RIA Compliance Blog
The Securities and Exchange Commission (SEC) recently released the 2024 Examination Priorities from the Division of Examinations, formerly known as the Office of Compliance Inspections and Examinations. This annual release provides insight into the areas that the SEC plans to highlight when examining investment advisers, investment companies, and broker-dealers during the coming year.
As more advisers have returned to the office, the SEC has ramped up its in-person examinations while also leveraging technologies and virtual options to increase the efficiency of the examination program. Going forward, many advisers may experience a blend of in-person and virtual portions of an examination.
For FY24 examinations, the SEC will place a significant focus on how advisers abide by their duty of care and duty of loyalty under their fiduciary standard. Under this focus, the SEC will place an emphasis on (1) the advice provided to clients for complex or illiquid products, (2) the adviser’s process for ensuring that advice is provided in the client’s best interest, (3) how the adviser addresses conflicts of interests, including economic incentives, and (4) how disclosures are made to clients and prospective clients regarding all materials facts necessary for the clients to make informed decisions.
In addition to an adviser’s fiduciary duty, SEC examinations will continue to focus on an adviser’s compliance program, inspecting whether an adviser’s policies and procedures are reasonably tailored to the adviser’s business, scope of services, client base, operational risks, and market risks. Particularly with respect to an adviser’s compliance program, the SEC has indicated that it will highlight certain areas, including, compensation arrangements, valuation policies (especially with regards to illiquid or hard-to-value assets) safeguarding of client’s non-public information, and the accuracy and completeness of regulatory filings, including the Form CRS.
SEC examinations will continue to pay particular attention to newly passed, or contemplated, rules and regulations to assess if, and how, advisers have incorporated the new regulatory framework into their compliance programs. For 2024, these newly enacted regulations include the new marketing rule and new rules for advisers to private funds.
With the August 2023 announcement of new regulations for the advisers to private funds, the SEC will continue to highlight private fund advisers for not only compliance with the new regulations, but also inspect areas of risk unique to private fund advisers. These risk include (1) portfolio management strategy when exposed to market volatility and increasing interest rates; (2) advisory committee operations and adherence to contractual requirements; (3) accurate calculation and allocation of fund expenses and fees; (4) conflicts of interest, controls, and disclosures for funds managed side-by-side with other affiliated funds and use of affiliate service providers; (5) compliance with custody requirements; and (6) Form PF and other regulatory reporting.
The Division will continue to focus on information security and operational resiliency. While this area has been a concentration for the past few years, it has expanded over the last few years due to lessons learned from the pandemic and rise in cyber related incidents. Examinations will focus not only on an adviser’s business continuity plan, but will specifically address the internal controls and policies and procedures adopted to prevent and respond to operational disruptions such as cybersecurity attacks, intense weather-related episodes, and geopolitical events. Advisers with multiple offices or other branch offices can expect the SEC to inquire about the adviser’s ability to safeguard information and maintain operations through these multiple offices.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.