Examination Priorities

Fiscal Year 2025

Examination Priorities

Division of Examinations

DISCLAIMER: This statement represents the views of the staff of the Division of Examinations. It is not a

rule, regulation, or statement of the U.S. Securities and Exchange Commission (SEC or Commission). The

Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no

legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations

for any person.

CONTENTS

MESSAGE FROM THE LEADERSHIP TEAM . . . . . . . . . . . . . . . . . . . . . . . . . . 1

FISCAL YEAR 2025 EXAMINATION PRIORITIES. . . . . . . . . . . . . . . . . . . . . . 5

I.

INVESTMENT ADVISERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A. Adherence to Fiduciary Standards of Conduct. . . . . . . . . . . . . . . . . . 5

B. Effectiveness of Advisers’ Compliance Programs. . . . . . . . . . . . . . . . 6

C. Examinations of Advisers to Private Funds . . . . . . . . . . . . . . . . . . . . 7

D. Never Examined Advisers, Recently Registered Advisers,

and Advisers Not Recently Examined. . . . . . . . . . . . . . . . . . . . . . . .7

II. INVESTMENT COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

III. BROKER-DEALERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

A. Regulation Best Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

B. Form CRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

C. Broker-Dealer Financial Responsibility Rules. . . . . . . . . . . . . . . . . . . 8

D. Broker-Dealer Trading-Related Practices and Services. . . . . . . . . . . . . 9

IV. SELF-REGULATORY ORGANIZATIONS. . . . . . . . . . . . . . . . . . . . . . . . 9

A. National Securities Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

B. FINRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

C. Municipal Securities Rulemaking Board. . . . . . . . . . . . . . . . . . . . . . 10

V. CLEARING AGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

VI. OTHER MARKET PARTICIPANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

A. Municipal Advisors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

B. Transfer Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

C. Security-Based Swap Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

D. Security-Based Swap Execution Facilities. . . . . . . . . . . . . . . . . . . . . 11

E. Funding Portals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

VII. RISK AREAS IMPACTING VARIOUS MARKET PARTICIPANTS . . . . . . . . . . 12

A. Information Security and Operational Resiliency . . . . . . . . . . . . . . . . 12

1. Cybersecurity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2. Regulation S-ID and Regulation S-P . . . . . . . . . . . . . . . . . . . . . 12

3. Shortening of the Settlement Cycle. . . . . . . . . . . . . . . . . . . . . . 13

B. Emerging Financial Technologies. . . . . . . . . . . . . . . . . . . . . . . . . 13

C. Crypto Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

D. Regulation Systems Compliance and Integrity. . . . . . . . . . . . . . . . . . 14

E. Anti-Money Laundering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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D I V I S I O N O F E X A M I N AT I O N S

MESSAGE FROM THE

LEADERSHIP TEAM

Three Decades Strong: An Adaptive, Transparent, and

Risk-Focused Examination Program

March 2025 marks 30 years since the creation of the Division of Examinations (Division or EXAMS).1 Since

that time, the securities markets have undergone significant transformations, evolving from brokers using fax

machines and open outcry floor trading, to an online, globally interconnected high-speed marketplace. To

keep pace, we have embraced adaptable structures and agile processes that evolve alongside industry to help

ensure robust investor protection and strong compliance.

Over the last three decades, technology has globally shifted the securities industry and how most people

invest. In the early years of the examination program, the internet was just becoming mainstream. Today,

some registered firms are developing generative artificial intelligence based applications and employing

complex algorithms to inform investment strategies. Securities trades clear faster and many people can invest

in our capital markets using just a smartphone.

As technology continues to transform investing, we must work to identify new and emerging risks. The

Division must constantly scan the horizon for these risks and stand ready to examine registered firms for

compliance with SEC rules tied to these risks, and not merely react to these threats. To ensure investors remain

protected, we continue to invest in training and work hard to keep our staff abreast of changes in the industry.

We also continue to assess how these changes might impact registered firms’ operations and regulatory

compliance, and at the same time, remain nimble to retool our approaches in conducting examinations.

ADAPTING OUR OVERSIGHT RESPONSIBILITIES AS THE INDUSTRY

LANDSCAPE CHANGES

We regularly reassess our tools, methods, and approaches to keep pace with the growing breadth and

complexity of the Division’s examination responsibilities. We remain committed to continually assess

ways we can further improve and fulfill our important responsibilities in overseeing a growing portfolio of

registered firms.

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The number and breadth of our staff and specialized examination programs have increased significantly since

1995. In those early years, we had approximately 500 staff across three programs. Today, we have more than

1,100 staff across five programs with specialized functions and capabilities responsible for the Congressionally

mandated increase in examination authority for many new types of registered firms. The SEC has also

promulgated various rules creating additional obligations for registered firms. As these rules are adopted, the

Division works closely with our partners across the SEC to develop a comprehensive examination agenda and

direct the necessary resources to ensure consistent, timely, and effective examinations.

