The Securities and Exchange Commission (SEC) Division of Examinations (“EXAMS”) has four pillars – to promote compliance, to prevent fraud, to monitor risk and to inform policy.
To this end, EXAMS helps to oversee the activities of investment advisers by evaluating their compliance with federal securities laws.
The SEC recently published the 2024 Examination Priorities for Investment Advisers. EXAMS plans to pay close attention to advisers’ fiduciary obligations particularly related to their duty of loyalty and duty of care to investors, and the protocols they put in place to act in the best interest of their clients by eliminating or mitigating conflicts of interest. At the forefront is the strength of the adviser’s internal controls and compliance program.
In 2024, EXAMS will hone in on several aspects of adviser-investor relationships such as:
Adviser products, strategies, and accounts: The SEC may pay close attention to investment advice or proposed strategies especially in relation to complex options (such as derivatives), high-cost products (such as variable annuities), illiquid products (such as REITs), and strategies that may be viewed as risky or non-traditional. In addition, advisers may be open to additional scrutiny on investment advice services to certain groups of clients, especially older clients and those saving for retirement.
Continued focus on the client’s best interest: EXAMS will continue to focus on processes and procedures that advisers use to analyze that the products and services provided were in the best interest of the client. The SEC will be paying close attention to advisers’ processes for determining initial and continued suitability, evaluating risks and cost to client, exploring best strategies and most importantly, determining and resolving existing or potential conflicts of interest, while taking into account clients’ goals and investment profiles.
Addressing conflicts of interest: For 2024, the SEC will pay close attention to how advisers address conflicts of interest including how they identify those conflicts, how they eliminate or mitigate them, and if necessary, how they offset them. Disclosure alone is not enough.
In addition, examiners will also assess advisers who are dually registered as broker-dealers, provide client-services through affiliate firms, or provide services to brokerage clients and advisory clients. The purpose of further examination is to ensure that advisers are not benefitting from multi-channel servicing to the disadvantage of the investor. This can include advising clients to buy or hold certain investments, or strategies that may yield more revenue for the adviser, or their affiliates, when comparable, more cost-effective options are available to the investor.
EXAMS will pay careful attention to client disclosures to ensure they provide transparent, truthful information pertaining to the investment and/or the adviser to allow for the client to have informed consent when making investment decisions.
Other priority areas for the 2024 examinations include:
- Evaluation of AI and how it is being used at the registrant’s firm
- Cybersecurity and safeguarding controls
- Policies and procedures for ensuring that clients have informed consent when material provisions to advisory contracts are modified
- Implementation of and compliance with the Marketing Rule, especially regarding potentially misleading advertisements, or advertisements with statements of facts that require substantiation
- Valuation assessment on illiquid assets or assets that present valuation challenges
- Implementation of privacy controls to protect clients’ private information
- Protocols for ensuring accurate and comprehensive disclosures
- Process of screening and use of third-party service providers to ensure they meet compliance requirements, including cybersecurity controls
The legal team at Jacko Law Group works with investment advisers to make sure they meet the regulatory requirements for the SEC, FINRA and state regulators. If you have questions regarding your compliance program, or upcoming examinations, please contact us at 619.298.2880.
Learn more about our practice here.