EXAMINATION PRIORITIES

U.S. Securities and

Exchange Commission

2024

EXAMINATION PRIORITIES

Division of Examinations

CONTENTS

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

DIVISION OF EXAMINATIONS – FISCAL YEAR 2024 EXAMINATION PRIORITIES......................................5

I.

Investment Advisers.......................................................................................................................................7

A. Examinations of Investment Advisers...............................................................................................7

B. Examinations of Investment Advisers to Private Funds...........................................................10

II.

Investment Companies................................................................................................................................. 11

III.

Broker-Dealers................................................................................................................................................ 13

A. Regulation Best Interest....................................................................................................................... 13

B. Form CRS....................................................................................................................................................14

C. Broker-Dealer Financial Responsibility Rules...............................................................................14

D. Broker-Dealer Trading Practices........................................................................................................14

IV.

Self-Regulatory Organizations.................................................................................................................. 15

A. National Securities Exchanges........................................................................................................... 15

B. Financial Industry Regulatory Authority........................................................................................ 15

C. Municipal Securities Rulemaking Board......................................................................................... 16

V.

Clearing Agencies.......................................................................................................................................... 16

VI. Other Market Participants.......................................................................................................................... 17

A. Municipal Advisors.................................................................................................................................. 17

B. Security-Based Swap Dealers............................................................................................................. 18

C. Transfer Agents........................................................................................................................................ 18

VII. Risk Areas Impacting Various Market Participants........................................................................... 18

A. Information Security and Operational Resiliency....................................................................... 18

B. Crypto Assets and Emerging Financial Technology.................................................................. 19

C. Regulation Systems Compliance and Integrity...........................................................................20

D. Anti-Money Laundering.........................................................................................................................2 1

VIII. Conclusion....................................................................................................................................................... 22

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.

2024 EXAMINATION PRIORITIES | 1

MESSAGE FROM THE LEADERSHIP TEAM

In the more than ten years since the publication of the Division of Examinations’ (Division)

first annual examination priorities, there has been a dramatic growth in, and increased

complexity of, the U.S. capital markets and its participants. At the same time, we have

seen financial products and technological tools offered to investors continue to evolve at

greater speed. Despite these exponential changes, the Division has remained resilient and

endeavored to keep pace with risks in the marketplace. As the speed of this transformation

in the markets continues to accelerate, the Division continues to evolve how we conduct

examinations and engage with market participants.

With over 1,100 staff members spread across eleven regional offices and in Washington, DC,

Division staff are engaged with market participants through examinations and proactive

outreach continuously throughout the year. These interactions form a critical connection

between the U.S. Securities and Exchange Commission (SEC or Commission) and the

capital markets, giving Division staff and staff across the agency a ground level view of

developments in the financial industry. Guided by the Division’s “four pillar” mission – to

promote compliance, prevent fraud, monitor risk and inform policy – our experienced

and talented staff gain a unique perspective of the industry and risks in the markets which

informs both what we do as a Division and the Commission more broadly.

We are pleased to provide you with the examination priorities for fiscal year 2024. This

year, for the first time, we are aligning the publication of our priorities with the start of the

fiscal year with the hope that it will better inform investors and registrants of the key risks,

trends, and examination topics that we plan to focus on in the upcoming year. This step,

along with focused engagement with the industry and investors through our national and

regional outreach events and a greater presence of our examiners in the field, are just a few

examples of our intention to provide more transparency and to continue to move forward

together with investors and the industry to promote compliance.

A LOOKBACK AT FISCAL YEAR 2023

As part of our commitment to fulfilling our “four pillars,” Division staff carried out critical

work over the last twelve months through focused and targeted examinations and outreach,

fostered compliance through proactive engagements with the industry, and uncovered

fraudulent conduct through our risk-based examination process. Completion of these

examinations has been no simple task, and the high quality and efficiency in which they

were conducted is a testament to the hard work of a committed and focused staff with a

mission to serve investors.

