10/28/2024 | News release | Distributed by Public on 10/28/2024 10:40
The Securities and Exchange Commission's Division of Examinations (Division) announced its 2025 examination priorities (Exam Priorities) Oct. 21, 2024. These priorities address areas of concern based on recent examinations, and often forecast referrals to the Division if material rule violations or deficiencies are uncovered. The Exam Priorities focus on six different types of market participants subject to SEC regulation or oversight, as well as four risk areas impacting many market participants.
Market Participants:
Risk Areas:
This GT Alert discusses the Exam Priorities related to each of these market participants and the four common risk areas impacting many market participants.
1. Investment Advisers
The Division will continue to prioritize advisers' adherence to their duty of care and duty of loyalty obligations to clients. In examining advisers' adherence to these fiduciary duties, the Division will focus on:
In addition, the Division will continue evaluating the effectiveness of advisers' compliance programs pursuant to Rule 206(4)-7 under the Investment Advisers Act of 1940. Examinations will focus on:
The Division will continue its recent focus on investment advisers to private funds and will closely review the following topics:
2. Investment Companies
The Division will focus on evaluation of registered investment company compliance programs, fund governance practices, disclosures to investors, and accuracy of reporting to the SEC. Specific examination focus areas may include:
3. Broker-Dealers
The Division will evaluate whether broker-dealers have established, maintained, and enforced written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest (BI), Form CRS, financial responsibility rules, and trading practices. Focus areas will include:
- Recommendations regarding products, investment strategies, and account types and whether the broker has a reasonable basis to believe the recommendation is in the best interest of the customer and does not place the broker's interests ahead of the customer's interests;
- Conflicts of interest disclosures and conflict identification, mitigation and elimination practices;
- Processes for reviewing reasonably available alternatives;
- Factors relating to clients' investment profiles (e.g., investment goals and account characteristics);
- Broker-dealer practices that recommend products that are complex, illiquid, or present higher risks to investors (e.g., highly leveraged or inversed products, crypto assets, structured products, alternative investments, not registered with the SEC, complex fee structures or return calculations, based on exotic benchmarks, or growth areas for retail investments); and
- Recommendations that use automated tools or other digital engagement practices, are related to opening different account types (e.g., option, margin, self-directed IRA accounts), and made to older investors and those saving for retirement or college.
- The structure, marketing, fees, and potential conflicts associated with bank sweep programs, fully paid lending programs, and mobile apps/online trading platforms;
- Trading in pre-IPO companies and the sale of private company shares in secondary markets;
- Execution of retail orders; and
- Compliance with Regulation SHO and whether broker-dealers are appropriately relying on the bona fide market making exception.
4. Self-Regulatory Organizations (SROs)
The Division will scrutinize SRO compliance with rules governing operations, enforcement activities, and fulfillment of regulatory duties.
5. Clearing Agencies
The Division will examine, at least once annually, each clearing agency designated as systemically important.
6. Other Market Participants
The Division's focus areas for other market participants include:
1. Information Security and Operational Resiliency
The Division will continue its focus on registrants' information security practices and their operational resiliency, including data loss prevention, access controls, account management, responses to cyber-related incidents, and alternative trading systems' safeguards to protect confidential trading information.
The Division will also assess cybersecurity risks and resiliency goals associated with the use of third-party services, particularly where such services are used without the IT department's approval, knowledge, or oversight.
For broker-dealers and investment advisers, the Division will assess firms' practices to prevent account intrusions and safeguard customer records and information. The Division will also evaluate broker-dealer compliance with the shortening of the settlement cycle for most broker-dealer transactions pursuant to Rules 15c6-1 and 15c6-2 under the Securities Exchange Act of 1934. Exams will assess registrant technology changes associated with the shortening of the settlement cycle and evaluate areas that require further attention and resources, such as specific products that routinely do not settle within the required time frames.
2. Emerging Financial Technologies
The Division will focus on companies' use of emerging technologies and alternative sources of data (e.g., automated investment tools, artificial intelligence, and trading platforms) and examine firms that use digital investment advisory services and related methods. Specifically, the Division will assess:
3. Crypto Assets
The Division will focus on the offer, sale, recommendation, advice, trading, and other activities involving crypto assets that are offered and sold as securities (e.g., spot bitcoin or ether exchange-traded products). Among other measures, exams will review whether registrants:
Finally, the Division will review practices that address the technological risks associated with the use of blockchain and distributed ledger technology, including risks pertaining to the security of crypto assets.
4. Regulation SCI
As in 2024, the Division will evaluate whether SCI entities (e.g., exchanges and clearinghouses) have implemented policies and procedures to ensure the security and resiliency of their systems and meet Regulation SCI requirements. Exams will evaluate SCI entities' operational risk management, business continuity planning, and incident response capabilities to uphold market stability.
5. Anti-Money Laundering (AML)
The Division will examine whether broker-dealers and certain registered investment companies:
The 2025 Exam Priorities do not significantly differ from 2024 but do highlight issues relating to emerging financial technologies, including AI. SEC-registered firms should be aware that the Exam Priorities list is not exhaustive, and examinations may cover issues not stated in this list. The current Exam Priorities align with recent SEC announcements and activity, such as recent, recently amended, or pending rules and regulations. Accordingly, registered firms should take note of these priorities when reviewing compliance programs to ensure such programs address the Division's focus. As always, firms should pay close attention to the 2025 Exam Priorities, as they may suggest sweep examination programs, as well as future priorities of the Enforcement Division and other actions.