We also strive to continually build and refine the Division’s knowledge management capabilities to better

position ourselves to tackle new and expanding examination responsibilities. In the past two years, the

Division has added specialized capabilities in the cybersecurity, security-based swaps, crypto asset, and

intelligence space. We have also dedicated additional resources to focus on other critical areas, including

national securities exchanges, private funds, and clearing agencies. In addition, we have enhanced our

organizational structure to respond to developments in the markets and demographic changes that resulted

from the global pandemic. We have likewise changed our approach to onsite examinations based on lessons

we learned operating in a remote and hybrid environment.

FOSTERING COMPLIANCE WITH PROACTIVE COMMUNICATION

AND TRANSPARENCY

We play a significant role in promoting compliance by engaging in extensive communication and outreach

initiatives with the industry and other regulators throughout the year. Since 2013, we have published our

annual examination priorities to inform investors and the industry about key areas where we intend to focus

our resources­—those areas the Division believes present the highest risk areas to investors and the markets.

Last year marked the first time we published the priorities with the start of the SEC’s fiscal year. Our goal

remains the same. We strive to provide more transparency and as early as reasonably possible to allow

registered firms more opportunities to evaluate their compliance efforts.

We also publish risk alerts throughout the year to provide additional transparency about our examination

program and to promote compliance. We published our first risk alert in 2011, which identified potential

risks that could harm investors and identified opportunities for broker-dealers to strengthen their internal

controls and compliance procedures to protect investors. Recently, in response to industry request, we

published risk alerts covering a wider range of topics that describe typical broker-dealer and registered

investment adviser examinations; even attaching sample document requests. We also published, earlier this

year, a risk alert on registered firms’ preparedness for the rule shortening the securities transaction settlement

cycle as part of the Division’s efforts to continue engaging with firms by providing additional information

about our examinations and outreach in assessing their preparedness.

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We also proactively engage with investors and the securities industry through outreach events, including

national and regional compliance seminars, and speaking engagements. We launched our formal outreach

program in 2005, following the implementation of the “Compliance Rule” for registered investment advisers

and registered investment companies. The Division’s goal was to promote open communications with chief

compliance officers as they worked to establish new compliance programs or improve existing compliance

programs within their organizations. This November, the Division will host its 12th Compliance Outreach

Program National Seminar for Investment Adviser and Investment Company Senior Officers.

Today, our outreach efforts reach a wider audience, including investors and different types of registrants,

and include a broad range of topics. Moving forward, we will continue our engagement with the industry to

discuss compliance issues with the hope that participants may learn about effective compliance practices. In

fiscal year 2025, for example, we anticipate conducting targeted outreach to the securities industry, focusing

on implementation of the requirements contained in the SEC’s updates to Regulation S-P.

DIRECTING RESOURCES TO CRITICAL RISK AREAS

We have spent considerable time and effort since 1995 enhancing and fine tuning our risk assessment and

surveillance capabilities to better ensure that the registered firms we believe pose the greatest risk to investors

and markets are identified for examination. Leveraging data and information to identify firms and practices

that present elevated risk to investors or the markets has been a key foundation of the Division’s risk-based

examination-planning and candidate-selection processes. We utilize, for example, a centralized team within

EXAMS that includes skilled quantitative analysts and financial engineers to perform more sophisticated

data analytics to identify potential examination candidates and practices, as well as serve as another valuable

resource to Division staff in analyzing large amounts of complex trade and financial data.

As part of our drive to conduct more efficient and effective examinations, we continue to make

organizational changes and reallocate our limited resources. Last year, for example, the Division made

structural enhancements to our broker-dealer and exchange program. We built out a group to focus on

national securities exchanges, added a national risk strategist to assess and examine planning considerations,

and added a new associate director to strengthen the program’s home office. Finally, EXAMS is deeply

engaged in a national effort to reevaluate the methodology we use to calculate annual examination number

projections. Going forward, we are committed to further tying our annual targets to our risk-based

examination approach and available staff resources.

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Since 1995, we have built an adaptive, transparent, and risk-focused examination program. To promote

compliance with securities laws and better protect investors, we diligently monitor risks, and as is

ever-necessary, adapt our approaches to transparently provide information based on our observations and

growing industry experience. With these crucial objectives in mind, we are pleased to present the Division’s

examination priorities for fiscal year 2025.

DIVISION OF EXAMINATIONS LEADERSHIP

Keith E. Cassidy

Acting Director

Allison M. Fakhoury

National Clearance and

Settlement Program

Director

Alexis L. Hall

National Technology

Controls Program

Acting Director

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Marshall M. Gandy

National Investment

Adviser/Investment

Company Program Director

Vanessa L. Horton

National Investment

Adviser/Investment

Company Program Director

Kevin W. Goodman

National FINRA and

Securities Industry

Oversight Program Director

Michael G. Rufino

National Broker-Dealer and

Exchange Program Director

FISCAL YEAR 2025

EXAMINATION PRIORITIES

T

he Division’s examination priorities

are developed in consultation with

other divisions and offices throughout

the SEC and are informed by prior

years’ examinations, market events, information

gathered through participation in conferences and

conversations with investors, registrants, industry

groups, and other regulators. They reflect practices,

products, and services that the Division believes

present potentially heightened risks to investors or

the integrity of the U.S. capital markets. They are

not a comprehensive compilation of the issues the

Division will address in examinations. The Division

will cover other areas and conduct examinations

focused on and devote resources to new or

emerging risks, products and services, market

events, and investor concerns.

