The Securities and Exchange Commission (SEC) released its 2024 examination priorities on the key risks, topics, and priorities it plans to focus on within the next year, with a direct emphasis on emerging risks to investors and markets.
The SEC’s Division of Examinations, who releases the yearly examination priorities, analyzes certain practices, products, and services that it believes “present potentially heightened risks to investors or the integrity of the U.S. capital markets,” said the agency in its 2024 report.
“The Division of Examinations plays a critical role in protecting investors and facilitating capital formation,” said SEC Chair Gary Gensler in a statement. “In examining for compliance with our time-tested rules, the Division helps registrants understand the rules as well as ensures that markets work for investors and issuers alike. The Division’s efforts, as laid out in the 2024 priorities, enhance trust in our ever-evolving markets.”
The overview of priorities includes:
Examinations of investment advisors
Examining for advisors’ adherence to their duty of care and duty of loyalty obligations remains a priority, wrote the SEC, and one in which the agency will focus on: investment advice provided to clients regarding investment strategies, and account types, including (1) complex products, such as derivatives and leveraged exchange-traded funds; (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.
Additionally, examination focus may be emphasized for investment advice provided to certain types of clients, including older investors and those saving for retirement.
Other examination priorities includes compliance policies, best interest processes, and disclosures made to investors.
Investment companies
The Division said it will continue to prioritize examinations of registered investment companies, including mutual funds and exchange-traded funds (ETFs), due to their importance to retail investors, particularly those saving for retirement.
These examinations often include assessments of compliance programs and fund governance practices, disclosures to investors, and SEC reporting.
Examination focus areas could include fees and expenses, derivatives risk management assessments, exemptive order conditions, and more.
Broker-dealers
As part of its examinations, the Division will evaluate whether broker-dealers have established, maintained, and enforced written policies and procedures, including Form CRS, which the SEC said will include (1) the relationships and services that it offers to retail customers; (2) its fees and costs; and (3) its conflicts of interest, and whether the broker-dealer discloses any disciplinary history.
These examinations will also evaluate whether broker-dealers have met their obligations to file their relationship summary with the Commission and deliver their relationship summary to retail customers, added the SEC in its report.
Cyber-resiliency
In its effort to prevent cyber hacks, the Division said it is focusing on registrants’ policies and procedures, internal controls, oversight of third-party vendors, governance practices, and responses to cyber-related incidents, including ransomware attacks.
“Part of this review will consider whether registrants adequately train staff regarding their identity theft prevention program and their policies and procedures designed to protect customer records and information,” the SEC noted.
Crypto assets and emerging financial technology
The Divison says it continues to observe cryptocurrencies and their associated products and services, along with new fintech products like broker-dealer mobile applications and automated investment advice solutions.
Specifically, the Division will focus on broker-dealers and advisers who offer new products and services or employ new practices, particularly technological and online solutions that service online accounts aimed at meeting the demands of compliance and marketing. Among the services it will analyze include 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.
Additional focuses as reported by the SEC can be found here.
SEE ALSO:
- ESG Matters Listed Among SEC’s 2021 Exam Priorities
- EBSA Updates Cybersecurity Guidance for Plan Sponsors and Fiduciaries
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.