SEC Announces 2024 Priorities for Broker-Dealers
Washington D.C., Oct. 16, 2023 —
The Securities and Exchange Commission’s Division of Examinations today released its 2024 examination priorities to inform investors and registrants of the key risks, examination topics, and priorities that the Division plans to focus on in the upcoming year. This year’s examinations will prioritize areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas.
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, maintaining, and enforcing policies and procedures reasonably designed to address conflicts of interest (Conflict of Interest Obligation); and (4) establishing, maintaining, and enforcing policies and procedures reasonably designed 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.
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.
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.
https://www.sec.gov/files/2024-exam-priorities.pdf