The Division welcomes comments and suggestions

regarding how it can better fulfill its mission to

promote compliance, prevent fraud, identify and

monitor risk, and inform SEC policy. Contact

information is available at https://www.sec.gov/

exams. If you suspect or observe activity that may

violate the federal securities laws or otherwise

operates to harm investors, please notify the SEC at

https://www.sec.gov/tcr.

I. INVESTMENT ADVISERS

A. Adherence to Fiduciary

Standards of Conduct

As a fiduciary, an investment adviser (adviser) owes

a duty of care and a duty of loyalty to its clients.

An adviser must, at all times, serve the best interest

of its clients and must not place its own interests

ahead of the interests of its clients. In addition,

an adviser must eliminate or make full and fair

disclosure of all conflicts of interest which may

lead the adviser—consciously or unconsciously—to

render advice that is not disinterested such that a

client can provide informed consent to the conflict.

Examining for advisers’ adherence to their duty

of care and duty of loyalty obligations remains a

priority, and the Division will continue to focus on:

§ Investment advice provided to clients regarding

products, investment strategies, and account

types, and whether that advice satisfies the

fiduciary obligations owed to their clients.

In particular, the Division will focus on

recommendations related to: (1) high-cost

products; (2) unconventional instruments;

(3) illiquid and difficult-to-value assets; and

(4) assets sensitive to higher interest rates

or changing market conditions, including

commercial real estate.

§ Dual registrants and advisers with affiliated

broker-dealers. Common areas of focus

include: (1) assessing investment advice and

recommendations regarding certain products to

determine whether they are suitable for clients’

advisory accounts; (2) reviewing disclosures

to clients regarding the capacity in which

recommendations are made; (3) reviewing the

appropriateness of account selection practices

(e.g., brokerage versus advisory), including

rollovers from an existing brokerage account to

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an advisory account; and (4) assessing whether

and how advisers adequately mitigate and fairly

disclose conflicts of interest.

§ The impact of advisers’ financial conflicts of

interest on providing impartial advice and

best execution, with consideration given for

non-standard fee arrangements.

B. Effectiveness of Advisers’

Compliance Programs

Rule 206(4)-7 under the Investment Advisers

Act of 1940 (Advisers Act), often referred to as

the “Compliance Rule,” requires SEC-registered

investment advisers to: (1) adopt and implement

written policies and procedures that are reasonably

designed to prevent violations of the Advisers Act

and the rules adopted under the Advisers Act by

the adviser and its supervised persons; (2) designate

an individual as Chief Compliance Officer to be

responsible for administering the policies and

procedures; and (3) review compliance policies and

procedures at least annually for their adequacy and

the effectiveness of their implementation.

The Division’s assessment of the effectiveness

of advisers’ compliance programs is a

fundamental part of the examination process.

Examinations focusing on this topic typically

include an evaluation of the core areas of

advisers’ compliance programs which include, as

applicable and appropriate for each examination,

marketing, valuation, trading, portfolio

management, disclosure and filings, and custody.

In addition, examinations on this topic typically

include an analysis of advisers’ annual reviews of

the effectiveness of their compliance programs,

which are a critical element for addressing and

monitoring conflicts of interests, including those

conflicts stemming from the advisers’ business

and compensation arrangements, arbitration

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clauses, and/or affiliations with certain parties

and transactions.

In reviewing advisers’ compliance policies and

procedures, the Division continues to focus on

whether the policies and procedures address

compliance with the Advisers Act and the rules

thereunder and are reasonably designed to prevent

the advisers from placing their interests ahead of

clients’ interests. Areas on which examinations

may focus include: (1) fiduciary obligations of

advisers that outsource investment selection and

management; (2) alternative sources of revenue

or benefits advisers receive, such as selling

non-securities based products to clients; and

(3) appropriateness and accuracy of fee calculations

and the disclosure of fee-related conflicts, such

as those associated with select clients negotiating

lower fees when similar services are provided to

other clients at a higher fee rate.

The Division’s review of an adviser’s compliance

program may focus on or go into greater depth

depending on its practices or products. For

example, if clients invest in illiquid or difficultto-value assets, such as commercial real estate,

examinations may have a heightened focus on

valuation. If advisers integrate artificial intelligence

(AI) into advisory operations, including portfolio

management, trading, marketing, and compliance,

an examination may look in-depth at compliance

policies and procedures as well as disclosures

to investors related to these areas. If an adviser

utilizes a large number of independent contractors

working from geographically dispersed locations,

examinations may focus on supervision and

oversight practices. Examinations may also focus

on compliance practices when advisers change their

business models or are new to advising particular

types of assets, clients, or services.

