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 INvestment Advisor priorities.
Advisors are urged to review these items and note that one of the areas is for a review of advisors who have not been recently audited.
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.
Examinations of Investment Advisers:
Fiduciary Duty: Investment advisers have a fiduciary duty to serve the best interests of their clients and must not place their own interests ahead of their clients.
Focus Areas: The SEC is focusing on investment advice related to complex products, high-cost and illiquid products, and unconventional strategies. They are particularly concerned about advice given to older investors and those saving for retirement.
Compliance: The SEC is reviewing advisers’ compliance programs to ensure they address conflicts of interest and are aligned with the advisers’ business operations and market risks.
Marketing Practices: Assessing whether advisers have appropriate policies and procedures to prevent violations of the Advisers Act, disclose marketing-related information, and maintain required records. They are also looking at the accuracy of disseminated advertisements.
Compensation Arrangements: Evaluating advisers’ fiduciary obligations regarding compensation, including revenue earned on clients’ bank deposit sweep programs and fee breakpoint calculation processes.
Valuation: Assessing advisers’ recommendations to invest in illiquid or difficult-to-value assets.
Safeguarding: Examining controls to protect clients’ non-public information, especially when multiple advisers share office locations or have high turnover of representatives.
Disclosure: Reviewing the accuracy and completeness of regulatory filings, including Form CRS.
Examinations Focus: Prioritizing examinations of advisers that have never been examined and those that have not been examined for a long time.
Examinations of Investment Advisers to Private Funds:
Portfolio Management Risks: Addressing risks associated with recent market volatility, higher interest rates, and poor performance in private funds.
Adherence to Contractual Requirements: Ensuring compliance with contractual requirements regarding advisory committees or similar structures.
Fee and Expense Calculations: Checking the accurate calculation and allocation of fees and expenses, especially for illiquid assets.
Due Diligence: Assessing due diligence practices, especially for prospective portfolio companies in private equity and venture capital funds.
Conflicts and Controls: Examining conflicts, controls, and disclosures related to private funds managed alongside registered investment companies and the use of affiliated service providers.
Custody Requirements: Ensuring compliance with custody requirements, including accurate Form ADV reporting and private fund audits.
Form PF Reporting: Reviewing policies and procedures for reporting on Form PF, especially in response to certain reporting events.
The full examination release is available at the SEC Website – https://www.sec.gov/files/2024-exam-priorities.pdf
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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.