2 | U.S. SECURITIES AND EXCHANGE COMMISSION

In the three years since the beginning of the pandemic, we have continued to transform how

we carry out examinations and communicate observations and other important information

to market participants. With the nationwide return to the office earlier this year, we have been

proactive in utilizing what we have learned over the past three years to enhance how we work

and communicate with market participants, while incorporating many of the efficiencies into

our processes. Division staff have also continued to conduct more in-person fieldwork, and

in many instances, provided virtual options to both examiners and registrants to participate

in different stages of an examination to broaden access. We have also sought to actively

manage the process of identifying the need for and publication of risk alerts that summarize

examination observations as well as preview to registrants potential examination scope areas

focusing on compliance with new rules.

Last fiscal year, the Division published nine risk alerts providing observations that touch on

a diverse cross-section of examination topics, including observations related to: (i) compliance

with Regulation S-ID and firms’ development and implementation of an identity theft

prevention program; (ii) broker-dealer compliance related to Regulation Best Interest;

(iii) issues identified in recent newly-registered investment adviser examinations; (iv) issues

concerning LIBOR-transition preparedness by investment advisers and investment companies;

and (v) compliance with anti-money laundering regulation. We also used our risk alerts to

highlight areas that certain examinations might cover, such as highlighting staff’s focus on

different aspects of the Marketing Rule under the Advisers Act.

In fiscal year 2023, we also continued our robust engagement with investors, investor groups,

industry, and regulatory partners, by participating both virtually and in-person, in various

speaking engagements and national and regional compliance events. Notably, the Division

held its semi-annual National Compliance Outreach seminar virtually in November 2022,

further extending the impact and reach of the event. Over 10,000 compliance and industry

professionals attended the event, which included discussions of a variety of key topics for

senior officers of registered investment advisers and investment companies. We also continued

to coordinate and share experiences and information with other federal and state regulators,

as well as with self-regulatory organizations. The Division also launched a series of joint

regulatory trainings with FINRA staff to enhance communication and collaboration between

both regulators related to our respective examination programs. By collaborating with one

another through these trainings, our aim was not only to enhance communication between

Division and FINRA staff, but also to learn about one another’s examination methodology,

2024 EXAMINATION PRIORITIES | 3

and how both organizations protect investors, ensure compliance, and preserve market

integrity. Our regional offices also took the lead in developing and organizing several

compliance focused events by collaborating with other regulators, as well as industry and

professional associations within their respective regions.

Although fiscal year 2023 continued to place greater demands on the Division’s resources,

we strived for more efficiency and effectiveness in carrying out our examinations

while being responsible and nimble. Last year, the Division implemented a number of

internal changes to align our resources to developments in the markets and the evolving

regulatory landscape. For instance, we centralized the monitoring and data function for

security-based swaps into the Office of Security Based Swaps within the Broker-Dealer

Exchange Program. We also established specialized teams within our different examination

programs, allowing us to better address emerging issues and risks associated with crypto

assets, financial technology, such as artificial intelligence, and cybersecurity, among others.

Finally, we continued to strengthen our leadership team by bringing onboard a number of

key senior and advisory positions and building additional capacity in various examination

programs to keep pace with the rapidly developing market ecosystem consistent with

Congress’ fiscal year 2023 appropriation.

CONTINUING TO MOVE FORWARD TOGETHER

The theme of evolving with the markets and remaining flexible in the ever-changing

markets also carries over to our engagement with registered firms, investors, and the

industry. More specifically, we acknowledge that changes in the regulatory landscape

will impact many registrants and other market participants. As the industry prepares to

meet new regulatory requirements, similarly, the Division will need to consider the impact

of these rules, which will influence potential examinations, compliance risks and new focus

areas. To support the industry, we expect to increase our engagement through increased

in-person fieldwork, compliance outreach events, speaking engagements, among other

touchpoints.

Since the publication of our fiscal year 2023 priorities approximately eight months ago,

we have advanced our mission as reflected in this year’s priorities, which provide both

continuity and change to reflect a fluid and evolving economic and regulatory landscape.

Given the shorter interval in between the publication of our priorities, several initiatives

and focus areas from last year remain as fiscal year 2024 priorities.

4 | U.S. SECURITIES AND EXCHANGE COMMISSION

FINAL NOTES

As we look ahead this fiscal year, the Division will build upon our past accomplishments

and efforts, strive to do more, and continue to adapt to the ever-changing markets.

Continuing to use our “four pillars” as our foundation, we will remain both resilient

and willing to adjust our priorities as the U.S. capital markets and market participants,

as well as products they offer, continue to rapidly evolve. In doing so, we hope to

increase the level of transparency across the range of activities in which we are engaged.

