SEC Exams Division Announces 2024 Priorities

On October 16, 2023, the U.S. Securities and Exchange Commission (the “SEC”) Division of Examinations (the “Division”) announced its 2024 examination priorities. For Investment Advisers (“Advisers”), the significant focus will be reminiscent of years past, but with a deeper focus on crypto assets and information security and operational resiliency.

The Division will concentrate its examination efforts on Registered Investment Advisers (RIAs) in several key areas. These examinations will encompass an evaluation of the RIA's operational processes, compliance protocols, and disclosures, focusing on one or more of the following areas: the safekeeping of client assets, asset valuation, portfolio management, and brokerage and execution. Additionally, these examinations will typically assess potential conflicts of interest, compliance-related matters, and the overall oversight and approval procedures concerning RIA fees and expenses, including fee calculations. Furthermore, the review will extend to the RIA's policies and procedures related to the retention and monitoring of electronic communications, as well as the selection and utilization of third-party service providers.

Additional focus areas included in the 2024 examination priorities are:

• RIAs to Private Funds
• Information Security and Operational Resiliency
• Crypto Assets and Emerging Financial Technology

‍RIAs to Private Funds

RIAs overseeing private funds continue to represent a substantial segment of the SEC-registered investment adviser landscape. The Division will maintain its focus on advisers to private funds and prioritize specific areas, including:

• Managing portfolio risks associated with recent market volatility and higher interest rate.
• Ensuring compliance with contractual obligations related to partnership advisory committees or similar structures, such as advisory boards.
• Evaluating due diligence practices for consistency with policies, procedures, and disclosures, particularly with respect to private equity and venture capital fund assessments of prospective portfolio companies.
• Review of conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
• Ensuring 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 private fund audited financial statements.
• Assessing the adequacy of policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.

‍Information Security and Operational Resiliency

Cybersecurity has evolved into a pervasive concern and has become a recurring point of emphasis for Advisers overseen by the SEC. The Division will continue to evaluate an Adviser's policies and procedures to mitigate operational disruptions and protect investor data. Examinations will focus on: 

• Review of policies and procedures, governance practices, and response to cyber incidents.
• Measures being taken to safeguard customer records and information.
• Evaluation of preventative actions against intrusions and the prescribed response procedures for such incidents.
• Review of policies and procedures relating to third-party vendors, particularly relating to the transfer of client information from one firm to another.

‍Crypto Assets and Emerging Financial Technology

The Division will continue its focus on crypto assets and their associated products and services, as well as emerging financial technology. The Division will conduct examinations of Advisers offering new products and services, such as robo-advisers and digital assets. Examination focus areas are expected to review an Adviser’s practices and policies around:

• Whether the Adviser adhered to and maintained standards of care in making recommendations, referrals, or providing investment advice.
• Whether the Adviser consistently reviewed, updated, and enhanced their compliance, disclosures, and risk management policies and procedures.
• A determination of whether advice or recommendations given to investors were in their best interest, taking into account the investor's financial circumstances.
• An evaluation to confirm the alignment of operational processes and controls with the disclosures presented to investors.
 

How Petra can help

Petra FundsGroup’s compliance team has decades of experience managing SEC regulatory compliance programs for private fund advisers. The group’s expertise enables them to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here.

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