Background of the Report

On October 16, the United States Securities and Exchange Commission (SEC) released its much-anticipated 2024 examination priorities report. This annual publication has been a staple for the SEC’s Division of Examinations for over ten years, serving as a beacon for registrants to spotlight the emerging risks the agency will zero in on.

Focus Areas: Crypto and Beyond

This year, the SEC has emphasized a broader range of sectors, including the burgeoning fields of crypto, fintech, and artificial intelligence. The agency has even set up specialized teams to tackle issues in these spaces, underlining the growing importance of cybersecurity in regulatory frameworks.

• Crypto dealer-brokers: Continuing scrutiny, especially in how crypto is being traded and serviced.
• Emerging technologies: Assessing innovations like automated investment tools and trading algorithms.
• AI applications: Understanding the mechanisms behind algorithms used for trading and customer interaction.

Guarding the Interests of Retail Investors

One of the SEC’s core missions is protecting investors, particularly vulnerable populations like older investors and those with retirement assets. The examination report emphasizes:

• Standards of conduct: Registrants will be evaluated on how well they advise customers and how well customers comprehend their financial products.
• Compliance with guidelines: Firms must meet the latest standards, especially concerning custody requirements.
• Technology risks: The SEC aims to understand and mitigate risks connected to blockchain and distributed ledger technology.

Transfer Agents in the Spotlight

The report also highlights an increased focus on transfer agents servicing crypto asset securities issuers. These factions will face scrutiny on how they integrate emerging technologies into their operations, as it’s not just about what they do, but how they do it.

T+1 Preparation: A Surprise Priority

Interestingly, prep for T+1 (the settlement cycle) has been flagged as a priority for brokers in 2024. While this issue can be more technical, it’s clear that the SEC is gearing up to enforce stricter compliance ahead of the May deadline.

Why Public Examination Priorities Matter

Richard Best, the Division Director, has stressed that making examination priorities public enhances transparency and prompts firms to concentrate their compliance efforts on areas that may pose heightened risks to retail investors. Collecting insights from examination teams, investors, and industry feedback ensures that the SEC is always aligning its focus with the real-world dynamics and challenges faced in the financial landscape.

The SEC’s systematic approach doesn’t merely aim to highlight risks but also prepares the financial ecosystem to brace for the changes that 2024 could bring.