SEC Examination Priorities in 2024
From the desk of Jim Eccleston at Eccleston Law
The Securities and Exchange Commission (SEC) has issued its 2024 examination priorities to inform investors and registrants about the focal areas, key risks, and examination topics the division intends to emphasize in the coming year. According to an article from ThinkAdvisor, the SEC's 2024 will focus on the following priorities.
Regulation Best Interest: Recommendations
In the context of Regulation Best Interest (Reg BI), examinations will give precedence to broker-dealer recommendations regarding:
- Products, investment strategies, and account types.
- Disclosures made to investors about conflicts of interest.
- Practices for mitigating conflicts.
- Procedures for assessing reasonably available alternatives.
- Factors considered concerning the investor's investment profile, including their investment objectives and account attributes.
Regulation Best Interest: Products
In Reg BI examinations, the focus will extend to recommended products with the following characteristics:
- Complexity, including derivatives and leveraged Exchange-traded funds.
- High cost, exemplified by variable annuities.
- Illiquidity, involving nontraded REITs and private placements.
- Proprietary products.
- Microcap securities.
Investment Advisors
In the realm of investment advisors, upcoming examinations will center on the advice offered to clients concerning products, investment strategies, and account types. This scrutiny will primarily target:
- Complex products like derivatives and leveraged ETFs.
- High-cost and illiquid products, including variable annuities and non-traded real estate investment trusts (REITs).
- Unconventional strategies, especially those claiming to address the challenges posed by rising interest rates. Moreover, particular attention may be given to investment advice provided to specific client demographics, such as older investors and those saving for retirement.
Form CRS
The exams will assess the broker-dealer's customer relationship summary content, focusing on how the broker-dealer describes:
- The relationships and services provided to retail customers.
- The fees and costs associated with their services.
- Conflicts of interest and whether any disciplinary history is disclosed.
Additionally, these examinations will determine if the broker-dealers have fulfilled their obligations to submit their Form CRS to the commission and deliver it to retail customers.
Marketing Rule
The examination will evaluate whether advisors, including those serving private funds, have taken the following actions:
- Implemented effective written policies and procedures to prevent violations of the Advisers Act and its rules, including the Marketing Rule.
- Adequately disclosed their marketing-related information on Form ADV.
- Maintained records and documentation to substantiate their processes and other mandated books and records.
Additionally, marketing practice reviews will scrutinize advertised content to determine if it contains any false statements of material facts, is significantly misleading, or involves deceptive practices. The reviews will also ensure compliance with performance, third-party ratings, testimonials, and endorsement requirements where applicable.
Crypto and Emerging Financial Technologies
Examinations will concentrate on crypto assets, their related products and services, and burgeoning financial technology like broker-dealer mobile apps and advisors opting to deliver automated investment advice to clients.
The examinations will emphasize specific services, including automated investment tools, artificial intelligence, trading algorithms or platforms, and the potential risks tied to the utilization of emerging technologies and alternative data sources.
Funds and ETFs
In the realm of Funds and ETFs, the SEC's 2024 examination priorities place specific emphasis on the following:
- Examining cases where varying advisory fees are levied on different share classes within the same fund.
- Investigating instances where identical investment strategies, offered by the same sponsor but through different distribution channels, feature distinct fee structures.
- Scrutinizing situations where advisory fees are notably higher when compared to industry peers.
- Assessing the fees and expenses of registered investment companies, particularly those underperforming concerning their peers.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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