The SEC‘s Division of Examinations prioritizes examinations of certain practices, products, and services that it believes present potentially heightened risks to investors or the integrity of the U.S. capital markets. They have announced the 2024 examination priorities. Here is a summary of the Broker-Dealer priorities for 2024.
Broker-dealers are urged to review these items and to address any deficiencies before the SEC examiners conduct a review. Voluntary corrections go a long way in any audit or exam.
Should you need assistance in that review, please call Sallah Astarita & Cox at 212-509-6544. Our partners include former SEC Senior Staff Attorneys and experienced broker-dealer and RIA counsel.
Regulation Best Interest (Reg BI):
- Standard of Conduct: Reg BI establishes the standard of conduct for broker-dealers when making recommendations to retail customers. They must act in the customer’s best interest and cannot prioritize their own financial interests.
- Component Obligations: Broker-dealers must fulfill several component obligations to meet the Reg BI standard, including providing necessary disclosure, exercising diligence and care in recommendations, addressing conflicts of interest, and ensuring compliance with Reg BI.
- Examination Focus: The SEC’s examinations of broker-dealer recommendations will concentrate on various factors, including the types of products and strategies recommended, disclosure practices, conflict mitigation, review of alternatives, and the consideration of investors’ profiles.
- Recommended Products: Examinations will pay special attention to recommendations involving complex products (e.g., derivatives and leveraged ETFs), high-cost products (e.g., variable annuities), illiquid products (e.g., nontraded REITs and private placements), proprietary products, and microcap securities.
- Investor Types: The focus will also extend to recommendations made to specific types of investors, such as older investors and those saving for retirement or college.
- Compliance Policies and Procedures: Examinations will assess whether broker-dealers have established and enforced written policies and procedures designed to achieve compliance with Reg BI, considering the costs, risks, and rewards associated with the recommended securities and strategies.
- Dual Registrants: Dual registrants (firms that are both broker-dealers and investment advisers) will be a focus, with examinations covering conflicts of interest, account allocation practices, and account selection practices.
- Relationship Summary: Examinations will review the content of a broker-dealer’s relationship summary, focusing on how it describes relationships, services, fees, costs, conflicts of interest, and any disciplinary history.
- Compliance Obligations: The SEC will evaluate whether broker-dealers have met their obligations to file the relationship summary with the Commission and deliver it to retail customers.
Broker-Dealer Financial Responsibility Rules:
- Compliance Focus: Examinations will concentrate on broker-dealer compliance with the Net Capital Rule and the Customer Protection Rule. This includes internal processes, procedures, and controls, as well as aspects like fully paid lending programs and the treatment of certain types of liabilities.
- Risk Management: The SEC will assess broker-dealer credit, interest rate, market, and liquidity risk management controls to determine whether they have sufficient liquidity to manage stress events.
Broker-Dealer Trading Practices:
- Trading Practices: Examinations will cover equity and fixed income trading practices, including compliance with Regulation SHO, Regulation ATS, and Exchange Act Rule 15c2-11.
- Wholesale Market Makers: For wholesale market makers, examinations may include a review of quote generation, order routing and execution practices, market data ingestion, regulatory controls, and risk management.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.