SEC Division of Examinations Announces 2024 Priorities

Published On - October 16, 2023

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SEC Division of Examinations Announces 2024 Priorities

Washington D.C., Oct. 16, 2023 —

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 evaluating costs and risks,
  3. 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 how advisers address conflicts of interest, including Mitigating or eliminating the conflicts of interest, when appropriate, and 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’ compliance programs, including those conflicts created by the advisers’ business arrangements or affiliations and related to adviser and registered investment company fees and expenses.

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 Advisers Act of 1940 (Advisers Act):

  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 marketing related 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.

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.

  1. 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.
  2. Conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
  3. 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.
  4. Policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.

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, 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.

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.

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

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.

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.

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.

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

  1. Policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and its implementing rules;
  2. 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
  3. 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

 

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.

The full text is here in this link

https://www.sec.gov/files/2024-exam-priorities.pdf

All material quoted below is from the SEC publication.

Key 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 evaluating costs and risks,
  3. 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 how advisers address conflicts of interest, including Mitigating or eliminating the conflicts of interest, when appropriate, and 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’ compliance programs, including those conflicts created by the advisers’ business arrangements or affiliations and related to adviser and registered investment company fees and expenses.

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 Advisers Act of 1940 (Advisers Act):

  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.

        •  

 

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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 marketing related 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.

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.

  1. 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.
  2. Conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
  3. 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.
  4. Policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.

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, 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.

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.

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

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.

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.

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.

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

  1. Policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and its implementing rules;
  2. 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
  3. 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