C. Examinations of Advisers

to Private Funds

Advisers to private funds remain a significant

portion of the SEC-registered investment adviser

population. The Division will continue to focus

on advisers to private funds and prioritize specific

topics, such as reviewing:

§ Whether disclosures are consistent with actual

practices and if an adviser met its fiduciary

obligations in times of market volatility and

whether a private fund is exposed to interest

rate fluctuations. Examples of investment

strategies that may be sensitive to market

volatility and/or interest rate changes include

commercial real estate, illiquid assets, and

private credit. The Division may particularly

focus on examinations of advisers to private

funds that are experiencing poor performance

and significant withdrawals and/or hold more

leverage or difficult-to-value assets.

§ The accuracy of calculations and allocations of

private fund fees and expenses (both fund-level

and investment-level). Examples of areas that

may impact the accuracy of fee calculations

include valuation of illiquid assets, calculation

of post commitment period management fees,

offsetting of such fees and expenses, and the

adequacy of disclosures.

§ Disclosure of conflicts of interests and risks,

and adequacy of policies and procedures.

Examples of products or practices for the focus

of such conflicts, controls, and risks reviews

include: (1) use of debt, fund-level lines of credit,

investment allocations, adviser-led secondary

transactions, transactions between fund(s) and/

or others; (2) investments held by multiple

funds; and (3) use of affiliated service providers.

§ Compliance with recently adopted SEC rules,

including amendments to Form PF,2 and the

updated rules that govern investment adviser

marketing,3 to assess whether advisers have

established adequate policies and procedures

and whether their actual practices conform

to them.

D. Never Examined Advisers, Recently

Registered Advisers, and Advisers

Not Recently Examined

As with previous years, the Division will prioritize

examinations of advisers that have never been

examined and those that have not been recently

examined with a continued focus on newly

registered advisers.

II. INVESTMENT COMPANIES

The Division continues to prioritize examinations

of registered investment companies (RICs or funds),

including mutual funds and exchange-traded

funds, due to their importance to retail investors,

particularly those saving for retirement.

Examinations of RICs will generally review their

compliance programs, disclosures, and governance

practices. Particular examination focus areas may

include review of specific topics or characteristics

involving: (1) fund fees and expenses, and any

associated waivers and reimbursements; (2)

oversight of service providers (both affiliated and

third-party); (3) portfolio management practices

and disclosures, for consistency with claims about

investment strategies or approaches and with fund

filings and marketing materials; and (4) issues

associated with market volatility. The Division

will also continue to monitor certain developing

areas of interest, such as RICs with exposure to

commercial real estate and compliance with new

and amended rules.

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As with adviser examinations, the Division will

continue to examine funds that have never before

been examined and those that have not been

recently examined with particular focus on newly

registered funds.

III. BROKER-DEALERS

A. Regulation Best Interest

The Division will continue to examine brokerdealer practices related to Regulation Best Interest,

including the following areas: (1) recommendations

with regard to products, investment strategies,

and account types and whether the broker has a

reasonable basis to believe the recommendation

is in the best interest of the customer and does

not place the broker’s interests ahead of the

customer’s interests; (2) disclosures made to

investors regarding conflicts of interest; (3) conflict

identification and mitigation and elimination

practices; (4) processes for reviewing reasonably

available alternatives; and (5) factors considered

in light of the investor’s investment profile such as

investment goals and account characteristics.

In particular, examinations of broker-dealer

practices will focus on those recommended

products that are complex, illiquid, or present

higher risk to investors. Examples of such products

may include highly leveraged or inverse products,

crypto assets, structured products, alternative

investments, products that are not registered with

the Commission (and are therefore less transparent),

products with complex fee structures or return

calculations, products based on exotic benchmarks,

or products that represent a growth area for retail

investment. Examinations may also focus on

recommendations: (1) using automated tools or

other digital engagement practices; (2) related to

opening different account types, such as option,

margin and self-directed IRA accounts; and (3)

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made to certain types of investors, such as older

investors and those saving for retirement or college.

Examinations may also focus on dual registrants

and encompass reviews of firms’ process for

identifying and mitigating and eliminating conflicts

of interest, account allocation practices (e.g.,

allocation of investments where an investor has

more than one type of account) and account

selection practices (e.g., brokerage versus

advisory, including when rolling over to an IRA

or transferring an existing brokerage account to

an advisory account, as well as advice to open

wrap fee accounts). Examinations may also assess

broker-dealer supervision of sales practices at

branch office locations.

B. Form CRS

The Division’s examinations will review the

content of a broker-dealer’s relationship summary,

such as how the broker-dealer describes: (1) the

relationships and services that it offers to retail

customers; (2) its fees and costs; and (3) its conflicts

of interest, and whether the broker-dealer discloses

any disciplinary history. These examinations will

also evaluate whether broker-dealers have met

the obligations to file their relationship summary

with the Commission and deliver their relationship

summary to retail customers.

C. Broker-Dealer Financial

Responsibility Rules

Examinations will continue to focus on brokerdealer compliance with the net capital rule and

the customer protection rule and related internal

processes, procedures, and controls. Areas of

review will include broker-dealer accounting

practices impacted by recent regulatory changes,

as well as the timeliness of financial notifications

and other required filings made by the brokerdealer. Reviews will also focus on broker-dealers’

operational resiliency programs, including

supervision of third-party or vendor provided

services that contribute to the records firms used

to prepare their financial reporting information.

