Each year, the SEC’s Exam Priorities report sets the compliance tone for Registered Investment Advisors and Broker-Dealers. The highly anticipated report gives these types of firms an idea of the SEC’s areas of focus for the coming year and tells us what we can expect when going through annual inspections.
These annual priorities are a bit of a “read of the tea leaves,” so we should look at what was included. And, when comparing the new edition to previous years, what was omitted can sometimes be as informative. Plus, with the recent U.S. Presidential Election, we should expect a change of leadership at the SEC.
Let’s summarize the focus for RIAs and Broker-Dealers in 2024.
The Rule of Compliance: Outsourcing in the Spotlight
First off, as it was for 2024, ensuring the effectiveness of your compliance program is a priority. The SEC requires RIAs to have written compliance policies, but policies must go beyond words on paper. You must “do what you say and say what you do.” Advisors and all employees must understand them and weave them seamlessly into their daily work.
As much as outsourced CCO is widely adopted, especially for smaller RIAs, it’s not regarded as a best practice. While this isn’t frowned upon (yet), the tide is turning regarding the outsourced Chief of Compliance role. Firms would do well to consider bringing these functions in-house.
Adherence to Fiduciary Standards was again front and center. In 2025, expect that the SEC will look for firms to:
- Demonstrate Fiduciary Duties of Care (under Regulation Best Interest)
- Disclose conflicts of interest
- Always place the interest of clients ahead of those of the Advisor
Investment suitability compliance and oversight continues to be something that RIA firms need to be able to demonstrate. In particular, Advisors should exercise caution when:
- Recommending high-cost and complex products like inverse or leveraged ETFs
- Justifying investments in illiquid, alternative assets
- Promoting products with complex fee structures, such as interest rate-based or interest-sensitive investments, hard-to-value assets, and difficult-to-value assets like non-traded REITS and commercial real estate
Navigating the New Tech Terrain
New technologies supporting crypto assets, crypto-related services, and blockchain and AI are more than buzzwords. These cutting-edge tools are used today, and firms will need to show they are using them responsibly. And, if firms plan to use AI for account management, the SEC is putting them on notice that disclosures and regulations will be forthcoming to protect the investment public.
The report also mentioned the dependence on blockchain and the ability to show robust safeguards to protect investor information from cybersecurity threats. What this portends for examinations or regulatory trends remains to be seen. Until crypto blockchain-based assets become part of the managed account mainstream, this will continue to be more of an active interest by the SEC.
SEC Silence on Communication Compliance
So, what is noticeably missing from the report? Surprisingly, email, text messages and off-channel communications are not mentioned. This omission is notable with record breaking fines last year, and almost all of those fines were attributable to deficiencies in email surveillance and archiving.
Having robust compliance procedures and oversight of all Advisor communications with the public is vital. Many in the compliance community have seen the harsh and expensive fines as an overstep, but the SEC’s resolute approach seems to be here to stay.
Staying ahead of the SEC’s Exam Priorities is not just good practice. It’s vital for operating effectively in a highly regulated environment. Compliance organizations should prioritize more attention and resources towards complying with SEC regulations and FINRA rules.
To learn how the SS&C Black Diamond Wealth Platform can support your firm’s compliance needs, request your personal demo, call 1-800-727-0605, or email info@advent.com.