We remain energized and determined to take on more challenges and make this year even

more successful.

Richard R. Best

Director

Natasha Vij Greiner

Deputy Director and

National Investment

Adviser/Investment

Company Program

Director

Marshall M. Gandy

National Investment

Adviser/Investment

Company Program

Director

Keith E. Cassidy

Deputy Director and

National Technology

Controls Program

Director

Kevin W. Goodman

National FINRA and

Securities Industry

Oversight Program

Director

Allison M. Fakhoury

National Clearance

and Settlement

Program Director

Michael G. Rufino

National BrokerDealer and Exchange

Program Director

Division of Examinations

2024

EXAMINATION

PRIORITIES

2024 EXAMINATION PRIORITIES | 7

FISCAL YEAR 2024 EXAMINATION PRIORITIES

The Division of Examinations (Division) prioritizes examinations of certain practices,

products, and services that it believes present potentially heightened risks to investors

or the integrity of the U.S. capital markets. This year’s examinations will prioritize areas

that pose emerging risks to investors or the markets, as well as examinations of core and

perennial risk areas.

I. INVESTMENT ADVISERS

A. Examinations of Investment Advisers

As a fiduciary, an investment 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 not

subordinate its clients’ interest to its own. In other words, an investment adviser cannot

place its own interests ahead of the interests of its clients. In addition, an adviser is

required to eliminate or make full and fair disclosure of all conflicts of interest which

might incline the adviser—consciously or unconsciously—to render advice which 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

for the Division. In reviewing advisers’ adherence to this fiduciary standard, the Division

continues to focus on:

• Investment advice provided to clients with regard to products, investment strategies,

and account types, particularly those regarding: (1) complex products, such as

derivatives and leveraged exchange-traded funds (ETFs); (2) high cost and illiquid

products, such as variable annuities and non-traded real estate investment trusts

(REITs); and (3) unconventional strategies, including those that purport to address

rising interest rates. Examination focus may be emphasized for investment advice

provided to certain types of clients, such as older investors and those saving for

retirement.

• Processes for determining that investment advice is provided in clients’ best

interest, including those processes for (1) making initial and ongoing suitability

determinations, (2) seeking best execution, (3) evaluating costs and risks, and

(4) identifying and addressing conflicts of interest. Such assessments will also

review the factors advisers consider in light of the clients’ investment profiles,

including investment goals and account characteristics. Examinations will review

8 | U.S. SECURITIES AND EXCHANGE COMMISSION

how advisers address conflicts of interest, including (1) mitigating or eliminating

the conflicts of interest, when appropriate, and (2) allocating investments to

accounts where investors have more than one account (e.g., allocating between

accounts that are adviser fee-based, brokerage commission-based, and wrap fee,

as well as between taxable and non-taxable accounts).

• Economic incentives that an adviser and its financial professionals may have to

recommend products, services, or account types, such as the source and structure

of compensation, revenue, or other benefits. Such economic incentives may exist

when there is revenue sharing, markups, or other incentivizing revenue arrangements.

Examinations will focus on the economic incentives and conflicts of interest

associated with advisers that are dually registered as broker-dealers, use affiliated firms

to perform client services, and have financial professionals servicing both brokerage

customers and advisory clients to identify, among other things: (1) investment advice

to purchase or hold onto certain types of investments (e.g., mutual fund share classes)

or invest through certain types of accounts when lower cost options are available; and

(2) investment advice regarding proprietary products and affiliated service providers

that result in additional or higher fees to investors.

• Disclosures made to investors and whether they include all material facts relating

to conflicts of interest associated with the investment advice sufficient to allow a client

to provide informed consent to the conflict.

The Division remains focused on advisers’ compliance programs, including whether their

policies and procedures reflect the various aspects of the advisers’ business, compensation

structure, services, client base, and operations, and address applicable current market risks.

The Division’s review of advisers’ annual reviews of the effectiveness of their compliance

programs is an important part of assessing whether the

advisers’ conflicts of interests are addressed in the advisers’

The Division remains focused on

compliance programs, including those conflicts created by

advisers’ compliance programs,

the advisers’ business arrangements or affiliations and

including whether their policies and

related to adviser and registered investment company fees

procedures reflect the various aspects

and expenses.

of the advisers’ business, compensation

structure, services, client base, and

operations, and address applicable

current market risks.

