October 26, 2023
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.
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:
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:
The Staff will continue to focus examinations on an adviser’s compliance program, which may include the following areas:
In addition to the broad compliance program areas listed above, the Staff specifically highlighted that it will prioritize reviewing an adviser’s:
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:
The release also covered examination priorities with respect to broker-dealers, self-regulatory organizations and clearing agencies and other market participants.
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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.
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