In addition, examinations will assess broker-dealer

credit, market, and liquidity risk management

controls to ensure that firms have sufficient

liquidity to manage stress events.

D. Broker-Dealer Trading-Related

Practices and Services

A focus on broker-dealer equity and fixed income

trading practices remains a Division priority. Areas

of review will consider the structure, marketing,

fees, and potential conflicts associated with

offerings by broker-dealers to retail customers,

including bank sweep programs, fully-paid

lending programs, and mobile apps/online trading

platforms. In addition, examinations will review

broker-dealer trading practices associated with

trading in pre-IPO companies and the sale of

private company shares in secondary markets. The

Division will also review broker-dealers’ execution

of retail orders. These reviews will include:

(1) whether retail orders are marked as “held” or

“not held,” and the consistency of the marking

with retail instructions; and (2) the pricing and

valuation of illiquid or retail-focused instruments

such as variable rate demand obligations, other

municipal securities, and non-traded REITs.

Finally, with respect to Regulation SHO, the

Division will review whether broker-dealers are

appropriately relying on the bona fide market

making exception, including whether quoting

activity is away from the inside bid/offer.

IV. SELF-REGULATORY

ORGANIZATIONS

A. National Securities Exchanges

National securities exchanges provide marketplaces

for securities transactions and, under the

federal securities laws, serve as self-regulatory

organizations responsible for enforcing compliance

by their members with applicable rules and laws.

As in prior years, the Division will examine these

exchanges to assess whether they are meeting

their obligations to enforce compliance with the

exchanges’ own rules, as well as federal securities

laws. Examinations may focus on exchange

governance, regulatory programs, and participation

in National Market System Plans.

B. FINRA

FINRA oversees approximately 3,400 brokerage

firms, 150,000 branch offices, and more than

612,000 registered representatives through

examinations, enforcement, and surveillance. In

addition, FINRA, among other things, promulgates

rules that govern its members, provides a forum

for securities arbitration and mediation, conducts

market regulation and oversight, including by

contract, for a majority of national securities

exchanges, reviews broker-dealer advertisements,

administers the testing and licensing of registered

persons, and operates industry utilities, such as

trade reporting facilities.

The Division conducts risk-based oversight

examinations of FINRA. It selects major regulatory

areas within FINRA to examine through a riskassessment process designed to identify aspects of

FINRA’s operations important to the protection of

investors and market integrity, including FINRA’s

implementation of investor protection initiatives

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such as Regulation Best Interest and Form CRS,

and the fair administration of its dispute resolution

forum. The Division’s risk-assessment process is

informed by: (1) collecting and analyzing extensive

information and data; (2) holding regular meetings

with key functional areas within FINRA; and

(3) reaching out to various stakeholders such as

broker-dealers and investor groups. The Division

also conducts oversight examinations of FINRA’s

examinations of certain broker-dealers and

municipal advisors that are FINRA members.

Based on the outcomes of these examinations, the

Division provides FINRA with detailed recommendations to improve its programs, risk assessment

processes, and future examinations.

C. Municipal Securities

Rulemaking Board (MSRB)

MSRB regulates the activities of broker-dealers

that buy, sell, and underwrite municipal securities,

and municipal advisors. MSRB establishes rules

for municipal broker-dealers (including registered

municipal securities dealers) and municipal

advisors, supports market transparency by making

municipal securities trade data and disclosure

documents available, and conducts education and

outreach regarding the municipal securities market.

The Division, along with FINRA and the federal

banking regulators, conducts examinations of

registrants to assess compliance with MSRB rules,

as well as applicable federal securities laws and

rules. The Division also applies a risk-assessment

process, similar to the one it uses to oversee

FINRA, to identify areas to examine at the MSRB.

V. CLEARING AGENCIES

Title VIII of the Dodd-Frank Act requires the

Commission to examine, at least once annually,

each clearing agency designated as systemically

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important and for which the Commission serves

as the supervisory agency. Pursuant to Section 807

of the Dodd-Frank Act, these examinations will

focus on clearing agencies’ core risks, processes,

and controls and will cover the specific areas

required by statute, including the nature of

clearing agencies’ operations and assessment of

financial and operational risk. Additionally, the

Division conducts risk-based examinations of

other registered clearing agencies that have not

been designated as systemically important. The

Division examines the registered clearing agencies

for compliance with the Commission’s Standards

for Covered Clearing Agencies, which are rules

that require covered clearing agencies to have

policies and procedures that address, among other

things, maintaining sufficient financial resources,

protecting against credit risks, managing member

defaults, and managing operational and other risks.

