In the ever-evolving world of regulatory compliance, staying ahead of the curve is essential for financial institutions and market participants. The U.S. Securities and Exchange Commission (SEC) has just revealed its examination priorities for 2024, and it's a roadmap that promises to shape the industry in the coming year. Here's an overview of these priorities and their potential impact on your firm.
The Four Pillars: The Foundation of SEC Priorities
The SEC continues to build its examination priorities on the foundation of its "four pillars":
- Promote compliance
- Prevent fraud
- Monitor risk
- Inform policy
These pillars serve as the guiding principles for the SEC's focus areas, and they are as relevant as ever in 2024.
A Risk-Based Approach
The SEC's approach to examination priorities is decidedly risk-based. This means that their priorities are designed to address the most significant risks facing the financial industry. The 2024 priorities encompass a wide range of financial institutions, including investment advisers (including advisers to private funds), investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and other market participants.
Investment Advisers: Navigating Fiduciary Duty and Compliance
For investment advisers, the SEC's examination priorities are divided into two main categories: fiduciary duty and compliance program.
Fiduciary Duty:
- Advice provided regarding complex products, such as derivatives and leveraged ETFs.
- High-cost and illiquid products, including variable annuities (VAs) and non-traded real estate investment trusts (REITs).
- Unconventional strategies.
- Advice to specific types of clients, including older clients and retirement savers.
Compliance Program:
- Scrutiny of marketing practices, including policies, procedures, and disclosure.
- Assessment of compensation arrangements, revenue sharing, mark-ups, and incentivizing arrangements.
- Valuation of illiquid or difficult-to-value assets.
- Controls to protect client material non-public information (MNPI), including privacy and cybersecurity policy testing.
- Processes to ensure the accuracy of regulatory filings.
Investment Advisers to Private Funds: Additional Priorities
For investment advisers to private funds, there are additional examination priorities, such as:
- Portfolio management risks, including performance, significant withdrawals, leverage, and illiquid assets.
- Contractual requirements, notification/consent processes, and advisory committee structures.
- Calculation of private fund fees and expenses, including asset valuation.
- Due diligence processes for portfolio companies.
- Controls and disclosure to mitigate conflicts when private funds are managed alongside registered investment companies.
- Custody rule compliance.
- Form PF policies and procedures.
Broker-Dealers: Compliance Under the Spotlight
Broker-dealers are under scrutiny in several key areas:
- Regulation Best Interest (Reg BI): This includes obligations related to disclosure, care, conflicts of interest, and compliance.
- Form CRS: Compliance with relationships, services, fees, costs, and disclosure obligations.
- Financial Responsibility Rules: This encompasses the Net Capital Rule, Customer Protection Rule, and internal controls.
- Trading Practices: Examination of Regulation SHO, Regulation ATS (including disclosures in Forms ATS & ATS-N), Exchange Act Rule 15c2-11, and more.
Common Risk Areas
The SEC has identified risk areas impacting various market participants that cut across different categories of firms. These areas of risk are common to advisers, broker-dealers, and other firms participating in the securities marketplace. They include:
- Information Security & Operational Resiliency: Addressing risk assessment, policies, procedures, internal controls, vendor management, branch offices, and response/recovery plans.
- Crypto Assets & Emerging Financial Technology: Covering blockchain, automated investment tools, artificial intelligence (AI), trading algorithms, and custody issues related to crypto assets.
- Regulation Systems Compliance & Integrity (SCI): Ensuring systems' capacity, integrity, resiliency, availability, and security, along with policies and procedures for security.
- Anti-Money Laundering (AML): Tailored AML programs for business models and risks, independent testing, customer identification programs, Suspicious Activity Report (SAR) filing obligations, and Office of Foreign Assets Control (OFAC) monitoring.
As the regulatory landscape continues to evolve, it's crucial for financial institutions and market participants to stay informed and adapt to these priorities. Compliance is not just about meeting regulatory requirements; it's about protecting your clients, your reputation, and the integrity of the financial markets. Hadrius is here to support you on this journey, providing automated solutions and expertise to streamline your compliance efforts.
At Hadrius, we automated SEC and FINRA compliance with AI, working closely with you to ensure your peace of mind and create the most efficient compliance program your firm has ever seen. Stay tuned for more insights and updates as we navigate the exciting world of SEC compliance together.
If you have any questions or need assistance with your compliance needs, please don't hesitate to reach out to us. Here's to a successful and compliant 2024!
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