RISK MANAGEMENT—Report outlines Division of Examinations priorities for 2024 - 19 October 2023

The priorities are guided by the Division's four pillars: promoting compliance, preventing fraud, monitoring risk and informing policy.

The SEC's Division of Examinations released its examination priorities for 2024. The examinations will emphasize areas posing emerging risks to investors or the markets. Among other items, the examination focus areas include investment adviser compliance programs and broker-dealers' obligations under Regulation Best Interest.

For the first time, the release of the examination priorities aligns with the start of the fiscal year, which the Division hopes will better inform the public of the key risks, trends, and examination topics that will be focused on. The published priorities, however, are not exhaustive of the Division's focus, and given the shorter publication interval, several initiatives from 2023 remain as priorities in the coming year.

SEC Chair Gary Gensler said: "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." Richard R. Best, the Director of the Division of Examinations added: "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."

Investment advisers and investment companies. First, the Division will remain focused on investment advisers' compliance programs. Areas of examination focus will include: marketing practices, compensation arrangements, valuation assessments (for recommendations to invest in illiquid assets), safeguarding assessments for protection of clients' information, and disclosure assessments. The report indicates that advisers to public funds, as a significant portion of the adviser population, will be an area of focus, and the report lists several high-priority topics, including due diligence practices, compliance with custody requirements, and reports on Form PF.

Due to their importance to retail investors, examinations of registered investment companies will continue to be a priority. The report lists compliance policies concerning advisory fees and violations of the fund derivatives rule as areas of examination focus. Another priority will be examinations of registered investment companies that have never been examined.

Broker-dealers. The report indicates that the Division will review whether broker-dealer recommendations are in their customers' best interest. In particular, the Division will look into: (1) recommendations about products, investment strategies, and account types; (2) disclosures made to investors on conflicts of interest; (3) conflict mitigation practices; (4) processes for reviewing reasonable alternatives; and (5) factors considered in light of the investor’s investment profile. The Division will also review the broker-dealer's relationship summary (Form CRS), its compliance with the Net Capital Rule and the Customer Protection Rule, and the firm's compliance with Regulations SHO and ATS.

SROs and clearing agencies. In addition, examinations will focus on whether national securities exchanges are meeting their obligations to enforce compliance with applicable rules and laws. As part of this process, the Division conducts oversight examinations of FINRA and the MSRB to identify areas to examine. In addition, examinations of registered clearing agencies include both risk-based examinations and Corrective Action Reviews to assess, among other items, whether the agencies' risk management complies with the Exchange Act.

Other risk areas. Cybersecurity remains an area of focus for all registrants. The Division will focus on registrants' policies and procedures, internal controls, oversight over third-party vendors, governance practices, and responses to cyber incidents. Examinations of broker-dealers and advisers will also review the firms' practices to promote cyber resiliency. The report notes further that the Division will be assessing registrant preparations associated with rule changes shortening the settlement cycle to one business day after the trade date (the compliance date for the rules is May 28, 2024).

Given the continued volatility of the crypto markets, the Division will continue to conduct examinations of registrants. These examinations will focus on activities in crypto assets including, trading, offers and sales, and recommendations and advice. The Division will also assess whether technological risks associated with the use of blockchain have been addressed.

Finally, the Division will prioritize compliance with Regulation SCI and anti-money laundering programs. One area of focus, the report says, will be on the security of SCI systems. AML programs will be reviewed to determine whether they are appropriately tailored and meet their SAR obligations, among other items.

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