Examinations of registered clearing agencies include

both risk-based examinations and corrective action

reviews, and are undertaken to assess: (1) whether

the clearing agencies’ respective risk management

frameworks comply with the Securities Exchange

Act of 1934 (Exchange Act), and serve the needs of

their members and the markets they serve; (2) the

adequacy and timeliness of their remediation of

prior deficiencies, including, for example, the role

of senior leadership in the remediation process; and

(3) other risk areas identified in collaboration with

the Commission’s Division of Trading and Markets

(Trading and Markets) and other regulators. In

addition, the Division also examines security-based

swap data repositories, as well as entities operating

pursuant to a Commission order exempting them

from the clearing agency registration requirement

under Section 17A(b)(1) of the Exchange Act.

Areas of examination focus may include risk

management of liquidity, margin systems, default

management, links, third-party relationships, and

operations, among other things.

Finally, the Division consults with the Federal

Reserve Board each year on the scope and methodology of the Commission’s Dodd-Frank examinations, as required by that Act, and routinely

consults with Trading and Markets on risks it

observes in its supervisory role over clearing

agencies. These risks are also incorporated into the

risk-based planning of the examinations.

VI. OTHER MARKET PARTICIPANTS

A. Municipal Advisors

The Division will continue to examine whether

municipal advisors have met their fiduciary duty

to municipal entity clients when engaging in

municipal advisory activities, such as providing

advice or recommendations regarding the pricing

or method of sale with respect to the issuance

of municipal securities. The Division will also

continue to examine whether municipal advisors

have complied with MSRB Rule G-42, which

establishes the core standards of conduct and duties

applicable to non-solicitor municipal advisors,

including requirements to disclose conflicts of

interest and to document municipal advisory

relationships. Finally, the Division will continue

to assess whether municipal advisors have made

required filings with the Commission and met

their professional qualification, recordkeeping, and

supervision requirements.

B. Transfer Agents

The Division will continue to examine transfer

agent processing of items and transfers,

recordkeeping and record retention, safeguarding

of funds and securities, and filings with the

Commission. Examinations will also focus on

transfer agents that use emerging technology to

perform their transfer agent functions.

C. Security-Based Swap Dealers (SBSDs)

For SBSDs that have yet to be examined,

the Division expects to continue to focus its

examinations on whether SBSDs have implemented

policies and procedures related to compliance

with security-based swap rules generally, including

whether they are meeting their obligations under

Regulation SBSR to accurately report securitybased swap transactions to security-based swap

data repositories and, where applicable, whether

they are complying with relevant conditions

in Commission orders governing substituted

compliance. For other SBSDs, the Division may

focus on SBSDs’ practices with respect to applicable

capital, margin, and segregation requirements and

risk management. The Division also expects to

assess whether SBSDs have taken corrective action

to address issues identified in prior examinations.

D. Security-Based Swap Execution

Facilities (SBSEFs)

On November 2, 2023, the Commission adopted

new Regulation SE under the Exchange Act,

which implements a set of rules and forms for

the registration and regulation of SBSEFs.4 The

adoption of Regulation SE eliminated the prior

temporary registration exemptions for SBSEFs as of

August 12, 2024, at which time SBSEFs needed to

apply for registration with the Commission. Subject

to the timing of these events and the Commission’s

decisions with respect to any submitted applications, the Division may begin conducting examinations of registered SBSEFs in late fiscal year 2025.

E. Funding Portals

The Division will examine whether funding portals

are making and preserving: (1) required records,

such as records related to investors who purchase,

or attempt to purchase, securities through the

funding portal; and (2) records related to issuers

who offer and sell, or attempt to offer and sell,

securities through the funding portal and the

control persons of such issuers, among others. In

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addition, the Division will review funding portals’

written policies and procedures to assess if they

are reasonably designed to achieve compliance

with applicable federal securities laws and rules,

such as the restrictions that prohibit funding

portals from engaging in the following activities:

(1) offering investment advice or recommendations;

(2) soliciting transactions in the securities displayed

on the funding portal’s platform; (3) compensating

persons for such solicitation or based on the sale

of securities displayed on the funding portal’s

platform; and (4) holding, managing, possessing, or

handling investor funds or securities.

VII. RISK AREAS IMPACTING VARIOUS

MARKET PARTICIPANTS

A. Information Security and

Operational Resiliency

1. CYBERSECURITY

The Division will continue to review registrant

practices to prevent interruptions to missioncritical services and to protect investor

information, records, and assets. Operational

disruption risks remain elevated due to the

proliferation of cybersecurity attacks, firms’

dispersed operations, weather-related events, and

geopolitical concerns. As part of its examinations

in this area, the Division will examine registrants’

procedures and practices to assess whether they

are reasonably managing information security and

operational risks.

A perennial examination priority, the Division’s

focus on cybersecurity practices by registrants

remains vital to ensure the safeguarding of

customer records and information, as applicable.

Particular attention will be on firms’ policies

and procedures, governance practices, data loss

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prevention, access controls, account management,

and responses to cyber-related incidents,

including those related to ransomware attacks.

The Division will also review alternative trading

systems’ safeguards to protect confidential

trading information.

With respect to third-party products and services

in particular, the Division will continue to consider

cybersecurity risks and resiliency goals associated

with third-party products, sub-contractors,

services, and any information technology (IT)

resources used by the business without the IT

department’s approval, knowledge or oversight,

or non-supported infrastructure. The focus will

include assessments of how registrants identify and

address these risks to essential business operations.

