chevron-down Created with Sketch Beta.

    Business Law Today

    October 2024

    October 2024 in Brief: Securities Law

    Alan J Wilson and Rani Doyle

    Oct 31, 2024

    3 min read

    Broker-Dealer Regulation Investment Adviser Regulation Investment Company Regulation Market & Exchange Regulation Regulatory Enforcement Securities Law Securities Regulation
    October 2024 in Brief: Securities Law
    iStock.com/LeeYiuTung

    Jump to:

    SEC Division of Examinations Releases Its 2025 Examination Priorities

    By Karen Liu, Reid & Wise LLC

    On October 21, 2024, the Division of Examinations (“Division”) of the U.S. Securities and Exchange Commission (“SEC”) released its annual Examination Priorities for Fiscal Year 2025 (“2025 Priorities”). The 2025 Priorities not only reiterate the Division’s continued attention to registrants’ perennial core risk areas, but they also highlight the importance of compliance with new SEC rules and emphasize emerging risk areas such as fiduciary duty, standards of conduct, cybersecurity, artificial intelligence (“AI”), and protection of investor data, reflecting the Division’s annually adjusted “risk-based” examination focuses.

    Compared with the last year’s Examination Priorities, the 2025 Priorities, among other things, reflect the Division’s heightened interest in the following areas:

    1. Investment Advisers
    • Fiduciary obligations of advisers when (i) outsourcing investment selection and management, (ii) selling both securities and non-securities based products to clients, and (iii) favoring select clients with lower fees while similar services are provided to other clients at higher fees.
    • Dual registrants and advisers with affiliated broker-dealers.
    • Advisers’ compliance program in addressing conflicts of interest stemming from arbitration clauses.
    • Advisers that integrate AI into advisory operations, especially their compliance policies and procedures and disclosures to investors.
    • Investment strategies of advisers that are sensitive to market volatility and/or interest rate fluctuations, such as commercial real estate, illiquid assets, and private credit.
    • Conflicts of interest of private fund advisers in use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between funds, and investments held by multiple funds.
    1. Registered Investment Companies (“RICs”)
    • RICs’ oversight of affiliated and third-party service providers.
    • RICs’ portfolio management practices and disclosures.
    • Issues associated with market volatility.
    1. Broker-Dealers
    • Broker-dealers that engage with higher risk products, such as highly leveraged or inverse products, crypto assets, structured products, alternative investments, products that are not registered with the SEC (and are therefore less transparent), products with complex fee structures or return calculations, and products based on exotic benchmarks.
    • Broker-dealers’ recommendations that use automated tools or other digital engagement practices, or that involve opening different account types, such as option, margin, and self-directed IRA accounts.
    • Broker-dealer accounting practices impacted by recent regulatory changes.
    • The timeliness of broker-dealers’ financial notifications and other required filings.
    • Broker-dealers’ supervision of third-party or vendor-provided services, especially those related to records used in financial reporting.
    • Broker-dealers’ trading in pre-IPO companies and the sale of private company shares in secondary markets.
    • Whether broker-dealers are appropriately relying on the bona fide market making exception, including whether quoting activity is away from the inside bid/offer.
    • Broker-dealers’ compliance with Rule 15c6-1 and Rule 15c6-2 and related books and records compliance and technology changes.
    1. National Securities Exchanges
    • Exchanges’ participation in National Market System Plans.
    1. FINRA
    • The fair administration of FINRA’s dispute resolution forum.
    1. Clearing Agencies
    • Clearing agencies’ default management and links.
    1. Security-Based Swap Dealers (SBSDs)
    • Whether SBSDs have taken corrective action to address issues identified in prior examinations.
    1. Security-Based Swap Execution Facilities (SBSEFs)
    • The Division may begin conducting examinations of registered SBSEFs in late fiscal year 2025, because the SEC adopted new Regulation SE on November 2, 2023, according to which SBSEFs are required to register with the SEC as of August 12, 2024.
    1. Funding Portals
    • Funding portals’ record-keeping of required records and records related to issuers and their control persons.
    • Funding portals’ written policies and procedures, especially compliance with restrictive and prohibitive behaviors.
    1. Cybersecurity
    • Data loss prevention and account management.
    • Alternative trading systems’ safeguards to protect confidential trading information.
    • Any information technology (IT) resources used by the business without the IT department’s approval, knowledge, or oversight.
    • Cybersecurity risks associated with nonsupported infrastructure.
    1. Regulation S-ID and Regulation S-P
    • Firms’ policies and procedures, internal controls, oversight of third-party vendors, and governance practices.
    • Policies and procedures on safeguarding customer records and information at firms providing electronic investment services.
    • Firms’ progress in preparing to establish incident response programs reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information.
    1. AI
    • Registrant representations regarding their AI capabilities or AI use.
    • Policies and procedures in monitoring and/or supervising their use of AI, including for tasks related to fraud prevention and detection, back-office operations, anti-money laundering (AML), and trading functions, as applicable.
    • Firm integration of regulatory technology to automate internal processes and optimize efficiencies.
    • How registrants protect against loss or misuse of client records and information that may occur from the use of third-party AI models and tools.

    As suggested by Keith E. Cassidy, the Division’s Acting Director, considering that the 2025 Priorities identify the key areas of potentially increased risks and related harm for investors, it is advisable for registrants to reevaluate and recalibrate their compliance programs and make changes as necessary. For a guidance on how the Division selects firms to examine and typically asked questions in SEC examinations, see the Division’s 2023 risk alert.

      Editors