Firms on notice with early release of SEC’s exam priorities

Released earlier than expected, the SEC’s 2024 Examination Priorities report (“Exam Priorities”) from the Division of Examinations (“the Division”) was issued on October 16, 2023. In the past few years, the Exam Priorities report was not made public until Q1 and sometimes not until late Q1, which made the data several months stale. The Division stated that it wanted this report to coincide with the beginning of its fiscal year of October 1, which makes perfect sense.

In reality, the SEC already knows what its examination priorities are for the following year by August, as the summer months are spent reviewing examination data from the current year to identify high risk areas. So, waiting until Q1 was a delayed process that would leave the industry in the dark. This new approach continues the current SEC’s focus on transparency of its operations. For an example, see our ComplianceAlert, “SEC Reveals its Examination Strategy” (link below) that focuses on a September 2023 SEC Alert describing how the SEC chooses firms for examination. This particular Alert was also a show of more openness by the SEC so that the industry would know the how and why of its exam selection process. For more perspective on this, also see our BoardRoom post, “Expectations Loom Huge in SEC’s 2024 Exam Priorities” (link below). It has been apparent that the Chairman Genzler-led SEC is doing its best to notify the industry of what compliance practices it expects to see at firms.

According to the Exam Priorities, the Division will specifically focus on the following areas during Private Fund Examinations:

2024 Private Fund Targeted Exams:

  • Marketing practices exams
  • Compensation focused exams
  • Valuation focused exams

Focus areas during Private Fund Exams will be generally:

  • Funds with poor performance, significant withdrawals, or high leverage
  • Offering document adherence (use of advisory boards, consent/notification processes, etc.)
  • Fund fees and expenses at both the fund level and portfolio level
  • Due diligence practices for private equity and venture capital funds
  • Side-by-side management of private funds with RICs
  • Custody Rule adherence
  • Form PF reporting

Investment Adviser Examinations in the 2024 fiscal year will include focus areas such as:

  • Compliance with the new Marketing Rule
  • Valuations of illiquid or hard-to-value assets
  • Safeguarding of client data and PII
  • Disclosure documents such as Form CRS and other regulatory filings
  • Use of third-party service providers, especially those affiliated with the adviser
  • Informed consent from clients for material changes to IMAs
  • Complex products such as derivatives and leveraged ETFs
  • Higher cost and illiquid products, including variable annuities and non-traded REITs
  • Various interest rate strategy products
  • Senior investors and retirement accounts
  • Reg BI compliance with suitability, best execution, costs/risks, and identifying conflicts of interest
  • Conflicts of interest (more broadly) and how they are mitigated, eliminated, or disclosed
  • Allocation of investments across multiple account types
  • Compensation incentives (i.e., revenue sharing, markups)
  • Dually registered advisers and the various conflicts of interest between the brokerage and advisory business
  • Disclosures regarding conflicts
  • Annual Compliance Reviews in accordance with Rule 206(4)-7
  • Firm written policies and how they comply with Rule 206(4)-7

Investment Companies such as mutual funds, BDCs, and ETFs will be examined for compliance with:

  • Fund governance practices
  • Disclosures to investors
  • SEC reporting
  • Fair valuation practices and pricing
  • Oversight of advisory fees and any associated fee waivers or reimbursements
  • Derivatives risk management under new Rule 18f-4
  • Liquidity Risk Management Programs
  • Exemptive order conditions especially for funds in liquidation

As you can see, the list of focus areas is rather long this time. Expect the SEC to be conducting both in-person and remote exams to keep up with a tight schedule. Almost all investment advisers and funds have some considerations regarding the above-listed items. Several areas noted above also have proposed rules related to them, demonstrating that the Division is playing a role in supporting those proposed rules. It appears that both the Division of Examinations and the Division of Investment Management (“IM”) are working together to identify and enforce non-compliance with the Investment Advisers Act and Investment Company Act in the fund and RIA space.

It is important for firms to recognize that this new approach of a clearly transparent SEC means it has high expectations for the compliance practices of its registrants, especially since they have been publicly outspoken on those expectations. Investment advisers and funds of all types should heed the warning now and work to ramp up the compliance areas mentioned above and as emphasized in the Exam Priorities.

View the SEC’s Division of Examinations “2024 Examination Priorities”

View our ComplianceAlert, “SEC Reveals its Examination Strategy”

View our BoardRoom post, “Expectations Loom Huge in SEC’s 2024 Exam Priorities”