The SEC’s Division of Examinations (commonly known as EXAMS) is the oversight branch of the Securities and Exchange Commission. It’s the second largest section of the agency, after the enforcement arm.
The Division of Examinations uses a variety of different inspections and examinations to make sure that companies and other market participants are following the SEC’s rules with the mission to protect investors and monitor risk, among other objectives.
Through its on-site examination process, agency representatives review how well a market participant is complying with SEC regulations, how it manages risk and transparency, and other critical issues.
Each year, the Division of Examination sets its examination priorities for the year ahead. While these are not necessarily exhaustive, the announced priorities show what the SEC examiners will pay specific attention to while they review a company’s operations.
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EXAMS Priorities for 2023
During the remainder of 2023, the SEC’s exams will include the following priorities. This summary is by no means exhaustive. For full details, see the SEC’s linked summary.
Compliance With New Rules
The SEC wants to ensure that companies are adapting to new regulations. In particular, it is examining companies for compliance with Rules 206(4)-1 (the Marketing Rule), 18f-4 (the Derivatives Rule) and 2a-5 (the Fair Valuation Rule).
Broker-Dealer and RIA Compliance
Given the scope of assets managed by private fund Registered Investment Advisors, the SEC is paying special attention to how they operate. It is also prioritizing applicable fiduciary duties and other standard of conduct issues for broker-dealers and Registered Investment Advisors.
Examiners are looking to ensure that any funds that label themselves as ESG, or “Environmental, Social and Governance,” comply with those marketing claims. They will examine these funds to ensure that their investment practices comply with their mission statements.
The SEC has made a recent push for cybersecurity as an investor security issue. In 2023, it has made information security and transparency in any cybersecurity-related matter a priority for its examination teams.
Cryptocurrency and FinTech
The SEC has made cryptocurrency a priority for its annual examinations. It will examine any market participant that offers, trades, advises or otherwise operates in cryptocurrency. It will also review the use of new and emerging financial technology, and financial advice given over digital and social media platforms.
Funds and Unexamined Advisors
As usual, the SEC will prioritize any investment advisors which have not been previously examined or which have not been examined in several years. It will also examine fund operations, including fee structures, mutual fund to ETF conversions and non-transparent ETFs.
The SEC will prioritize risk exposure for broker-dealers. This will particularly include conflict of interest issues, liquidity and capital safeguards, recordkeeping compliance and anti-money laundering rules.
Every year the SEC must examine any clearance agencies designated systematically important. It will continue to do so in 2023.
Anti-Money Laundering Rules
The SEC will make a specific point of reviewing broker-dealers and other registered entities for their compliance with anti-money laundering statutes and related programs. This will particularly emphasize reporting and due diligence requirements.
EXAMS Priorities for 2024
In October, the SEC released its EXAMS priorities for 2024. These include, but are not limited to, the following issues. As above, please see the SEC’s summary for a complete discussion of its 2024 priorities.
The SEC will examine investment advisors for best practices, conflicts of interest, incentive structures, compliance with fiduciary duties and other related matters. Overall, the exams will focus on ensuring that advisors are transparent with clients and operating in those clients’ best interests, including those who work with private funds. The SEC will continue to prioritize advisors who have never been examined, or who have not been examined recently.
Investment companies will be examined for their compliance with SEC regulations and their accuracy of reporting. They will also be examined for fee structures, compliance with their own written procedures, and transparency of reporting. As with investment advisors, the SEC will prioritize investment companies that have not been examined or that have not been examined recently.
The SEC will examine broker dealers for overall adherence to fiduciary duty, transparency and good faith. This will include, among other issues, the broker-dealer’s written policies on product recommendations and investment strategies, their policies for ensuring that investments serve the client’s best interests, and their management of higher-risk asset classes such as derivatives and REITs.
As in previous years, the Division of Examinations will examine securities exchanges that fall under the SEC’s authority for compliance with applicable oversight, transparency and disciplinary rules. It will also examine FINRA and the MSRB for risk-management practices.
As required by law, the SEC will conduct its annual examination of systematically important clearing agencies.
Municipal Advisors and Security-Based Swap Dealers
In 2024, the SEC will conduct oversight examinations of municipal advisors and security-based swap dealers. These exams will focus on applicable issues of fiduciary duty, transparency, risk management and regulatory compliance.
Information Security and Cryptocurrency
As in 2023, the SEC will examine market participants for their compliance with new and emerging cybersecurity rules, including transparency regarding any known or suspected breaches. They will also continue to examine market participants that participate in the cryptocurrency trade, including those who advise or otherwise facilitate these assets.
Finally, as in 2023, the SEC will examine market participants for their compliance with applicable anti-money laundering statutes and disclosures.
Every year the SEC publishes its examination priorities for regulated entities. This year it has published its 2024 priorities early, so that companies and investors can begin to prepare for next year’s examinations.
Securities Licensing Tips
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