The examination focus on compliance policies and

procedures may include one or more of the following

areas, as discussed in the adopting release for the

compliance rule (Compliance Rule) under the Investment

2024 EXAMINATION PRIORITIES | 9

Advisers Act of 1940 (Advisers Act):1 (1) portfolio management processes; (2) disclosures

made to investors and regulators; (3) proprietary trading by the adviser and the personal

trading activities of supervised advisory personnel; (4) safeguarding of client assets from

conversion or inappropriate use by advisory personnel; (5) the accurate creation of

required records and their maintenance in a manner that secures them from unauthorized

alteration or use and protects them from untimely destruction; (6) safeguards for the

privacy protection of client records and information; (7) trading practices; (8) marketing

advisory services; (9) processes to value client holdings and assess fees based on those

valuations; and (10) business continuity plans. Compliance program reviews will also

assess whether the policies and procedures are sufficient to support compliance with

advisers’ fiduciary obligations.

Particular examination focus will include:

• Marketing practice assessments for whether advisers, including advisers to private

funds, have: (1) adopted and implemented reasonably designed written policies

and procedures to prevent violations of the Advisers Act and the rules thereunder

including reforms to the Marketing Rule; (2) appropriately disclosed their marketingrelated information on Form ADV; and (3) maintained substantiation of their

processes and other required books and records. Marketing practice reviews will

also assess whether disseminated advertisements include any untrue statements of a

material fact, are materially misleading, or are otherwise deceptive and, as applicable,

comply with the requirements for performance (including hypothetical and

predecessor performance), third-party ratings, and testimonials and endorsements.

• Compensation arrangement assessments focusing on: (1) fiduciary obligations of

advisers to their clients, including registered investment companies, particularly

with respect to the advisers’ receipt of compensation for services or other material

payments made by clients and others; (2) alternative ways that advisers try to

maximize revenue, such as revenue earned on clients’ bank deposit sweep programs;

and (3) fee breakpoint calculation processes, particularly when fee billing systems are

not automated.

• Valuation assessments regarding advisers’ recommendations to clients to invest

in illiquid or difficult to value assets, such as commercial real-estate or private

placements.

1 Advisers Act Rule 206(4)-7. See also SEC, Final Rule: Compliance Programs of Investment Companies

and Investment Advisers, IA-2204 (Dec. 17, 2003).

10 | U.S. SECURITIES AND EXCHANGE COMMISSION

• Safeguarding assessments for advisers’ controls to protect clients’ material non-public

information, particularly when multiple advisers share office locations, have

significant turnover of investment adviser representatives, or use expert networks.

• Disclosure assessments to review the accuracy and completeness of regulatory filings,

including Form CRS, with a particular focus on inadequate or misleading disclosures

and registration eligibility.

The Division is also focused on advisers’ policies and procedures for: (1) selecting and

using third-party and affiliated service providers; (2) overseeing branch offices when

advisers operate from numerous or geographically dispersed offices; and (3) obtaining

informed consent from clients when advisers implement material changes to their advisory

agreements. Such reviews will assess, among other things, whether the advisers’ policies

and procedures are reasonably designed and implemented and whether the procedures

prevent the advisers from placing their interests ahead of clients’ interests.

As with previous years, the Division continues to prioritize examinations of advisers that

have never been examined, including recently registered advisers, and those that have not

been examined for a number of years.

B. Examinations of Investment 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:

• The portfolio management risks present when there is exposure to recent market

volatility and higher interest rates. This may include private funds experiencing poor

performance, significant withdrawals and valuation issues and private funds with

more leverage and illiquid assets.

• Adherence to contractual requirements regarding limited partnership advisory

committees or similar structures (e.g., advisory boards), including adhering to any

contractual notification and consent processes.

• Accurate calculation and allocation of private fund fees and expenses (both

fund-level and investment-level), including valuation of illiquid assets, calculation of

post commitment period management fees, adequacy of disclosures, and potential

offsetting of such fees and expenses.

2024 EXAMINATION PRIORITIES | 11

• Due diligence practices for consistency with policies, procedures, and disclosures,

particularly with respect to private equity and venture capital fund assessments of

prospective portfolio companies.

