Summary of the SEC’s 2024 Examination Priorities for Registered Investment Advisers
Yesterday, the United States Securities and Exchange Commission (the “SEC” or the “Commission”) Division of Examinations released its examination priorities to inform market participants of the key topics and priorities that the SEC plans to focus on when conducting examinations on SEC-registered investment advisers, investment companies, broker-dealers, transfer agents, municipal advisers, securities-based swap dealers, clearing agencies and other self-regulatory organizations in the coming year.
This article summarizes upcoming examination priorities applicable to investment advisers that registrants can expect in the following year’s examinations. It should be noted, however, that the SEC’s published priorities in any given year are not the exhaustive list of areas on which the SEC will focus its examinations. In addition to listing the priorities summarized in this article, the Commission reiterated its broader continued areas of focus for investment advisers: adherence to the duties of care and loyalty to clients; determinations that investment advice is provided in clients’ best interests; scrutiny of the economic incentives that an adviser may have to recommend products or services; disclosure of conflicts of interest; and the examination of advisers’ internal policies and procedures and annual review of the effectiveness of such policies and procedures. Registered investment advisers should ensure that their compliance programs adhere to these broader guidelines, while also taking care to address the SEC’s stated areas of specific priority for the 2024 calendar year.
In its release announcing the 2024 examination priorities (the “Release”), the Commission noted these areas of focus regarding investment advisers:
- The SEC will conduct marketing practice assessments to evaluate whether advisers, including those for private funds, have: (1) put written policies and procedures into practice that are reasonably designed to prevent violations of the Investment Advisers Act of 1940 (the “Advisers Act”) and its related rules, including the reforms to 17 CFR § 275.206(4)-1 (the “Marketing Rule”); (2) appropriately disclosed their marketing-related information on Form ADV; and (3) maintained proper documentation of their processes and other required books and records. In addition, these assessments will examine if any distributed advertisements have untrue statements of material facts, are misleading in a significant way or are otherwise deceptive. They will also seek to confirm if distributed advertisements comply with the requirements for performance disclosures (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements.
- The Commission will assess advisers’ compensation arrangements, giving special attention to: (1) fiduciary obligations of advisers to their clients, including how advisers receive compensation for services and other payments from clients and other parties; (2) alternative methods that advisers use to increase revenue, such as earning revenue from clients’ bank deposit sweep programs; and (3) calculation processes for fee breakpoints, particularly in cases where fee billing systems are not automated.
- Another priority is assessing advisers’ valuation practices, particularly as they relate to recommendations to clients to invest in illiquid or difficult-to-value assets, such as commercial real estate or private placements.
- The SEC will assess advisers’ controls to safeguarding clients’ material non-public information, particularly when multiple advisers share office locations, there is significant turnover of investment adviser representatives or advisers use expert networks.
- The Commission will review the accuracy and completeness of regulatory filings particularly focusing on inadequate or misleading disclosures and registration eligibility.
- The SEC is also focused on advisers’ policies and procedures for: (1) selecting and using third-party and affiliated service providers; (2) overseeing branch offices when advisers operate from many or geographically dispersed offices; and (3) obtaining informed consent from clients when advisers make material changes to their advisory agreements.
Regarding investment advisers that specifically advise or manage private funds, the SEC also noted these priorities for examinations in the upcoming year:
- An assessment of portfolio management risks present when there is exposure to recent market volatility and higher interest rates. This may include private funds experiencing poor performance, significant withdrawals and valuation issues, and private funds with more leverage and illiquid assets.
- The SEC will examine how advisers follow contractual requirements about limited partnership advisory committees or similar advisory bodies. Specifically, the Commission will investigate the extent to which advisers adhere to contractual notification and consent processes.
- The Commission will scrutinize the accuracy of the calculation and allocation of private fund 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.
- A further priority is examining due diligence practices for consistency with an adviser’s policies, procedures and disclosures, particularly regarding private equity and venture capital fund assessments of prospective portfolio companies.
- Additionally, examinations will focus on conflicts, controls and disclosures regarding private funds managed side by side with registered investment companies and use of affiliated service providers.
- The SEC will also focus on compliance with Advisers Act requirements regarding custody, including accurate Form ADV reporting, timely completion of private fund audits by a qualified auditor and the distribution of audited financial statements for private funds.
- Advisers will further need to demonstrate policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.
As previously mentioned, the above description of the 2024 regulatory examination priorities for the SEC is not exhaustive, and regulated entities should carefully review the report as it gives important insight into the likely focus of future examinations. The SEC’s recent enforcement actions, along with record penalties and public statements from its staff, highlight the Commission’s current stringent approach to enforcing investment adviser compliance. It is crucial for firms to be aware of this regulatory environment and to remain diligent in staying abreast of guidance in emerging areas.