For the first time, the SEC is providing their list of exam priorities closer to the start of the new year to better inform registrants of the key risks, trends, and exam topics they plan to focus on in the upcoming year.
The SEC will continue to examine advisor’s for adherence to their duty of care and duty of loyalty obligations to clients as this remains a priority for the SEC. In reviewing advisors’ adherence to this fiduciary standard, the SEC continues to focus on: investment advice provided to clients related to products, investment strategies and account types; and processes for determining that investment advice is provided in the clients’ best interest.
Additionally, the SEC remains focused on advisors’ compliance programs, including whether their policies and procedures reflect the various aspects of the advisors’ business, compensation structure, services, client base, and operations, and addresses applicable current market risks. The SEC’s review of advisors’ annual review of the effectiveness of their compliance programs is an important part of assessing whether the advisors’ conflicts of interest are addressed in their compliance programs, including those conflicts created by the advisors’ business arrangements or affiliations and related to advisor and registered investment company fees and expenses.
The 2024 Examination Priorities for RIAs include:
Marketing practice assessments for whether advisors, including advisors to private funds, have: (1) 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; (2) appropriately disclosed their marketing- related information on Form ADV; and (3) 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 and, as applicable, comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements.
Compensation arrangement assessments focusing on: (1) fiduciary obligations of advisors to their clients, including registered investment companies, particularly with respect to the advisors’ receipt of compensation for services or other material payments made by clients and others; (2) alternative ways that advisors try to maximize revenue, such as revenue earned on clients’ bank deposit sweep programs; and (3) fee breakpoint calculation processes, when fee billing systems are not automated.
Valuation assessments regarding advisors’ recommendations to clients to invest in illiquid or difficult to value assets, such as commercial real-estate or private placements.
Safeguarding assessments for advisors’ controls to protect clients’ material non-public information, particularly when multiple advisors share office locations, have significant turnover of investment advisor representatives, or use expert networks.
Disclosure assessments to review the accuracy and completeness of regulatory filings, including Form CRS, with a particular focus on inadequate or misleading disclosures and registration eligibility.
The SEC is also focused on advisors’ policies and procedures for: (1) selecting and using third-party and affiliated service providers; (2) overseeing branch offices when advisors operate from numerous or geographically dispersed offices; and (3) obtaining informed consent from clients when advisors implement material changes to their advisory agreements. Such reviews will assess, among other things, whether the advisors’ policies and procedures are reasonably designed and implemented and whether the procedures prevent the advisor from placing their interests ahead of clients’ interests.
As with previous years, the SEC continues to prioritize examinations of advisors that have never been examined, including recently registered advisors, and those that have not been examined for a number of years. I encourage state registered advisors to review this information as well as the states tend to follow the trend of the SEC with examinations.
To read the complete 2024 Examination Priorities release, click here.