• Conflicts, controls, and disclosures regarding private funds managed side-by-side with

registered investment companies and use of affiliated service providers.

• Compliance 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.

• Policies and procedures for reporting on Form PF, including upon the occurrence of

certain reporting events.

II. INVESTMENT COMPANIES

The Division continues to prioritize examinations of registered investment companies,

including mutual funds and ETFs, due to their importance to retail investors, particularly

those saving for retirement.

Examinations of registered investment companies often include assessing, among other

things, their compliance programs and fund governance practices, disclosures to investors,

and accuracy of reporting to the SEC. In assessing registered investment companies’

compliance programs and governance practices, the Division will review boards’ processes

for assessing and approving advisory and other fund fees,

particularly for funds with weaker performance relative to their

The Division continues to

peers. In addition, the Division will review registered investment

prioritize examinations of

company valuation practices, particularly for those addressing

registered investment companies,

fair valuation practices (e.g., implementing board oversight

including mutual funds and ETFs,

duties, setting recordkeeping and reporting requirements, and

due to their importance to retail

overseeing valuation designees), and, as applicable, will assess the

investors, particularly those

effectiveness of registered investment companies’ derivatives risk

saving for retirement.

management and liquidity risk management programs.

12 | U.S. SECURITIES AND EXCHANGE COMMISSION

Examination focus areas may include:

• Fees and expenses and reviewing whether registered investment companies have

adopted effective written compliance policies and procedures concerning the

oversight of advisory fees and implemented any associated fee waivers and

reimbursements. A particular focus will be on: (1) charging different advisory

fees to different share classes of the same fund; (2) identical strategies offered by

the same sponsor through different distribution channels but that charge differing

fee structures; (3) high advisory fees relative to peers; and (4) high registered

investment company fees and expenses, particularly those of registered investment

companies with weaker performance relative to their peers. Examinations will also

review the boards’ approval of the advisory contract and registered investment

company fees.

• Derivatives risk management assessments to review whether registered investment

companies as well as business development companies have adopted and

implemented written policies and procedures reasonably designed to prevent

violations of the Commission’s fund derivatives rule (Investment Company Act Rule

18f-4). Review of compliance with the derivatives rule may include review of the

adoption and implementation of a derivatives risk management program, board

oversight, and whether disclosures concerning the registered investment companies’

or business development companies’ use of derivatives are incomplete, inaccurate

or potentially misleading. Examinations may also cover the associated registered

investment companies’ or business development companies’ procedures for, and

oversight of, derivative valuations.

In addition, the Division will review for compliance with the terms of exemptive order

conditions and the issues associated with recent market dislocations and volatility, such

as whether registered investment companies in liquidation are following liquidation

procedures.

As with adviser examinations, the Division continues to prioritize examinations of

registered investment companies that have never been examined, including recently

registered investment companies, and those that have not been examined in a number

of years.

2024 EXAMINATION PRIORITIES | 13

III. BROKER-DEALERS

A. Regulation Best Interest

Regulation Best Interest establishes the standard of conduct for broker-dealers at the

time they recommend to a retail customer a securities transaction or investment strategy.

When making such a recommendation, a broker-dealer must act in the retail customer’s

best interest and cannot place the financial or other interest of the broker-dealer ahead

of the customer’s interest. This obligation is satisfied only if the broker-dealer complies

with the following specified component obligations: (1) providing certain required

disclosure, before or at the time of the recommendation, about the recommendation and

the relationship between the retail customer and the broker-dealer (Disclosure Obligation);

(2) exercising reasonable diligence, care, and skill in making

the recommendation (Care Obligation); (3) establishing,

Regulation Best Interest establishes

maintaining, and enforcing policies and procedures

the standard of conduct for brokerreasonably designed to address conflicts of interest (Conflict

dealers at the time they recommend

of Interest Obligation); and (4) establishing, maintaining,

to a retail customer a securities

and enforcing policies and procedures reasonably designed

transaction or investment strategy.

to achieve compliance with Regulation Best Interest

(Compliance Obligation).

