The regulator said its exam priorities for the year are on Regulation Best Interest compliance , fee calculations and disclosures , and recommendations about account types .

Each advisor “ must eliminate or make full and fair disclosure of all conflicts of interest which may lead the advisor — consciously or unconsciously — to render advice that is not disinterested so that a client can provide informed consent to the conflict ,” the SEC said .

As the agency ’ s examiners dig into advisors ’ duty-of-care and duty-of-loyalty obligations under Reg BI , the staff expects to focus on advice provided to clients about products , investment strategies and account types .

“ In particular , the division will focus on recommendations related to : ( 1 ) high-cost products ; ( 2 ) unconventional instruments ; ( 3 ) illiquid and difficult-to-value assets ; and ( 4 ) assets sensitive to higher interest rates or changing market conditions , including commercial real estate ,” the SEC said .

Dual registrants and advisors with affiliated broker-dealers are the SEC ’ s second most pressing exam priority , according to the report . Examiners plan to spend 2025 reviewing client disclosures and the appropriateness of account selection practices and look into whether reps ’ practices of steering clients into brokerage accounts rather than advisory accounts are actually in the clients ’ best interests .

Rollovers from existing brokerage accounts to advisory accounts are likely to get added scrutiny , the agency said . The focus here will “ be assessing whether and how advisors adequately mitigate and fairly disclose conflicts

The agency said it will look at artificial intelligence in advisory operations — including portfolio management , trading , marketing and compliance .

of interest ,” the report said . The agency said it plans to take a close look at what it calls “ non-standard fee arrangements .”

Firms should be mindful of how they ’ re calculating fees and disclosing any fee-related conflicts , the regulator said . Expect SEC examiners to look at any conflicted fee arrangements that allow “ select clients to negotiate lower fees when similar services are provided to other clients at a higher fee rate ,” the SEC noted .

Areas of exam focus will include the fiduciary obligations of advisors who outsource investment selection and management , as well as alternative sources of revenue that advisors receive , the SEC said .

The agency said it will also look at difficult-to-value assets such as commercial real estate . And it will look at the use of artificial intelligence in advisory operations — including portfolio management , trading , marketing and compliance .

Like advisors , broker-dealers can expect SEC examiners to focus on recommended products that are complex or illiquid , or that present higher risk to investors .

The broker-dealer examinations may also focus on any recommendations using artificial intelligence and those related to opening different account types , such as option , margin and self-directed IRA accounts , the SEC said . Recommendations to older investors and those saving for retirement or college may elicit extra scrutiny , as may advice to open wrap fee accounts , the report said . “ Examinations may also assess broker-dealer supervision of sales practices at branch office locations ,” the SEC said . “ If an advisor utilizes a large number of independent contractors working from geographically dispersed locations , examinations may focus on supervision and oversight practices .”

As part of ensuring that investors are fully apprised of firms ’ limitations and potentially costly conflicts , examiners will likely be digging into advisors ’ disclosures , particularly Form CRS ( customer relationship summaries ) to ensure the firms are telling investors the truth about services , fees and costs , conflicts of interest , and firm disciplinary histories , the SEC said .

“ As with previous years , the division will prioritize exams of advisors that have never been examined and those that have not been recently examined , with a continued focus on newly registered advisors ,” the regulator said .

— Tracey Longo

12 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2024 WWW . FA-MAG . COM