On October 16, 2023, the US Securities and Exchange Commission ("SEC") Division of Examinations ("Examination Division") announced its 2024 Examination Priorities.1 Registrants should ensure that policies, procedures, and surveillance efforts related to these priorities address the concerns articulated in this report.
The Examination Division is responsible for conducting inspections of entities registered with the SEC, including investment advisers and broker-dealers. The Examination Division’s priorities report offers insight into the SEC’s regulatory objectives for the upcoming year. The report is not exhaustive of the Examination Division’s focus areas, but highlights particular risk areas. Additionally, the Examination Division’s priorities often later result in enforcement actions focused on those same priorities, so the list serves as a guide for potential areas for enforcement.
To align the release of the report with the SEC’s fiscal year, the Examination Division released its priorities just eight months after the 2023 report was released. As a result, the Examination Division acknowledged that certain focus areas from 2023 remain relevant in 2024. The Director of the Examination Division also emphasized that publishing these priorities "encourages firms to focus their compliance and surveillance efforts on areas of potentially heightened risk to retail investors."2
The 2024 priorities report outlines three noteworthy risk areas that are relevant to most capital markets participants: (1) information security and operational resiliency; (2) crypto assets and emerging financial technology; and (3) anti-money laundering.
Information Security and Operational Resiliency: The Examination Division will review registrants’ cybersecurity practices and systems, including assessing whether companies are adequately training their staff on cybersecurity measures. The Examination Division will also review cybersecurity issues associated with the use of third-party vendors. The Examination Division’s emphasis on cybersecurity protocols follows proposed rules released earlier this year that would require market participants to take steps to mitigate cyber risks.3 As the SEC continues to vet cyber resiliency, companies should preemptively bolster their cybersecurity infrastructures and policies.
Crypto Assets and Emerging Financial Technology: The Examination Division will focus on products or services "employing new practices."4 The Examination Division noted that with the "continued volatility of, and activity around, the crypto asset market," it will scrutinize activities involving crypto assets. Additionally, the Examination Division is assessing technological risks associated with the use of blockchain. This indicates that the SEC is showing a commitment to crypto regulation and potentially laying the foundation for continued enforcement activity.
Anti-Money Laundering ("AML"): The Examination Division emphasized certain market participants’ obligations to establish customized AML programs. The Examination Division stated that it will assess these programs and also review registrants’ adherence to the Office of Foreign Assets Control sanctions. As international sanctions have increased over the past several years, the SEC has closely monitored AML compliance, which companies should be constantly assessing.
Unlike the 2023 priorities, which specifically addressed the potentials of climate-based risk,5 there is no reference to ESG compliance in the 2024 priorities. Companies, however, should not read too much into the absence of ESG and climate-related language in the priorities. All signs suggest that the SEC is still intent on regulating climate risk disclosures, especially as it is still considering ESG disclosure rules for both investment advisers6 and public companies.7 As a result, companies should consider how best to adhere to existing or future ESG-related disclosure requirements.
The Examination Division also noted other priorities, including continued review of compliance with the Investment Advisers Act of 1940 provisions, which govern how investment advisers can market and advertise. Similarly, the Examination Division will continue to assess whether broker-dealers are adhering to Regulation Best Interest, which establishes a standard of conduct for broker-dealers when they recommend securities transactions or investment strategies to clients. In addition, with respect to investment advisers, the Examination Division will focus on marketing of complex products, compensation arrangements, valuation of illiquid and difficult to value assets, and safeguarding of material non-public information. The Examination Division indicated that it would also continue to focus on advisers to private funds, including, among other things, scrutiny of disclosure of portfolio risk, adherence to contract provisions and accurate calculation of fees and expenses.8
1 2024 Examination Priorities, US Sec. & Exch. Comm’n Div. of Examinations (Oct. 16, 2023), https://www.sec.gov/files/2024-exam-priorities.pdf.
2 Press Release, SEC Division of Examinations Announces 2024 Priorities, US Sec. & Exch. Comm’n (Oct. 16, 2023), https://www.sec.gov/news/press-release/2023-222.
3 Press Release, SEC Proposes New Requirements to Address Cybersecurity Risks to the US Securities Market, Sec. & Exch. Comm’n (Mar. 15, 2023), https://www.sec.gov/news/press-release/2023-52.
4 2024 Examination Priorities, supra note 1.
5 2023 Examination Priorities, US Sec. & Exch. Comm’n Div. of Examinations (Feb. 7, 2023), https://www.sec.gov/files/2023-exam-priorities.pdf.
6 Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release No. 33-11068 (May 25, 2022), https://www.sec.gov/files/rules/proposed/2022/33-11068.pdf; see also Client Alert, SEC Proposes Amendments to Rules to Regulate ESG Disclosures for Investment Advisers & Investment Companies, White & Case (June 13, 2022).
7 The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11042; 34-94478 (Mar. 21, 2022), https://www.sec.gov/files/rules/proposed/2022/33-11042.pdf.
8 Private fund advisers should note that these priorities are in advance of the effectiveness of the new private fund rules. See Private Fund Advisers: Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-6383 (Aug. 23, 2023), https://www.sec.gov/files/rules/final/2023/ia-6383.pdf; see also Client Alert, SEC Adopts Final Private Fund Adviser Rules, White & Case (Sept. 1, 2023).
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