2. REGULATION S-ID AND

REGULATION S-P

The Division will assess registrant compliance

with Regulations S-ID and S-P, as applicable.

Examinations will focus on firms’ policies and

procedures, internal controls, oversight of thirdparty vendors, and governance practices. In

addition, the Division will focus on firms’ policies

and procedures as they pertain to safeguarding

customer records and information at firms

providing electronic investment services, including:

§ Identification and detection to prevent and

protect against identity theft during customer

account takeovers and fraudulent transfers.

§ Firms’ practices to prevent account intrusions

and safeguard customer records and

information, including personally identifiable

information, especially as it pertains to firms

with multiple branch offices.

§ Firm training on identity theft prevention

program and whether their policies and

procedures are reasonably designed to

protect customer records and information.

Examinations will also assess a firm’s efforts to

address operational risk, including technology

risks, as operational failures may impact a

firm’s ability to safeguard customer records and

information.

In preparation for the compliance date of the

Commission’s amendments to Regulation S-P,5 the

Division will engage with firms during examinations about their 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.

3. SHORTENING OF THE

SETTLEMENT CYCLE6

The Division will evaluate broker-dealer

compliance with Rule 15c6-1 under the Exchange

Act, which reduced the standard settlement cycle

for most securities to the day after trade date

(T+1), and with Rule 15c6-2 under the Exchange

Act, which requires broker-dealers engaging in the

allocation, confirmation, or affirmation process

to have written agreements or written procedures

reasonably designed to ensure completion of the

process as soon as practicable and no later than the

end of day on trade date (T+0).

The Division will evaluate advisers’ compliance

with amended books and records requirements

associated with T+1. The Division will also

consider advisers’ operational changes, or impacts

related to adviser facilitation of institutional

transactions that are involved in the allocation,

confirmation, or affirmation processes subject to

Rule 15c6-2(a).

In addition, examinations will assess registrant

technology changes associated with shortening

of the settlement cycle and evaluate any areas

that need further attention and resources, such as

specific products or counterparties that are routinely

not settling within the required time frames.

B. Emerging Financial Technologies

The Division remains focused on registrants’ use

of certain services, such as automated investment

tools, AI, and trading algorithms or platforms,

and the risks associated with the use of emerging

technologies and alternative sources of data. As

such, the Division will, in particular, examine

firms that employ certain digital engagement

practices, such as digital investment advisory

services, recommendations, and related tools

and methods. When conducting these reviews,

assessments generally will include whether:

(1) representations are fair and accurate;

(2) operations and controls in place are consistent

with disclosures made to investors; (3) algorithms

produce advice or recommendations consistent

with investors’ investment profiles or stated

strategies; and (4) controls to confirm that advice

or recommendations resulting from digital

engagement practices are consistent with regulatory

obligations to investors, including older investors.

With respect to AI, the Division will review

registrant representations regarding their AI

capabilities or AI use for accuracy. In addition,

the Division will assess whether firms have

implemented adequate policies and procedures

to monitor and/or supervise 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. Reviews will also consider firm

integration of regulatory technology to automate

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internal processes and optimize efficiencies. In

addition, the Division will examine how registrants

protect against loss or misuse of client records and

information that may occur from the use of thirdparty AI models and tools.

the use of blockchain and distributed ledger

technology, including risks pertaining to the

security of crypto assets.

C. Crypto Assets

SCI entities must establish, maintain, and enforce

written policies and procedures reasonably

designed to ensure that their systems’ capacity,

integrity, resiliency, availability, and security is

adequate to maintain their operational capability

and promote the maintenance of fair and orderly

markets. As part of the Division’s examination of

SCI entities, reviews will focus on:

The Division continues to observe the proliferation

of investments involving crypto assets and their

associated products and services. Given the

volatility and activity involving the crypto asset

markets, the Division will continue to monitor

and, when appropriate, conduct examinations of

registrants offering crypto asset-related services.

Examinations of registrants will focus on the offer,

sale, recommendation, advice, trading, and other

activities involving crypto assets that are offered

and sold as securities or related products, such as

spot bitcoin or ether exchange-traded products.

In particular, these examinations will review

whether the registrants: (1) meet and follow

their respective standards of conduct when

recommending or advising customers and clients

regarding crypto assets with a focus on an initial

and ongoing understanding of the products

that have a particular focus on scenarios where

investors are retail-based (including older investors)

and investments involving retirement assets; and

(2) routinely review, update, and enhance their

compliance practices (including crypto asset wallet

reviews, custody practices, Bank Secrecy Act (BSA)

compliance reviews, and valuation procedures),

risk disclosures, and operational resiliency practices

(i.e., data integrity and business continuity plans),

if required.

The Division will assess registrant practices to

address the technological risks associated with

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D. Regulation Systems Compliance

and Integrity (SCI)

§ The policies and procedures regarding the

operational, business continuity planning and

testing practices of SCI entities.

