Pursuant to its mandate of ensuring sound and functioning securities markets, the Securities and Exchange Commission (SEC) has announced its priorities for 2024 and beyond. 

Capital markets firms will want to plan ahead for SEC exams, compliance risks, and processes. To that end, we offer some specific items for SEC registrants to consider.

General Themes for 2024

• For registered investment advisors and investment companies, the SEC is placing increased focus on those impacting retail investors from a marketing, advertising, and fiduciary perspective
• Firms who have not been examined by the SEC will get special priority in 2024, as well as those who have not been examined in several years
• For private funds, the SEC is placing special focus on portfolio risk, including valuations and application of the Marketing Rule
• Broker-Dealers and certain Investment Companies should expect significant regulatory attention dedicated to Anti-Financial Crimes (AFC), Countering the Financing of Terrorism (CFT), and Sanctions compliance programs

Impact Areas Affecting Market Participants

For 2024, the SEC has identified high-impact areas, which affect registered firms across the securities markets landscape.

Crypto and Fintech

• Registrants should meet and follow the appropriate standards of conduct when advising their clients on crypto assets
• Registrants should regularly update BSA and compliance practices, including wallet reviews, custody, valuation and other subjects
• For crypto assets which are funds or securities, registrants should meet custody requirements under the Advisors Act (Rule 206(4)-2)

Anti-Money Laundering (AML)

• Firms should demonstrate adequate customer identification programs, including the identification and verification of Beneficial Owners
• A registrant’s AML program must be tailored to the firm’s business model and specific AML risks
• Firms should demonstrate completion of independent AML testing per prescribed methods
• Meeting SAR filing obligations, which includes both timeliness and completeness standards 

Systems Compliance and Integrity

• In 2024, the SEC will look for alignment with the act Regulation Systems Compliance and Integrity (SCI) from 2014
• Key points of SEC review include maintenance of infrastructure consistent with SCI, including data centers
• Scope of SCI coverage includes multiple groups, including exchanges, clearing agencies, and others

Key Regulatory Compliance Dates for 2024

Impact Areas by Business Segment

For 2024, the SEC has identified specific impact areas for individual business segments on which they’ll focus.

Investment Advisors

Individual Investors

• Marketing practices and policies need to align with the Advisors Act and the Market Rule
• Compensation arrangement disclosure needs to fully define how advisor is compensated, including indirect methods such as interest on sweeps balances
• Valuation of illiquid assets when recommended should be clearly stated
• Safeguarding of client material non-public information should prevent inappropriate disclosure
• Completeness of regulatory filings to ensure clarity of disclosure

Private Funds

• Appropriate portfolio risks in adverse conditions to enable necessary mitigation
• Adherence to contractual requirements for LP advisory committees to ensure transparency in governance
• Fee and expense allocation to ensure transparency at fund and investment levels
• Due diligence practices and application of controls, especially with review of portfolio companies
• Custody practices and appropriate regulatory reporting which aligns with the Advisers Act

Investment Companies

• Review of performance and fund fees to ensure disclosure and parity of fees relative to peers and no channel-based bifurcation of fees for identical products
• Fair valuation practices to demonstrate transparency and consistency of valuation, including oversight
• Derivatives risk management which ensures appropriate mitigation strategies
• Review of compliance to ensure appropriate treatment of exemptive order conditions and liquidity in recent market volatility

Broker Dealers

• Regulation Best Interest: Examiners will focus on products offered based on suitability (complexity, high cost, liquidity, proprietary ownership, microcap status)
• Form CRS: Registrants should complete the Customer Relationship Summary, which describes their relationship with retail, fees and costs, and conflicts of interest
• Financial Responsibility Rules: Key regulatory guidance incudes the Net Capital Rule, Customer Protection Rule, which focus on internal processes, procedures and controls
• Trading Practices: For equity and fixed income trading, Regulation SHO (aggregation requirement), Regulation ATS (Alternative Trading Systems) are priorities

Self-Regulatory Agencies

• National Securities Exchanges: SEC conducts exams regarding trade execution and surveillance, and regulatory service agreements with these entities
• FINRA: SEC conducts oversight examinations with FINRA field offices
• MSRB: Municipal Securities Rulemaking Board – SEC and FINRA conducts examinations of registered firms regarding MSRB rules

Clearing Agencies

• DFA required SEC to examine systemically important FIs. Going forward, SEC will also examine non-systemically important Fis
• Examiners will focus on risk management frameworks and senior leadership review
• Security-based swap data repositories will receive enhanced focus in 2024

Municipal Advisors

• New MSRB Rule G-46, which becomes effective on March 1, 2024
• Key guidance includes fiduciary obligations to clients, focusing on disclosure

Security-based Swap Dealers

• Regulation SBSR – Security Based Swap Rule
• SBSR reporting concerns whether security-based swap dealers are complying with applicable capital, margin, and segregation requirements

Transfer Agents

• Transfer agent processing of items and transfers
• Examiners will focus on transfer agents that service certain types of issuers, including those issuing microcap and crypto asset securities

How Capco Can Help

For 25 years we have specialized in helping our clients prepare for regulatory exams and remediate identified issues. We provide a full range of related risk and compliance services, with some areas of support/deliverables including: 

• Compliance and readiness assessments
  
• Control design advisory and testing
  
• Trade Reporting
  
• Financial Crimes Compliance:

• Program design advisory and implementation 
  
• Gap assessments
  
• Regulatory Response support

• Managed Services

• Transaction monitoring and sanctions alert disposition
  
• Onboarding, including CDD/EDD, Negative News and PEP screening, and KYC remediation
  
• Trade surveillance support

We welcome your feedback and would be pleased to discuss ideas for ensuring your preparedness for the 2024 exam priorities.