On October 16, 2023, the SEC’s Division of Examinations (“Division” or “EXAMS”) issued its examination priorities for 2024. The publication details the key examination topics and risks that the Division intends to prioritize in the next year. The Division highlighted the following areas of examination focus relevant to investment advisers:
Duty of Care and Loyalty: The Division will continue to examine advisers’ adherence to duties of care and loyalty owed to clients, with a specific focus on:
- Investment advice provided to clients regarding products, investment strategies and account types;
- Advisers’ processes for determining that advice is provided in clients’ best interest (e.g., those related to cost/risk evaluations and addressing conflicts of interest);
- Economic incentives that an adviser and/or its financial professionals may have to recommend specific transactions, products, services or account types; and
- Advisers’ disclosures to investors, and particularly whether such disclosures include all material facts relating to conflicts of interest associated with an adviser’s investment advice sufficient to allow a client to provide informed consent to the conflict.
Compliance Programs: The Division will similarly continue to focus on advisers’ compliance programs, including whether an adviser’s policies and procedures reflect the various aspects of its business, compensation structure, services, client base and operations, and address applicable current market risks.
Marketing Practices: The Division will examine advisers’ marketing practices to understand whether they have (i) adopted and implemented written policies and procedures reasonably designed to prevent violations of amended Rule 206(4)-1 (“Marketing Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”), and the Advisers Act, generally, (ii) appropriately disclosed marketing-related information on Form ADV and (iii) maintained substantiation of their processes and other required books and records. Advertisements disseminated by advisers will also be reviewed for Marketing Rule compliance.
Compensation Arrangements: Advisers will be examined on receipt of compensation for services or other material payments made by clients and others.
Valuation Assessments: EXAMS will assess advisers’ recommendations to clients to invest in illiquid or difficult to value assets (e.g., commercial real estate or private placements).
Safeguarding Client Information: The Division will review advisers’ safeguards for protection of clients’ material non-public information.
Disclosure Assessments: EXAMS will conduct disclosure assessments to review regulatory filings for completeness, focusing on inadequate or misleading disclosures and registration eligibility.
Advisers to Private Funds: EXAMS will continue to focus on advisers to private funds, prioritizing specific examination topics, including:
- Portfolio management risks related to market volatility and higher interest rates;
- Adherence to contractual requirements regarding LPACs or similar structures;
- Accurate calculation and allocation of private fund fees and expenses (both fund-level and investment-level);
- Consistency of due diligence practices with the adviser’s policies, procedures and disclosures;
- Conflicts, controls and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers;
- Compliance with the Adviser Act’s custody requirements; and
- Form PF policies and procedures.
Information Security and Operational Resiliency: EXAMS will review advisers’ practices designed to prevent interruptions to mission-critical services and to protect investor information, records and assets. The Division will specifically assess advisers’ (i) policies and procedures, (ii) internal controls, (iii) oversight of third-party vendors (where applicable), (iv) governance practices, (v) responses to cyber-related incidents and general cyber resiliency and (vi) staff training and related policies and procedures regarding safeguarding client records and information. EXAMS will also continue to assess how advisers identify and address risks to essential business operations in connection with the use of third-party products and services.
Crypto Assets and Emerging Financial Technology: The Division will continue to examine private fund advisers’ use of developing financial technologies and solutions that service online accounts aimed at meeting the demands of compliance and marketing. The offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets or related products will also be a topic of heightened examination for applicable advisers.
- 1. The full publication is available here.↵
- 2. The Division noted that examinations may include one or more of the following areas: (1) portfolio management processes; (2) disclosures made to investors and regulators; (3) proprietary trading by the adviser and the personal trading activities of supervised advisory personnel; (4) safeguarding of client assets from conversion or inappropriate use by advisory personnel; (5) the accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction; (6) safeguards for the privacy protection of client records and information; (7) trading practices; (8) marketing advisory services; (9) processes to value client holdings and assess fees based on those valuations; and (10) business continuity plans. The Division also will review advisers’ policies and procedures with respect to (a) selecting and using third party and affiliated service providers, (b) overseeing branch offices when advisers operate from numerous or geographically dispersed offices and (c) obtaining informed consent from clients regarding material changes to their advisory agreements.↵