In reviewing whether broker-dealer recommendations are in customers’ best interest, areas

of particular interest will include: (1) recommendations with regard to products, investment

strategies, and account types; (2) disclosures made to investors regarding conflicts of interest;

(3) conflict mitigation practices; (4) processes for reviewing reasonably available alternatives;

and (5) factors considered in light of the investor’s investment profile, including investment

goals and account characteristics.

Examinations will focus on those recommended products that are: (1) complex, such as

derivatives and leveraged ETFs; (2) high cost, such as variable annuities; (3) illiquid, such

as nontraded REITs and private placements; (4) proprietary; and (5) microcap securities.

Examinations may also focus on recommendations to certain types of investors, such as

older investors and those saving for retirement or college.

As part of the examinations, the Division will evaluate whether the broker-dealer has

established, maintained, and enforced written policies and procedures reasonably designed

to achieve compliance with the areas described above as well as with Regulation Best

Interest as a whole. This analysis will include considering whether the written policies and

procedures are reasonably designed based on the costs, risks, and rewards of the securities

and investment strategies that the broker-dealer recommends to customers.

14 | U.S. SECURITIES AND EXCHANGE COMMISSION

The Division will also continue to focus on dual registrants and examinations will

encompass firms’ 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 and wrap fee accounts). Examinations will also

assess broker-dealers supervision of 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 their 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 focus on broker-dealer compliance with the Net Capital Rule and the

Customer Protection Rule and related internal processes, procedures and controls. Areas

of review will include fully paid lending programs and broker-dealer accounting for certain

types of liabilities, such as reward programs, point programs, gift cards and non-brokerage

services, and will also assess broker-dealer credit, interest rate, market, and liquidity risk

management controls to assess whether broker-dealers have sufficient liquidity to manage

stress events.

D. Broker-Dealer Trading Practices

Examinations will cover broker-dealer equity and fixed income trading practices. In

particular, examinations will review compliance with: (1) Regulation SHO, including the

rules regarding aggregation units and locate requirements; (2) Regulation ATS, and whether

the operations of alternative trading systems are consistent with the disclosures provided in

Forms ATS and ATS-N; and (3) Exchange Act Rule 15c2-11.

During examinations of wholesale market makers, examinations may include quote

generation, order routing and execution practices, market data ingestion, regulatory

controls, and risk management.

2024 EXAMINATION PRIORITIES | 15

IV. SELF-REGULATORY ORGANIZATIONS

A. National Securities Exchanges

Examinations will focus on whether national securities exchanges are meeting their

obligations to enforce compliance with self-regulatory organization rules and the federal

securities laws. Specifically, examinations will focus on exchange order handling and

exchange surveillance, investigation, and enforcement programs to detect and discipline

member firm violations. In addition, examinations will focus on exchange oversight of

regulatory service agreements.

B. Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA) oversees approximately 3,400

brokerage firms, 150,000 branch offices, and more than 620,000 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, 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 areas within

FINRA to examine through a risk assessment process designed to identify those aspects

of FINRA’s operations important to the protection of investors and market integrity,

including FINRA’s implementation of investor protection initiatives such as Regulation

Best Interest and Form CRS. The analysis is informed by collecting and analyzing extensive

information and data, regular meetings with key functional areas within FINRA, and

outreach to various stakeholders, including industry and investor groups. Based on the

outcome of this risk assessment process, the Division conducts inspections of FINRA’s

major regulatory programs. The Division also conducts oversight examinations of FINRA’s

examinations of certain broker-dealers and municipal advisors that are FINRA members.

From its observations during all of these inspections and examinations, the Division makes

detailed recommendations to improve FINRA’s programs, its risk assessment processes,

and its future examinations.

16 | U.S. SECURITIES AND EXCHANGE COMMISSION

C. Municipal Securities Rulemaking Board

The Municipal Securities Rulemaking Board (MSRB) regulates the activities of brokerdealers that buy, sell, and underwrite municipal securities, and municipal advisors. The

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 markets.

