The proliferation of certain types of investments that pose emerging risks to investors, such as crypto assets, as well as emerging financial technology, will be among the Securities and Exchange Commission’s (SEC) 2024 exam priorities.
These topics, in addition to core and perennial risk areas, were outlined by the SEC’s Division of Examinations in its 2024 examination priorities released Oct. 16. The 28-page document, released annually, seeks to inform investors and registrants of the key risks, examination topics, and priorities the division plans to focus on in the coming year.
“We hope that aligning the publication of our examination priorities with the beginning of the SEC’s fiscal year will provide earlier insight to registrants, investors, and the marketplace of adjustments in our areas of focus year to year,” Division of Examinations Director Richard R. Best said in a statement.
Crypto Assets and Emerging FinTech
As to the proliferation of certain types of investments and emerging technologies, the SEC notes that it will focus on broker-dealers and advisers offering new products and services or employing new practices, particularly technological and online solutions that service online accounts aimed at meeting the demands of compliance and marketing.
As such, the division remains focused on certain services, including automated investment tools, artificial intelligence, and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative sources of data.
Meanwhile, given the continued volatility of the crypto markets, the division says it will also continue to monitor and, when appropriate, conduct examinations of registrants. The SEC notes that examinations will focus on the “offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets or related products.”
Specifically, this includes reviewing whether such registrants involved with crypto assets follow their respective standards of conduct when recommending or advising clients regarding crypto assets, particularly when the investors are retail-based (including older investors) and investments involve retirement assets.
In addition, the division will assess whether any technological risks associated with the use of blockchain and distributed ledger technology have been addressed, including whether compliance policies and procedures are “reasonably designed, accurate disclosures are made and the risks pertaining to the security of crypto asset securities are addressed, if required by applicable law.”
Marketing Practices
Examinations will also include marketing practice assessments for whether advisers have adopted and implemented reasonably designed written policies and procedures to prevent violations of the Advisers Act and the rules thereunder including reforms to the Marketing Rule, the SEC further notes.
As part of these assessments, the SEC will check whether advisers appropriately disclosed their marketing-related information on Form ADV and maintained substantiation of their processes and other required books and records.
Marketing practice reviews will also assess whether disseminated advertisements include any untrue statements of a material fact, are materially misleading, or are otherwise deceptive. The SEC will also review whether they comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements.
Investment Companies
The division also continues to prioritize examinations of registered investment companies (RICs), including mutual funds and ETFs, due to their importance to retail investors, particularly those saving for retirement. Examination focus areas may include, for example, whether RICs have adopted effective written compliance policies and procedures concerning the oversight of advisory fees and implemented any associated fee waivers and reimbursements. A particular focus will be on:
- charging different advisory fees to different share classes of the same fund;
- identical strategies offered by the same sponsor through different distribution channels but that charge differing fee structures;
- high advisory fees relative to peers; and
- high registered investment company fees and expenses, particularly those of registered investment companies with weaker performance relative to their peers.
Regulation Best Interest
Finally, while Regulation Best Interest has been around for a couple of years, the SEC notes that it will evaluate whether broker-dealers have established, maintained, and enforced written policies and procedures to achieve compliance with Reg BI as a whole.
This includes considering whether the written policies and procedures are reasonably designed based on the costs, risks, and rewards of the securities and investment strategies that the broker-dealer recommends to customers.
The division will also continue to focus on dual registrants and examinations will encompass firms’ conflicts of interest, account allocation practices (e.g., allocation of investments where an investor has more than one type of account) and account selection practices (e.g., brokerage versus advisory and wrap fee accounts).
These examinations will also evaluate whether broker-dealers have met their obligations to file their Form CRS with the Commission and deliver their relationship summary to retail customers.
Finally, as a caveat, the SEC notes that its published priorities are not exhaustive of the focus areas of the division in its examinations, risk alerts, and outreach. In addition, as with previous years, the division continues to prioritize examinations of advisers that have never been examined, including recently registered advisers, and those that have not been examined for a number of years.
