SEC Division of Examinations Releases its 2024 Examination Priorities

Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; and Investment Advisers

Quick Take: The staff of the SEC Division of Examinations (Staff) recently released its 2024 examination priorities. The release was issued earlier than in prior years to align with the start of the SEC’s fiscal year to provide transparency and inform participants of the Staff’s focus areas in the upcoming fiscal year. In its release, the Staff indicated that exams involving registered investment companies would prioritize review of a fund’s compliance program and fund governance practices, disclosures to investors, accuracy of reporting to the SEC, fees and expenses, and derivatives risk management.

With regards to investment advisers, the Staff indicated that it would prioritize reviewing risk areas including, among other things, an adviser’s adherence to its fiduciary duties, disclosure of material facts relating to conflicts of interest, compliance policies and procedures, cyber and information security, safeguarding of client assets, and advertising practices. As has been the case in past years, private fund advisers will continue to receive heightened attention from the Staff.

In its release, the Staff identified a broad range of examination priorities, which covered a number of different types of market participants.

Registered Funds

The Staff will prioritize multiple focus areas specific to registered investment companies (funds). As in previous years, the Staff will continue its “perennial” focus on compliance programs, governance practices, disclosures to investors and accuracy of reporting to the SEC. This year, the Staff will again evaluate the adequacy of the processes of a board for evaluating and approving advisory and other fund fees and expenses. With respect to fund fees and expenses, the Staff noted that there will be a particular focus on:

  • advisory fees that vary by share classes of the same fund;

  • identical strategies offered by the same sponsor through different distribution channels that charge differing fee structures;

  • high advisory fees relative to peers; and

  • high fund fees and expenses, particularly for funds with weaker performance relative to their peers.

The Staff indicated that it would also focus on whether funds have adopted and implemented written policies and procedures reasonably designed to prevent violations of the derivatives rule (Investment Company Act Rule 18f-4) and policies, procedures, and internal controls reasonably designed to achieve compliance with the anti-money laundering requirements of the Bank Secrecy Act.

The Staff will also continue to prioritize examinations of funds that have never been examined or have not been examined in a number of years.

Registered Investment Advisers

As noted above, the Staff indicated that it would review an adviser’s adherence to its fiduciary duties. In this respect, the Staff stated that it would prioritize reviewing:

  • investment advice provided to clients with regard to products, investment strategies, and account types;

  • processes for determining that investment advice is provided in a client’s best interest (specifically noting how advisers will mitigate or eliminate conflicts of interest);

  • economic incentives to an adviser and its financial professionals for recommending products or services; and

  • disclosures made to investors.

The Staff will continue to focus examinations on an adviser’s compliance program, which may include the following areas:

  • portfolio management processes;

  • disclosures made to investors and regulators;

  • proprietary trading by the adviser and the personal trading of its personnel;

  • safeguarding of client assets from conversion or inappropriate use by advisory personnel;

  • 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;

  • safeguards for the privacy protection of client records and information;

  • trading practices;

  • marketing advisory services;

  • processes to value client holdings and assess fees based on those valuations; and

  • business continuity plans.

In addition to the broad compliance program areas listed above, the Staff specifically highlighted that it will prioritize reviewing an adviser’s:

  • compliance with the Marketing Rule;

  • compensation arrangements (including bank deposit sweep programs);

  • valuation assessments concerning illiquid and difficult to value assets;

  • safeguarding of clients’ material non-public information; and

  • disclosure and regulatory filings for accuracy and completeness.

In addition to fiduciary duty and compliance program concerns, the Staff stated that it would prioritize reviewing an adviser’s selection and use of third-party and affiliated service providers, oversight of branch offices, and receipt of informed consent from clients when implementing material changes to their advisory agreements. Notably, the Staff removed environmental, social and governance (ESG) investing from its exam priorities (however, this topic likely falls within disclosure and marketing rule requirements), and added monitoring by advisers of, and compliance with, Office of Foreign Assets Control sanctions.

Private Fund Advisers

The Staff noted that private fund advisers remain a significant portion of the SEC-registered adviser population, and that their examinations will focus on topics such as:

  • portfolio management risks present when there is exposure to recent market volatility and higher interest rates;

  • adherence to contractual requirements regarding limited partnership advisory committees or similar structures;

  • calculation and allocation of private fund fees and expenses (including valuation of illiquid assets, post commitment period management fees, adequacy of disclosures, and potential offsets);

  • due diligence practices for consistency with policies, procedures, and disclosures, particularly with respect to private equity and venture capital fund assessments of prospective portfolio companies;

  • conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers;

  • compliance with Advisers Act requirements regarding custody, including accurate Form ADV reporting, timely completion of private fund audits by a qualified auditor and the distribution of private fund audited financial statements; and

  • policies and procedures for reporting on Form PF.

The release also covered examination priorities with respect to broker-dealers, self-regulatory organizations and clearing agencies and other market participants.

For more detailed information, the Staff’s 2024 examination priorities are available here, while the SEC’s press release on the Staff’s 2024 examination priorities is available here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.