By Jared Calvert, Director, Compliance Services

Changing leaves, cooler air, and pumpkin spiced lattes are not the only things investment advisers have to look forward to this fall. On October 16, 2023, the Securities and Exchange Commission (“SEC”) Division of Examinations released its exam priorities for 2024.  This came eight short months after the fiscal year 2023 priorities were released and marks the first time in the Commission’s history the priorities were released prior to the start of the calendar year.

We are grateful the Division made the choice to release this document early.  The Commission understands the markets are evolving, and they acknowledge that new regulations will impact registrants, both new and existing, in a variety of ways.  The expectations for an increase of in-person fieldwork, outreach events, and speaking engagements will be in consideration as they look to the coming year.  With a brief period of time from their last list of exam priorities, several areas of priority for 2023 will remain a focus for the Division.

The SEC continues to prioritize the fiduciary duties of an investment adviser, namely the duty of loyalty and duty of care.  They will do this by focusing on the following areas:

  • Investment advice provided to clients with regard to products, investment strategies, and account types.
  • Processes for determining that investment advice is provided in the client’s best interest, including how advisers consider the client’s investment profile, along with identifying and addressing conflicts of interest;
  • Economic incentives that an adviser and/or its financial professionals may have to recommend products, services, or account types. This includes the source and structure of the compensation, revenue, or other economic benefits. The Commission states they will focus on conflicts of interest associated with advisers which are dually registered as broker-dealers, use affiliated firms to perform certain client services, and have financial professionals servicing both brokerage customers and advisory clients.
  • Disclosures made to investors and whether they include all material facts relating to conflicts of interest associated with the investment advice given which would allow a client to provide informed consent to the conflict.

The Division also remains focused on the effectiveness of compliance programs.  This focus includes making certain that policies and procedures truly reflect the aspects of the adviser’s business, compensation, services, client base, and operations.  It also includes an assessment of the adviser’s annual reviews of the effectiveness of the compliance program and whether the conflicts of interest are addressed in the compliance program.  The exams will scrutinize areas such as:

  • Marketing practices, including advisers to private funds;
  • Compensation arrangements;
  • Valuation assessments of recommendations for illiquid or difficult to value assets;
  • Safeguarding client’s nonpublic information;
  • Accuracy and completeness of regulatory filings
  • Selecting and using third-party service providers;
  • Branch office oversight;
  • Obtaining informed consent from clients when advisers implement material changes to their advisory agreements.

This begs the question: what does my firm need to do in preparation for an examination?  Good question! We would recommend that you do the following:

  1. Review your compliance manual alongside of your procedures. Be sure that what you are stating you do in your manual is what you are actually doing in your day in/day out processes.
  2. Review your conflicts of interest and areas of risk to your firm. The risks and conflicts should be addressed in your policies, procedures, and program reviews. Any conflicts of interest which haven’t been eliminated should be addressed in the advisory agreement, Form ADV Part 2A, and/or the Form CRS.
  3. Make sure you are familiar with how your firm is compensated by third-party service providers and affiliates. Any direct or indirect compensation should be addressed in the firm’s policies and procedures, along with being disclosed to potential and existing clients. These disclosures should not be vague but give enough information that your clients can understand and consent to any potential conflicts.

If you are uncertain about whether your firm is ready for its next SEC examination, or if you have questions in general about your compliance program, please feel free to contact Key Bridge Compliance with your questions at 859-309-3246 or inquiries@keybridgecompliance.com