The U.S. Securities and Exchange Commission (SEC) has recently unveiled its 2024 Examination Priorities Report, shedding light on its focal areas and priorities for the year. We typically see this report released in the first quarter of each year. Going forward, the SEC will begin providing their annual examination priorities at the beginning of their Fiscal Year. The SEC’s Fiscal Year is October 1 through September 30 annually. This report underscores the SEC’s unwavering commitment to adapting to the ever-evolving financial markets and regulatory challenges, all in the interest of safeguarding investors and ensuring the integrity of the securities industry. In this blog post, we will delve into key takeaways from the 2024 SEC Exam Priorities Report, with a specific focus on two distinct sectors: investment advisers and broker-dealers.
The 2024 SEC Exam Priorities Report recognizes the dynamic regulatory landscape, a force that will significantly impact registered firms and market participants. The Division of Examinations has identified the need to adapt to these changes, concentrating on potential examinations, compliance risks, and emerging areas of concern. To support the industry, the Division intends to increase its engagement through in-person fieldwork, compliance outreach events, speaking engagements, and various interaction points. These priorities aim to effectively address the evolving financial landscape, providing both continuity and adaptability.
Investment Advisers: Key Takeaways
The core takeaways from the report predominantly revolve around the examination of investment advisers:
- Fiduciary Duty and Putting Clients First: For registered investment advisers (RIAs), the central theme revolves around the fiduciary standard, where they are expected to put their clients’ interests first. This includes identifying and mitigating conflicts of interest, establishing robust policies and procedures (P&Ps), and ensuring full disclosure of any conflicts that might impact the advice provided.
- Focus on Products: The SEC is closely scrutinizing the products recommended by RIAs, with particular attention to complex, high-cost, and illiquid products. This scrutiny ensures that advisers are recommending investments that align with the best interests of their clients.
- Emerging Fintech and AI: The report acknowledges the significance of emerging fintech, including artificial intelligence (AI) and mobile applications. It also references automated investment advice. Although the report doesn’t explicitly mention the SEC’s proposed rule around predictive analytics, it hints at the SEC’s cautious approach to technological advancements in the industry.
- Marketing Practices: A significant focus is placed on marketing practices, ensuring that advisers have implemented written policies to prevent violations of the Advisers Act and have accurately disclosed marketing-related information.
- Compliance Programs: The Division is actively assessing the effectiveness of compliance programs among investment advisers. These assessments ensure that compliance programs are tailored to the firm’s unique aspects, compensation structures, services, client base, and current market risks.
- AML and Cybersecurity: The report stresses the importance of robust anti-money laundering (AML) and cybersecurity measures. Certain financial institutions are required under the Bank Secrecy Act (BSA) to tailor their AML programs to their unique risks. These programs must include compliance policies, independent testing, and risk-based customer due diligence to detect and report suspicious transactions. Some institutions also need to submit Suspicious Activity Reports (SARs) to the Financial Crimes Enforcement Network (FinCEN). The Division’s ongoing AML focus involves assessing if these institutions are: (1) aligning their AML programs with their risks; (2) conducting independent testing; (3) establishing comprehensive customer identification programs; and (4) meeting SAR filing obligations. Certain registered investment companies will also be reviewed for their oversight of financial intermediaries.
- Third-Party Vendor Management: There is a growing emphasis on third-party vendor selection and management, indicating the SEC’s keen interest in ensuring that advisers maintain strong oversight over their vendors to protect client interests.
- Enhanced Disclosure: The report emphasizes the need for accurate and complete regulatory filings, including Form CRS, with a specific focus on identifying inadequate or misleading disclosures.
- Examination Priorities: The Division continues to prioritize examinations of advisers that have never been examined before, including newly registered advisers, and those that have not been examined for an extended period. This ensures a comprehensive assessment of firms’ compliance and adherence to regulatory standards.
Broker-Dealers: Key Takeaways
- Regulation Best Interest: The 2024 SEC Exam Priorities Report places significant focus on Regulation Best Interest (Reg BI). Reg BI sets 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 the retail customer, adhering to specific component obligations, including providing required disclosures, exercising diligence and care in recommendations, addressing conflicts of interest, and ensuring compliance with Reg BI. Examiners will scrutinize recommendations related to various products, investment strategies, and account types, ensuring adequate disclosures, conflict mitigation practices, review processes for alternative investment options, and alignment with the investor’s profile. Specific product types under scrutiny include derivatives, leveraged exchange-traded funds (ETFs), variable annuities, nontraded Real Estate Investment Trusts (REITs), private placements, proprietary products, microcap securities, and illiquid and complex products.
- Form CRS: Examinations will include a review of broker-dealers’ relationship summaries outlined in Form CRS, assessing how they describe relationships, services offered, fee structures, conflicts of interest, and any disciplinary history. The Division will also evaluate compliance with filing the relationship summary with the Commission and delivering it to retail customers.
- Broker-Dealer Financial Responsibility Rules: The report underscores a focus on broker-dealer compliance with the Net Capital Rule and the Customer Protection Rule, extending to internal processes, procedures, and controls. This includes liquidity management, fully paid lending programs, accounting for specific liabilities, and risk management related to credit, interest rates, market, and liquidity.
- Broker-Dealer Trading Practices: Examinations will cover equity and fixed-income trading practices among broker-dealers, with specific areas of focus on compliance with Regulation SHO, Regulation ATS, and Exchange Act Rule 15c2-11. For wholesale market makers, examinations may include aspects like quote generation, order routing, execution practices, regulatory controls, and risk management.
The 2024 SEC Exam Priorities Report demonstrates the SEC’s commitment to maintaining the integrity of the securities industry and protecting retail investors. Investment advisers should be prepared for heightened scrutiny in areas such as fiduciary duty, compliance, marketing practices, and compensation arrangements. Broker-dealers, on the other hand, should expect increased scrutiny related to Regulation Best Interest, Form CRS, financial responsibility rules, and trading practices. Adherence to these priorities is fundamental for instilling investor trust and upholding market integrity in a rapidly evolving financial landscape. As the industry continues to evolve, the SEC’s focus on emerging fintech, AI, and cybersecurity will remain critical for ensuring a robust and secure financial ecosystem.
How RegEd Can Help
As regulatory landscapes evolve and become increasingly complex, organizations are turning to technological solutions to ensure adherence to advertising regulations, manage conflicts of interest (COI), streamline policies and procedures (P&P), and conduct Anti-Money Laundering (AML) training. RegEd offers a suite of tools designed to assist firms in these critical areas.
Advertising Review: With RegEd’s Advertising Review, advanced technologies integrate artificial intelligence to streamline and automate the end-to-end process for marketing and advertising communication submission, review, collaboration and approval, speeding time to market for review items. Learn more.
Conflicts of Interest: Enables firms to seamlessly monitor, identify and remediate conflicts of interest and code of conduct issues. The solution captures a full audit trail of requests, approvals, exceptions and remediation, and provides ready documentation for internal and external regulatory reporting. Learn more.
Policies & Procedures Management: Enables comprehensive, end-to-end administration and oversight of all elements of the firm’s policies and procedures. It ensures that critical compliance information is synchronized with current rules and regulations, and also streamlines preparedness for regulatory audits and market conduct exams with strong documentation and detailed evidence of compliance. Learn more.
Anti-Money Laundering (AML) training: RegEd’s Anti-Money Laundering (AML) Program enables producers to fulfill AML training requirements and then share those results with all participating carriers. Learn more.