The Securities & Exchange Commission (SEC) annually issues a description of what their examiners will focus on in their routine examinations of investment advisers. When designing their compliance goals and projects for the upcoming year, advisers would do well to review what the SEC sees as important. Even though these are the SEC’s priorities, state securities regulators will look to the same priorities in designing their own examinations.

Quite a lot has changed in the United States since the SEC issued its priorities for 2024, and quite a lot will change with the SEC’s views on enforcement under President Donald Trump. The SEC will still conduct exams and bring enforcement cases, but the number of exams and cases may be smaller than it has been under President Joe Biden.

But there are also priorities of the SEC that apply no matter who is in office. Below are things that the SEC has said that advisers should continue to focus on even after the change in administration.

Fees

The regulators will always look closely at fee arrangements to ensure that clients know what they are being charged and that those fees are calculated accurately. This includes both the direct fees paid by the clients as well as other benefits that advisers may receive, whether for selling securities or non-securities products or services like accounting or tax services. Advisers should disclose fees in writing, and should ensure that clients are charged the fees they signed up for and that the assets that are the basis of the fees are valued properly. Advisers also should review illiquid and hard-to-value assets carefully to make sure they are charging their clients fairly. Additionally, advisers should carefully review and disclose conflicts of interest related to fees. If some clients have negotiated a lower fee for the same services, then the adviser must include that in its disclosures. Similarly, if an adviser charges different fees based on asset class, advisers must make sure they are meeting their fiduciary duties in investing the client’s assets and not acting for their own benefit by allocating assets to earn more fees, instead of to meet the needs of the client.

Conflicts of Interest

As fiduciaries, advisers have a duty of loyalty to act in their clients’ best interests. While it is practically impossible to avoid all conflicts of interest, advisers must minimize the ones they can and inform clients of all remaining conflicts, including a description of how the conflict would affect the client. As stated above, the SEC and the states will review adviser compensation from the client or from other sources for specific products, especially if they are high-cost products or unconventional investments. If an adviser receives 12b-1 fees from a fund provider or soft dollars based on the number of trades or amount of assets with a specific custodian, then the adviser must include those disclosures in its ADV Part 2A so that clients can make an informed decision. If an adviser is affiliated with a broker or is dually registered, then the adviser must make it very clear what role it is playing in making a recommendation so that the client knows the level of care the adviser has in recommending the investment. In general, regulators will look closely at any of the adviser’s activity that puts its own or its employees’ interest ahead of client interests.

Compliance Program

Regulators will always look at the compliance program itself to make sure it is adequately monitoring the activities of the adviser. The compliance department must have a solid testing program, document the issues it finds and the resolutions of those issues, and ensure that it reports directly to management and has the support of management to implement necessary changes. A competent compliance program should be fully integrated into all aspects of the firm and must be designed to find and resolve issues quickly so that the clients are not harmed. 

Cybersecurity and Privacy

Even though advisers may be a victim of a cyberattack resulting in a major disruption of their business, that will not stop regulators from coming in after the fact with an enforcement action. Advisers must have adequate cybersecurity policies in place, including systems to prevent a cybersecurity incident. Further, advisers must test those policies and systems with periodic penetration testing and vulnerability assessments. Due to the technical knowledge required, all but the largest advisers would be well served to bring in information technology and cybersecurity consultants to assist with building and testing the program. Advisers must also have a written Incident Response Plan so that they have documented steps to follow after they learn of an incident, and advisers must test that plan at least annually so that key employees know how to respond to a cybersecurity incident. 

Similarly, advisers must carefully protect client information. As they use third parties for different aspects of their business, they are required to ensure those parties will protect client information if they have access to it. This involves careful due diligence, both at the start of the relationship and annual due diligence updates to ensure their systems are still adequate. Advisers should prepare an annual questionnaire for all their vendors, paying particular attention to the vendors that are key to their business.

Conclusion

SEC and state examiners will prioritize these areas when reviewing investment advisers, even after the change in administration. Investment advisers should ensure their compliance programs are aware of these priorities and have measures in place to find issues before an examiner does. Dentons is well-positioned to assist in reviewing your compliance program, helping with individual issues, and assisting if you are undergoing an examination.