Authored By Tim Barry
SVP, Head of Financial Institutions

The release of the SEC’s 2024 exam priorities tells a familiar story, and notably omits a previous topic. Investment Advisors need to keep these priorities top of mind when preparing for any potential upcoming SEC Exams.

The Securities and Exchange Commission (SEC) released their annual exam priorities memo in October of 2023, detailing the areas of focus for routine and targeted exams for investment advisors in 2024. Consistent with prior years, the SEC will be focused on best interests of investors, conflicts of interest, marketing disclosures, cybersecurity, and protecting the Main Street investor, especially older investors. They will also continue to emphasize digital assets and emerging technologies within the financial space. Noticeably absent from this year’s priorities is ESG, which has lost some steam and, in some ways, reversed course in the investment community.

The main focus of the SEC remains the protection of investors from misleading or deceptive practices. The more complex products or strategies tend to carry the highest burden of disclosure and transparency from the advisor. This serves to protect both the advisor and the investor, as the risk factors are more clearly defined ahead of any investment decision. Economic incentives, such as fees and commissions, should also be very clearly defined ahead of the investment.

Marketing materials are one of the most common areas of scrutiny when it comes to SEC audits. Advisors need to be sure all representations in their marketing documents are in line and up to date with SEC compliance standards. Past performance representations should clearly state whether the returns are gross or net of fees of commissions. The same goes for valuation practices for illiquid or difficult to value assets. Similarly, the names of funds or strategies should accurately reflect the investments within those products to avoid a deficiency for misleading materials.

These same guidelines hold true for private, or comingled, funds. Transparency of fees, conflicts of interest, and risk factors are of utmost importance to regulators. The presence of accredited investors does not eliminate the fiduciary duty of disclosures for the advisor.

It is worth noting that the ESG (Environmental, Social and Governance) movement that gained momentum in recent years has been omitted from the SEC exam priorities this year. Newly branded funds and strategies with a hyper-focus on ESG factors have seemingly become a thing of the past. Poor performance, increased costs, and a shift in investor sentiment have contributed to a decline in demand for such products in the investment community. That being said, advisors still need to remain focused on investor mandates and suitability when making investment decisions and branding products.

At Falcon Risk Services, we are continually monitoring the ever-changing regulatory environment when servicing and developing insurance solutions for our clients. We offer a broad suite of products that will help protect advisors in the event of a targeted regulatory action or investor litigation. Falcon’s expert agents have hands on experience in the Financial Institutions sector and are equipped to provide advisors with industry-leading coverage enhancements. We also have an experienced, in-house team of claims handlers to rely on in the event of unwanted regulatory action or litigation.

Please reach out to your insurance broker if you are interested in receiving a quote from us for your next insurance renewal or explore our website to learn more about Falcon Risk Services.

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