SEC Announces 2024 Examination Priorities

On October 16, 2023, the Securities and Exchange Commission’s (SEC) Division of Examinations announced its 2024 examination priorities. The priorities are focused on key areas the commission believes pose emerging risks to investors or the markets. The SEC conducts examinations and inspections of registered investment advisers, investment companies, broker-dealers, transfer agents, municipal advisors, securities-based swap dealers, clearing agencies, and other self-regulatory organizations. The following is a summary of the priorities for an investment adviser to focus on for their compliance program as well as risk factors to consider for private funds.

The SEC will continue to examine the fiduciary responsibilities of investment advisers, with a focus on whether advisers put the best interest of their clients above their own. Examiners are interested in how advisers eliminate or mitigate conflicts of interest and whether advisers provide full and fair disclosure when conflicts exist.  A few examples of conflicts provided in the exam priorities include client allocations, fees and expense charged to clients vs. the adviser and the use of affiliated service providers.

In an effort to inform registrants about the topics likely to be examined in the upcoming calendar year, the SEC’s dissemination of priorities aligned with the start of the fiscal year.

Investment Advisers’ Compliance Programs

The SEC will continue to focus on the investment adviser compliance program. Compliance policies and procedures will be reviewed for their effectiveness based on the applicable business operations, services, and risks of the adviser. The SEC plans to scrutinize marketing practices and compensation arrangements as follows:

Marketing Practices:

• Reasonably designed policies and procedures relevant to the marketing rule to help ensure compliance with new requirements for testimonials, endorsements and third-party ratings among other changes,
• ADV disclosures about marketing-related activities, and
• Appropriate substantiation and proper books and records.

Compensation Arrangements:

• Fiduciary obligations of advisers,
• Alternative ways to maximize revenue (e.g., bank deposit sweep programs),
• Fee breakpoint calculations,
• Valuation assessments for difficult-to-value assets (e.g., illiquid securities, commercial real estate),
• Information barriers, and
• Regulatory filings and avoidance of misleading disclosures

The examiners will also evaluate policies and procedures on third party and affiliated service providers selection, branch office oversight and proper consent with material changes to the advisory agreements.

Private Funds Risk Factors

Investment advisers to private funds should be aware of the following risks and areas of focus for SEC examinations in 2024. 

• Portfolio management risks: Risks associated with recent market volatility and higher interest rates, especially for private funds with more leverage and illiquid assets.
• Contractual requirements: Follow all contractual requirements regarding limited partnership advisory committees or similar structures, including notification and consent processes.
• Fees and expenses: Accurately calculate and allocate private fund fees and expenses, including valuation of illiquid assets, calculation of post commitment period management fees, and disclosures.
• Due diligence: Ensure due diligence practices are in place that are consistent with policies, procedures, and disclosures, especially for private equity and venture capital fund assessments of prospective portfolio companies.
• Conflicts, controls, and disclosures:  Manage conflicts of interest, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
• Custody: Comply 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.
• Form PF reporting: Update policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events. 

The SEC’s published examination priorities do not cover all areas that may be examined. In its decisions about what to examine. In its decisions about what to examine, the SEC looks at an entity’s history, operations, services, products, and other risk factors.

For more information and to find out how Weaver can assist private funds advisers prepare for examinations, review disclosures, analyze their compliance programs for conflicts of interest and adherence to SEC requirements, contact us. We are here to help. 

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