Articles & Alerts

The SEC Division of Examinations recently released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics and emerging issues the Division plans to focus on in the upcoming year.

The Division’s annual priorities are normally published in the first quarter of the year, and this year marks the first time they have been published at the beginning of the SEC fiscal year. The SEC noted in its release that the shortened 8-month span between publication of the 2023 and 2024 priorities is reflected in some priorities being repeated.

Of significant interest to our clients and friends in the industry is that the 2024 priorities demonstrate that conflicts of interest will remain a priority for the Division’s examiners. This indicates that examiners will analyze not only how advisers identify and disclose conflicts to clients, but also their processes for mitigating or eliminating those conflicts when appropriate.

Key Areas of Focus Will Include:

• The adviser’s processes and practices for allocating investments to accounts where clients have multiple accounts (e.g., allocating between accounts that are adviser fee-based, brokerage commission-based and wrap fee, and between taxable and non-taxable accounts).
• Investment advice regarding complex products (derivatives and leveraged ETFs), high-cost and illiquid products (such as variable annuities and non-traded REITs), and unconventional strategies (including ones purporting to address rising interest rates).
• The economic incentives an adviser and its professionals may have to recommend certain products, services or accounts over others.
• The adviser’s disclosures of all material facts relating to conflicts of interest.

Priority Areas Specific to Private Fund Advisers

The Division highlighted these focus areas for private fund advisers:

• Risks present when there is exposure to recent market volatility and higher interest rates, including private funds experiencing poor performance, significant withdrawals and valuation issues, and private funds with more leverage and illiquid assets.
• Adherence to contractual requirements regarding limited partnership advisory committees or similar structures (e.g., advisory boards), including adhering to any contractual notification and consent processes.
• Accurate calculation and allocation of fees and expenses (both fund-level and investment-level), including valuation of illiquid assets, calculation of post-commitment period management fees, adequacy of disclosures and potential offsetting of such fees and expenses.
• 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.
• Conflicts, controls and disclosures regarding the selection and use of third-party and affiliated service providers.
• Compliance with the Custody Rule (Advisers Act Rule 206(4)-2), including accurate Form ADV reporting, timely completion of audited financials by a qualified auditor and distribution of audited financial statements.
• Policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events (i.e., the reporting events adopted earlier this year as part of the Form PF final rule amendments).

Priority Areas for All Advisers

Advisers’ adherence to the fiduciary standard and the strength of their compliance programs both remain high priorities for the Division. Among several areas of focus for all advisers that the Division addressed, the following are most relevant for private fund advisers:

• Compliance with the Marketing Rule (Advisers Act Rule 206(4)-1), including whether advisers adopted and implemented appropriate policies and procedures, made marketing-related disclosures on Form ADV, and maintained substantiation of their processes and other required books and records; Marketing Rule reviews will also assess whether any advertisements were misleading and whether advertisements complied with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, substantiation and testimonials and endorsements.
• Valuation assessments regarding advisers’ recommendations to clients to invest in illiquid or difficult-to-value assets, such as commercial real estate or private placements.
• Controls around material non-public information and the use of expert networks.

Cybersecurity

Cybersecurity remains a perennial focus area. The Division will continue to review advisers’ practices to prevent interruptions to mission-critical services and to protect investor information, records and assets.

The Division will focus on:

• Policies and procedures, internal controls, oversight of third-party vendors, governance practices and responses to cyber-related incidents including ransomware attacks.
• Identity theft prevention programs, including whether advisers adequately train their staff.
• Practices, policies and procedures to prevent account intrusions and safeguard customer records and information, including personally identifiable information.
• Oversight of third-party vendors, including adviser visibility into the security and integrity of third-party products and services and whether there has been any unauthorized use of third-party providers.

Crypto Assets and Emerging Financial Technology

The Division will continue to focus on crypto assets and emerging financial technology. It will continue to review whether advisers involved with crypto or crypto-related assets: (1) met and followed their standard of care when providing investment advice; (2) routinely reviewed, updated and enhanced their compliance processes, risk disclosure and operational resiliency practices; and (3) whether advisers are complying with the Custody Rule with respect to crypto assets that are funds or securities.

Certain services continue to receive focused attention by the Division, including automated investment tools, artificial intelligence and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative sources of data.

How Anchin Can Help

This is a brief overview of the SEC Division of Examination’s announced priorities for 2024. The published priorities are not exhaustive of the focus areas the Division expects to pursue in its examinations, risk alerts and outreach. The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff who are positioned to identify the practices, products, services and other factors that may pose risk to investors or the financial markets. The Division also gathers input and advice from the chair and other commissioners, staff from other SEC divisions and offices, other federal financial regulators, investors and industry groups.

For further information on how the Division’s approach and focus areas will affect you, please reach out to George Teixeira, Ed Thorp or your Anchin Relationship Partner.