The Division, along with FINRA and the federal banking

The Municipal Securities Rulemaking

regulators, conducts examinations of registered firms to assess

Board regulates the activities of

compliance with MSRB rules, and applicable federal securities

broker-dealers that buy, sell, and

laws. The Division also applies a risk assessment process,

underwrite municipal securities, and

similar to the one it uses to oversee FINRA, including outreach

municipal advisors.

to various stakeholders, 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 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 will conduct risk-based examinations of other

registered clearing agencies that have not been designated

Title VIII of the Dodd-Frank Act

as systemically important. The Division will examine

requires the Commission to

the registered clearing agencies for compliance with the

examine, at least once annually,

Commission’s Standards for Covered Clearing Agencies, which

each clearing agency designated

are rules that require covered clearing agencies to have policies

as systemically important and for

and procedures that address, among other things, maintaining

which the Commission serves as the

sufficient financial resources, protecting against credit risks,

supervisory agency.

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 Exchange Act, and serve the

2024 EXAMINATION PRIORITIES | 17

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 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 in fiscal year 2024 may include risk management of liquidity,

models and model validation, margin systems, third-party service providers, and

operations, and the internal audit function, 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 the Commission’s Division of Trading and Markets concerning risks it observes in

its supervisory role over the above clearing agencies. These risks are incorporated into the

risk-based planning of the examinations.

VI. OTHER MARKET PARTICIPANTS

A. Municipal Advisors

Examinations will continue to review whether municipal advisors have met their fiduciary

duty obligation to clients, particularly when providing advice regarding the pricing, method

of sale, and structure of municipal securities. Examiners will review whether municipal

advisors are complying with their obligations to document municipal advisory relationships

and disclose conflicts of interest and requirements related to

registration, professional qualification, continuing education,

New MSRB Rule G-46, which

recordkeeping, and supervision.

becomes effective on March 1,

New MSRB Rule G-46, which becomes effective on March 1,

2024, is designed to establish the core standards of conduct

for solicitor municipal advisors, which include disclosure of

conflicts of interest and documentation of client relationships,

among other things. Examinations of solicitor municipal

advisors during the second half of fiscal year 2024 will focus

on compliance with new MSRB Rule G-46.

2024, is designed to establish the

core standards of conduct for

solicitor municipal advisors, which

include disclosure of conflicts of

interest and documentation of client

relationships, among other things.

18 | U.S. SECURITIES AND EXCHANGE COMMISSION

B. Security-Based Swap Dealers

Examinations will continue to focus on whether security-based swap dealers have

implemented policies and procedures related to compliance with security-based swap rules

generally and are meeting their obligations under Regulation SBSR to accurately report

security-based swap transactions to security-based swap data repositories. Moreover,

examinations will focus on whether security-based swap dealers are complying with

applicable capital, margin, and segregation requirements and relevant conditions in

Commission orders governing substituted compliance.

C. Transfer Agents

Examinations will focus on 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 service certain types of issuers, including

those issuing microcap and crypto asset securities, and transfer agents that use emerging

technologies to perform their transfer agent functions.

VII. RISK AREAS IMPACTING VARIOUS MARKET PARTICIPANTS

A. Information Security and Operational Resiliency

The Division will continue to review broker-dealers’ and advisers’ practices to prevent

interruptions to mission-critical services and to protect investor information, records, and

assets. Operational disruption risks remain elevated due to the proliferation of cybersecurity

attacks, firms’ dispersed operations, intense weather-related events, and geopolitical

concerns. Given these risks and concerns, cybersecurity remains a perennial focus area for all

registrants.

The Division will focus on registrants’ policies and procedures, internal controls, oversight of

third-party vendors (where applicable), governance practices, and responses to cyber-related

incidents, including those related to ransomware attacks. Part of this review will consider

whether registrants adequately train staff regarding their identity theft prevention program

and their policies and procedures designed to protect customer records and information.

With respect to third-party products and services in particular, the Division will continue

to assess how registrants identify and address risks to essential business operations. In

connection with its mission to inform policy, the Division will also look at the concentration

risk associated with the use of third-party providers, including how registrants are managing

this risk and the potential impact to the U.S. securities markets.

2024 EXAMINATION PRIORITIES | 19

In addition, many broker-dealers and advisers consist of a main office and multiple other

branch offices. Examinations of broker-dealers and advisers will continue to look at firms’

practices to prevent account intrusions and safeguard customer records and information,

including personally identifiable information, especially as it pertains to their multiple

other offices.

Lastly, the Commission adopted rule changes to shorten

the standard settlement cycle for most broker-dealer

transactions from two business days after the trade date to

one business day after the trade date. In connection with

this change, the Division will assess registrant preparations

associated with this shortening of the settlement cycle,

which has a compliance date of May 28, 2024.

