On October 16, 2023, the Division of Examinations of the U.S. Securities and Exchange Commission (the "Division" and the "SEC," respectively) announced its examination priorities for 2024. 1 While the Division typically announces its examination priorities near the start of the calendar year, this is the first time that the Division has published its examination priorities this early, to align with the start of the fiscal year. The Division stated its hope that this will better inform investors and registrants of key risks, trends and examination topics on which the Division intends to focus in 2024.

As in prior years, the Division's examination priorities focus on areas that the Division believes pose emerging risks to the markets or to investors, in addition to existing core risk areas. The Division acknowledged the short interval of eight months since the publication of the fiscal year 2023 priorities and noted that several areas of focus from last year will remain as priorities for the Division in fiscal year 2024. Notably, in contrast to previous examination priorities, there was no specific focus area concerning Environmental, Social and Governance ("ESG") issues in the 2024 examination priorities, although the wording of this year's areas of focus is certainly broad enough to capture ESG-related regulatory concerns.

For fiscal year 2024, the Division identified the following focus areas for various market participants, including: (i) examinations of investment advisers under the Investment Advisers Act of 1940 ("Advisers Act"), including registered investment advisers ("RIAs") to private funds and funds registered under the Investment Company Act of 1940 ("Investment Company Act"); (ii) registered investment companies, including mutual funds and exchange-traded funds ("ETFs"); (iii) broker-dealers, including compliance with Regulation Best Interest ("Reg BI") and the use of Form CRS, financial responsibility rules and trading practices; and (iv) other market participants, including self-regulatory organizations, clearing agencies, municipal advisors and security-based swap dealers, among others.

Many of the areas highlighted by the Division align with industry expectations based on the guidance provided by the SEC and its staff in the recent years. Last fiscal year, the Division published nine risk alerts sharing insights and observations from examinations on various key topics, including firms' development and implementation of an identity theft prevention program and compliance with Regulation S-ID; observations from broker-dealer examinations related to Reg BI; issues identified in recent newly registered investment adviser examinations; issues arising from LIBOR-transition preparedness by investment advisers and investment companies; and compliance with anti-money laundering regulation.

The Division's risk alerts also highlighted areas that may be covered in certain examinations, such as the different aspects of Rule 206(4)-1 under the Advisers Act (the "Marketing Rule"). 2

The following provides a brief overview of the Division's examination priorities of certain practices, products and services applicable to investment advisers, investment companies, broker-dealers, and multiple or other market participants.

Investment Advisers

EXAMINATIONS OF INVESTMENT ADVISERS

Investment Advisers' duty of care and duty of loyalty. The Division stated that it would continue to focus on whether investment advisers are complying with their fiduciary obligations under the Advisers Act, including (i) the obligation to serve the best interests of clients and not to subordinate a client's interest to the investment adviser's own interest; and (ii) the obligation to eliminate or make full and fair disclosure of conflicts of interest, such that a client can provide informed consent to the conflict. In examining whether an investment adviser has complied with its duty of care and duty of loyalty, the Division stated that it would focus on the following areas:

  • whether an investment adviser has met the fiduciary standards with regards to products, investment strategies, and account types, specifically focusing on advice relating to (1) complex products, such as derivatives and leveraged exchange-traded funds (ETFs); (2) high cost and illiquid products, such as variable annuities and non-traded real estate investment trusts (REITs); and (3) unconventional strategies, including those that purport to address rising interest rates. The Division identified that its focus may be emphasized on investment advice provided to older investors and those saving for retirement.
  • an investment adviser's processes for determining whether investment advice was provided in a client's best interest, including the processes for (1) making initial and ongoing suitability determinations; (2) seeking best execution; (3) evaluating costs and risks; and (4) identifying and addressing conflicts of interests. The Division will focus on the factors that an adviser considers in light of its client's investment profile, including investment goals and account characteristics. With regard to conflicts of interest, the Division stated that it will review how investment advisers address conflicts of interest, including (1) how an investment adviser mitigates or eliminates conflicts of interest where appropriate and (2) allocating investments to accounts in the scenario where an investor has more than one account (e.g., adviser fee-based; brokerage commissionbased; wrap fee based).
  • the economic incentives that an adviser and its financial professionals may have when it recommends products, services or account types to investors. Examinations will focus on the economic incentives and conflicts of interest to identify, among other things: (1) investment advice to purchase or hold onto certain types of investments or invest through certain types of accounts when lower cost options are available; and (2) investment advice regarding proprietary products and affiliated service providers that result in additional or higher fees to investors.
  • examining the disclosures made to investors and whether all material facts relating to conflicts of interest were sufficiently disclosed to allow a client to provide informed consent to the conflict.

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Footnotes

1. SEC Division of Examinations, 2024 Examination Priorities (October 16, 2023).

2. See SEC Division of Examinations, Risk Alerts on Observations From Broker-Dealer and Investment Adviser Compliance Examinations Related to Prevention of Identity Theft Under Regulation S-ID (Dec. 5, 2022), Observations from Examinations of Investment Advisers and Investment Companies Concerning LIBOR-Transition Preparedness (May 11, 2023) and Observations from Broker-Dealer Examinations Related to Reg BI (Jan. 30, 2023). See also our related Legal Updates on SEC's Risk Alerts on Anti-Money Laundering, LIBOR Transition for Investment Advisers and Investment Companies and Reg BI.

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