2024 Examination Priorities for Investment Advisers from SEC Division of Examinations

While the full report details the Division’s priorities for a wide range of market participants, below is a summary of key efforts that are priorities for this year for registered Investment Advisers:

1. Products & Strategies

The Division will review the investment advice provided to clients, with an emphasis on reviewing the Adviser’s offered products and strategies to ensure the Adviser is serving best interest of the client. In particular, the Division will focus on complex products, high cost and illiquid products, and unconventional strategies, with an emphasis on tailoring investment advice in light of the investor profile.

Unsurprisingly, the Division announced 2024 will bring continued oversight of Advisers’ advice related to crypto assets and emerging financial technology. Given the continued volatility of the crypto assets market, examinations will focus on the offer, sale, recommendation of, advice regarding, and trading in crypto-based assets and related products, ensuring Advisers are meeting their respective standard of conduct and reviewing and enhancing their compliance practices and risk disclosures as the market progresses. Additionally, the Division will place extra focus on reviewing new technological products and services, particularly automated investment advice and trading tools, artificial intelligence, and trading algorithms and platforms.

2. Policies and Processes

The Division will continue its focus from previous years on reviewing and assessing the development, compliance, and revision of Advisers’ internal policies and processes.

Examinations will focus on:

• Policies related to Rule 206(4)-7 under the Investment Advisers act of 1940 (Compliance Rule), including portfolio management processes, disclosures, proprietary trading, safeguarding client assets, record creation and retention, privacy, trading practices, marketing advisory services, valuations and related fees, and business continuity. Within this broader focus, the Division announced enhanced focus on marketing practices (including written policies, disclosures on Form ADV, and substantiation), compensation arrangements, and valuation practices;
• Policies and processes for the selection and oversight of third-party service providers;
• Oversight of multiple branch offices;
• Procedures for obtaining informed consent for material changes to advisory agreements, conflicts of interest, and adherence to contractual requirements (such as limited partnership advisory committees and notification and consent provisions);
• Portfolio risk management;
• Calculation and allocation of private fund fees and expenses; and
• Due diligence practices.

3. Conflicts of Interest

Examinations will focus on how Advisers address conflicts of interest, including identifying, mitigating, and/or eliminating conflict risks, compliance with disclosure obligations relating to potential conflicts of interest, and conflicts created by the Adviser’s business arrangements or affiliations.

The Division will also focus on reviewing economic incentives for Advisers to recommend particular products and strategies and compensation arrangements. Examinations will review source and structure of compensation, revenue, and other benefits and the related conflicts of interest inherent in those structures, fiduciary obligations of the Adviser in light of compensation structures, alternative methods of revenue maximization, fee breakpoint calculation processes, and the use of affiliated service providers.

4. Disclosure and Reporting

The Division is placing a broad focus on disclosure and reporting obligations and practices. Examinations will focus on the thoroughness of disclosures related to conflicts of interest and investment risks, processes for obtaining informed consent, and reviewing compliance with the requirements of Form ADV, Form CRS, and Form PF. Further, examinations will review the accuracy and completeness of all regulatory filings, with a particular focus on inadequate or misleading disclosures.

5. Information Security

The Division recognizes the ongoing importance of strong cybersecurity practices and will review Advisers’ practices and policies to ensure they are designed and implemented to protect investor information, records, and assets. Examinations will review policies and procedures, internal controls, oversight of third-party vendors, governance practices, and incident responses, as well as staff training practices, threat identification and remediation, and broader cyber resiliency abilities.

For a full list of the Division’s priorities, the report is available here. Reach out to an ArentFox Schiff attorney to ensure your firm is ready for this year’s priorities.