The compliance date for recently

adopted rules shortening the standard

settlement cycle for most broker-dealer

transactions to one business day after

the trade date is May 28, 2024.

Examinations of broker-dealers and advisers will continue to look at firms’ practices to

promote cyber resiliency. Reviews will include firm practices, policies, and procedures to

prevent account intrusions and safeguard customer records and information, including

personally identifiable information. Additional focus will be on the cybersecurity issues

associated with the use of third-party vendors, including registrant visibility into the

security and integrity of third-party products and services. The Division will also review

whether there has been an unauthorized use of third-party providers.

B. Crypto Assets and Emerging Financial Technology

The Division continues to observe the proliferation of certain types of investments,

including crypto assets and their associated products and services, and emerging financial

technology, such as broker-dealer mobile applications

and advisers choosing to provide automated investment

The Division continues to observe

advice to their clients. The Division will focus on brokerthe proliferation of certain types of

dealers and advisers offering new products and services

investments, including crypto assets

or employing new practices, particularly technological

and their associated products and

and online solutions that service online accounts aimed at

services, and emerging financial

meeting the demands of compliance and marketing. The

technology, such as broker-dealer

Division remains focused on certain services, including

mobile applications and advisers

automated investment tools, artificial intelligence, and

choosing to provide automated

trading algorithms or platforms, and the risks associated

investment advice to their clients.

with the use of emerging technologies and alternative

sources of data.

20 | U.S. SECURITIES AND EXCHANGE COMMISSION

Given the continued volatility of, and activity around, the crypto asset markets, the

Division will continue to monitor and, when appropriate, conduct examinations of

registrants. Examinations of registrants will focus on the offer, sale, recommendation

of, advice regarding, trading in, and other activities in crypto assets or related products.

Specifically, reviewing whether such registrants involved with crypto assets: (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, to the extent required by the applicable standard of conduct, particularly

when the investors are retail-based (including older investors) and investments involve

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. With

respect to crypto assets that are funds or securities, the Division will consider whether

advisers are complying with the custody requirements under the Advisers Act (Rule

206(4)-2). In addition, the Division will assess whether any technological risks associated

with the use of blockchain and distributed ledger technology have been addressed,

including whether compliance policies and procedures are reasonably designed, accurate

disclosures are made and the risks pertaining to the security of crypto asset securities are

addressed, if required by applicable law.

C. Regulation Systems Compliance and Integrity

The Commission adopted Regulation Systems Compliance and Integrity (SCI) in 2014

to strengthen the technology infrastructure of the U.S. securities markets. Regulation

SCI entities include national securities exchanges, registered and certain exempt clearing

agencies, FINRA, MSRB, plan processors, and alternative trading systems that meet

certain volume thresholds. Among other things, these critical market infrastructure

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. The Division will continue to evaluate whether

SCI entities have established, maintained, and enforced written policies and procedures,

as required. One area of focus will include whether the policies and procedures of SCI

entities are reasonably designed to ensure the security of the SCI systems, including the

physical security of the systems housed in data centers, as required.

2024 EXAMINATION PRIORITIES | 21

D. Anti-Money Laundering

The BSA requires certain financial institutions, including broker-dealers and certain

registered investment companies, to establish anti-money laundering (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 customer due diligence (as required by the Customer Due Diligence

rule), 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 detect 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 to review whether broker-dealers

and certain registered investment companies 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 registered investment companies will also review policies and

procedures for oversight of applicable financial intermediaries.

Also, the Division will review whether broker-dealers and advisers are monitoring

Office of Foreign Assets Control sanctions and ensuring compliance with such sanctions.

22 | U.S. SECURITIES AND EXCHANGE COMMISSION

VIII. CONCLUSION

These priorities reflect the Division’s assessment of certain risks, issues, and policy

matters arising from market and regulatory developments, information gathered

from examinations, and other sources, including tips, complaints, and referrals, and

coordination with other Divisions and Offices at the Commission as well as other

regulators. While the Division will allocate significant resources to the examination issues

described herein, it will also 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

Commission policy. Our 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 Commission staff at https://www.sec.gov/tcr.

U.S. Securities and

Exchange Commission

100 F Street NE

Washington, DC 20549

SEC.gov