fully paid lending programs, broker-dealer accounting for certain liabilities, and risk management controls to assess liquidity management.
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To conclude, it may be worth noting, that the SEC will prioritize those firms that have not been subject to examinations yet. And due to the increasing risks of sanction evasion, money laundering, and cyber security intrusion, a key focus of the Division will lie on the monitoring of AML and CFT practices, IT- infrastructures and measures to prevent system incidents, and on due diligence practices of supervised firms.