The U.S. Securities and Exchange Commission (SEC) published its examination priorities on October 16, 2023, which outlines the critical focus areas for the Division of Examinations for the fiscal year 2024. These priorities reflect the Division's assessment of risks, issues, and policy matters arising from market and regulatory developments, among other factors.
The Division of Examinations of the SEC has stated its commitment to maintaining a risk-based approach for its 2024 examinations, emphasizing the focus on specific practices, products, and services that pose significant risks to investors or could potentially impact the integrity of the U.S. capital markets. In 2024, this focus will predominantly cover several critical areas:
1. Information Security and Operational Resiliency
The Division plans to rigorously examine the measures implemented by firms to secure sensitive information and ensure the continuous operation of crucial services. This includes thoroughly reviewing cybersecurity measures to protect against data breaches and cyber-attacks. The Division will assess the robustness of internal controls, policies, and procedures designed to safeguard investor information, records, and assets and evaluate the resilience of firms' operational capabilities in the face of potential disruptions caused by technological threats, intense weather events, or geopolitical instabilities.
2. Cryptocurrency Assets and Emerging Financial Technology
Given the rapid evolution and increasing adoption of cryptocurrencies and new financial technologies, the Division will closely scrutinize the practices surrounding these areas. This will examine how broker-dealers and investment advisers incorporate these new assets and technologies into their offerings. The focus will be on ensuring that firms adhere to their standards of conduct, particularly when recommending or advising on cryptocurrency assets. The Division will also evaluate the firms’ understanding of these products, their compliance practices, wallet reviews, custody practices, and how they address the unique risks presented by these technologies, such as those associated with blockchain and distributed ledger technologies.
3. Regulation Systems Compliance and Integrity (SCI)
The Division will ensure that entities comply with the SCI regulation, designed to enhance the technology infrastructure of the U.S. securities markets. This includes evaluating if national securities exchanges, registered clearing agencies, FINRA, MSRB, plan processors, and alternative trading systems have implemented policies and procedures to ensure their systems' adequate capacity, integrity, resiliency, availability, and security.
4. Anti-Money Laundering (AML) Practices
Anti-money laundering measures remain a key focus, with the Division examining whether firms have appropriately tailored their AML programs to their specific business models and associated risks. This encompasses assessing customer identification processes, the effectiveness of independent testing systems, adherence to Suspicious Activity Report (SAR) filing requirements, and compliance with Office of Foreign Assets Control sanctions.
While environmental, social, and governance (ESG) issues are not explicitly prioritized for 2024 as in previous years, the Division is expected to maintain its surveillance in this area. This ongoing attention highlights the SEC’s commitment to ensuring transparency and responsibility in ESG practices and disclosures, aligning with investor interests and the overarching aim of preserving market integrity.
Entity-Specific Focus Areas
The 2024 examination priorities outlined by the SEC highlight specific focus areas for different entities. These priorities are designed to enhance oversight and ensure compliance across various sectors. Each entity will be examined with a tailored approach, addressing unique risks and regulatory requirements. This structured examination strategy aims to uphold market integrity and protect investors. Given below are the priorities of each of the entities.
1. Registered Investment Advisers
For Registered Investment Advisers, the SEC's 2024 priorities include ensuring adherence to fiduciary duties and full disclosure of conflicts of interest. The SEC will scrutinize advice regarding complex or high-cost products, ensuring client interests are prioritized in investment decisions, marketing practices, and compliance programs. New and previously unexamined advisers will be a focus to ensure compliance across the sector.
2. Investment Companies
The SEC's 2024 Examination Priorities for Investment Companies focuses on ensuring robust compliance and governance practices. Key areas include scrutinizing compliance programs and governance structures, particularly in advisory fee assessments and fund fee approvals. The review will also cover valuation practices, emphasizing fair valuations and the effectiveness of risk management programs for derivatives and liquidity. Attention will be given to fees and expenses, ensuring adherence to policies on advisory fees, fee waivers, and reimbursements. Mutual funds and ETFs will continue to be a priority due to their impact on retail investors, particularly those saving for retirement. Compliance with custody requirements under the Advisers Act, including accurate reporting and timely completion of private fund audits, will also be examined.
The SEC's 2024 priorities for Broker-Dealers include ensuring compliance with Regulation Best Interest, focusing on the best interest of retail customers in securities transactions and investment strategies, alongside strict adherence to disclosure, care, conflict of interest, and compliance obligations. Reviewing relationship summaries will assess the accuracy in representing services, fees, conflicts of interest, and disciplinary history. Compliance with financial responsibility rules, particularly the Net Capital Rule and the Customer Protection Rule, will be examined, including internal risk management for credit, interest rate, market, and liquidity. Cybersecurity practices will be evaluated to protect customer records and compliance with transaction settlement cycles. Broker-dealer trading practices, including compliance with various regulations and the practices of wholesale market makers, will be scrutinized for quote generation, order routing, and execution.
4. Self-Regulatory Organizations (SROs)
The SEC's 2024 Examination Priorities for SROs include rigorous oversight of national securities exchanges, ensuring they meet obligations to enforce SRO rules and federal securities laws, particularly in order handling, surveillance, and enforcement programs. The Division will conduct risk-based oversight examinations of FINRA, focusing on areas crucial for investor protection and market integrity, including implementing initiatives like Regulation Best Interest and Form CRS. Examinations of the MSRB will assess compliance with MSRB rules and federal securities laws, emphasizing market transparency, education, and outreach in municipal securities markets.
5. Clearing Agencies
For Clearing Agencies, the SEC prioritizes examining systemically important clearing agencies, focusing on core risks, processes, and controls. This includes assessing financial and operational risk management. Risk-based examinations for other registered clearing agencies will ensure compliance with the Commission's standards. The SEC will evaluate clearing agencies' risk management frameworks for compliance and effectiveness, review remediation efforts of prior deficiencies, and examine security-based swap data repositories and exempt entities.
6. Other Market Participants
The 2024 priorities for Other Market Participants include ensuring municipal advisors comply with fiduciary duties, particularly in advising on municipal securities. Security-based swap Dealers will be scrutinized for adherence to rules, including reporting swap transactions and meeting capital, margin, and segregation requirements. Transfer Agents will be examined for transfer processing, recordkeeping, fund and securities safeguarding, and compliance with Commission filings.
The SEC's 2024 Examination Priorities represent a robust and diligent framework meticulously crafted to safeguard the integrity of the U.S. capital markets and fortify investor protection. This strategic blueprint underscores the SEC's unwavering commitment to rigorous oversight, astutely addressing today's multifaceted and dynamic financial landscape. The SEC adeptly navigates the complexities of market regulation by pinpointing critical areas such as Investment Advisers, Investment Companies, Broker-Dealers, and Clearing Agencies. The focus on emergent domains like cybersecurity, financial technology, and stringent risk management practices epitomizes the SEC's proactive stance in adapting to evolving market challenges. This comprehensive approach fortifies regulatory compliance and reinforces the SEC's pivotal role in fostering a transparent, resilient, and trustworthy financial ecosystem. As the financial markets evolve, the SEC's strategic priorities are poised to uphold market confidence and protect investors and market participants.