§ The effectiveness of incident response plans. In

particular, the Division will evaluate policies

and procedures regarding the decision to

disconnect or reconnect from another registrant

or third-party that is experiencing a cyber

event, and the decision-making process to

disconnect or reconnect to registrants or third

parties when the SCI entity is experiencing a

cyber event. This would include all forms of

inbound and outbound connectivity, such as

trade processing, data feeds, remote processing,

post trade reporting, market surveillance, and

remote access.

§ The policies and procedures pertaining to the

security operations management tools employed

by SCI entities to ensure that their SCI systems

and indirect SCI systems have adequate levels

of security and their effectiveness to meet the

security goals of the organization.

E. AML

The BSA requires certain financial institutions,

including broker-dealers and certain RICs, to

establish AML programs that are tailored to

address the risks associated with the firm’s location,

size, and activities, including the customers they

serve, the types of products and services offered,

and how those products and services are offered.

These programs must, among other things,

include policies, procedures, and internal controls

reasonably designed to achieve compliance with

the BSA and its implementing rules; independent

testing; and risk-based procedures to perform

certain customer due diligence, which includes

identifying and verifying the identity of customers

and conducting ongoing monitoring to identify and

report suspicious transactions. Where appropriate,

certain financial institutions must also file Suspicious Activity Reports (SARs) with the Financial

Crimes Enforcement Network. SARs can be used

to identify and combat market manipulation,

insider trading, Ponzi schemes, corruption, money

laundering, terrorist financing, and a variety

of other illicit activities potentially violative of

securities and other laws and regulations.

The Division will continue to focus on AML

programs and review whether broker-dealers

and certain RICs are: (1) appropriately tailoring

their AML program to their business model

and associated AML risks; (2) conducting

independent testing; (3) establishing an adequate

customer identification program, including for

beneficial owners of legal entity customers;

and (4) meeting their SAR filing obligations.

Examinations of certain RICs will also review

policies and procedures for oversight of

applicable financial intermediaries.

Lastly, the Division will review whether

broker-dealers and advisers are monitoring the

Department of Treasury’s Office of Foreign Assets

Control sanctions and ensuring compliance with

such sanctions.

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Endnotes

1

The Commission established in March 1995, the

Office of Compliance Inspections and Examinations,

which on December 17, 2020, was renamed the

Division of Examinations.

SEC, Form PF; Reporting Requirements for All Filers

and Large Hedge Fund Advisers, Advisers Act Rel.

No. 6546 (Feb. 8, 2024) (Adopting amendments to

Form PF with a compliance date in March 2025 to,

among other things, enhance reporting by private

fund advisers regarding private funds’ operations and

strategies, improve data quality and comparability,

assist in identifying trends, and improve the ability

of the Financial Stability Oversight Council to

monitor and assess systemic risk); Form PF Reporting

Requirements for Large Liquidity Fund Advisers,

Advisers Act Rel. No. 6344 (Jul. 12, 2023) (Adopting

amendments to Form PF concerning the information

large liquidity fund advisers must report for the

liquidity funds they advise); and Form PF; Event

Reporting for Large Hedge Fund Advisers and Private

Equity Fund Advisers; Requirements for Large Private

Equity Fund Adviser Reporting, Advisers Act Rel. No.

6297 (May 3, 2023) (Adopting amendments to Form

PF to require event reporting upon the occurrence

of key events, to require large private equity fund

advisers to provide additional information to the SEC

about the private equity funds they advise).

SEC, Investment Adviser Marketing, Advisers Act Rel.

No. 5653 (Dec. 22, 2020) (Adopting amendments to

create a single rule that replaces the prior advertising

and cash solicitation rules and modernizes rules

that govern investment adviser advertisements and

payments to solicitors).

2

3

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4

5

6

SEC, Security-Based Swap Execution and Registration

of Security-Based Swap Execution Facilities, Exchange

Act Rel. No. 98845 (Nov. 2, 2023).

SEC, Regulation S-P: Privacy of Consumer Financial

Information and Safeguarding Customer Information,

Advisers Act Rel. No. 6604 (May 16, 2024) (Adopting

amendments to Regulation S-P that apply to brokerdealers, funding portals, investment companies,

SEC-registered investment advisers, and transfer

agents registered with the SEC or another appropriate

regulatory agency (collectively, “covered institutions”)

and are designed to modernize and enhance the

protection of consumer financial information by: (1)

requiring covered institutions to develop, implement,

and maintain written policies and procedures for an

incident response program that is reasonably designed

to detect, respond to, and recover from unauthorized

access to or use of customer information; (2) requiring

that the response program include procedures for

covered institutions to provide timely notification

to affected individuals whose sensitive customer

information was, or is reasonably likely to have

been, accessed or used without authorization; and

(3) broadening the scope of information covered by

Regulation S-P’s requirements).

Division, Risk Alert: Shortening the Securities

Transaction Settlement Cycle (Mar. 27, 2024) (To

assess registrants’ adaptiveness to the shortened

settlement cycle, EXAMS intends to continue engaging

with registrants through examinations and outreach.

The Risk Alert provides registrants with additional

information about the scope and content of the

examinations and outreach).

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549