On October 21, 2024, the Securities and Exchange Commission’s (the “SEC”) Division of Examinations (the “Division”) published its examination priorities for the calendar year 2025 (the “2025 Priorities”). Released annually, the priorities usually outline the key areas where the Division intends to focus its examination efforts and resources in the upcoming year. The 2025 Priorities share considerable overlap with the priorities set for 2024, generally continuing to emphasize critical areas for investment advisers, broker-dealers, and other SEC registrants. Next year’s examinations will seek to prioritize perennial and emerging risk areas, such as fiduciary duty, standards of conduct, cybersecurity, as well as artificial intelligence (“AI”). This article focuses on the 2025 Priorities that may be of particular relevance to investment advisers.
Investment Advisers and Advisers to Private Funds
Fiduciary Duty
Examinations of investment advisers will focus on reviewing adherence to the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and managers’ fiduciary duties, with particular focus on the following three (3) core areas:
(i) investment advice concerning: (1) high-cost products; (2) unconventional instruments; (3) illiquid and/or difficult-to-value assets; and (4) assets sensitive to higher interest rates or changing market conditions, including commercial real estate;
(ii) with respect to dual registrants and advisers with affiliated broker-dealers, key focus areas are expected to include: (1) ensuring that investment advice is suitable for advisory accounts; (2) reviewing disclosures about the adviser’s role; (3) evaluating account selection practices (including, without limitation, rollovers); and (4) assessing how conflicts of interest are disclosed and possibly mitigated; and
(iii) the impact of advisers’ financial conflicts of interest on their ability to provide impartial advice and best execution, including the effects of non-standard fee arrangements.
Compliance Programs
The Division intends to focus on critical components of advisers’ compliance programs, such as marketing practices, asset valuation approaches, trading activities, portfolio management, client disclosures and regulatory filings, as well as custody arrangements.
The Division may focus on the following areas: (1) the fiduciary duties of advisers who outsource investment selection and management; (2) alternative revenue streams or benefits advisers receive, such as selling non-securities products to clients; and/or (3) the accuracy and appropriateness of fee calculations, as well as the disclosure of fee-related conflicts, such as discrepancies in fee rates for similar services provided to different clients.
The Division’s review of an adviser’s compliance program may vary based on their practices or products. For example, the Division may focus more on valuation for illiquid assets like commercial real estate, while paying more attention to compliance policies and disclosures if AI is integrated into operations. If an adviser uses many independent contractors, the examination focus may be on supervision.
Finally, the Division may also target compliance when advisers change business models or start advising new asset types, clients, and/or services.
Investment Advisers to Private Funds
Examinations of private fund managers are generally expected to focus on several key areas, many of which reflect various concerns the SEC previously sought to address through the now-vacated private fund adviser rules.
Exposure to Market Volatility and Interest Rate Fluctuations: The Division may assess whether an adviser’s disclosures match its actual practices and whether such adviser’s fiduciary obligations were met during a time of market volatility. The Division may focus on private funds exposed to interest rate fluctuations (including those with strategies sensitive to market changes, such as commercial real estate and private credit). Special attention may be given to managers of funds with poor performance, substantial or unusually large withdrawals, high leverage, and/or a high percentage of illiquid assets in the portfolio.
Accuracy of Fee and Expense Calculations: The Division may focus on the accuracy of fees and expense calculations, as well as allocations, for private equity funds, both at the fund and at the underlying investment levels. Key areas that could impact accuracy of the foregoing include the manager’s approach to valuation of illiquid assets, calculation of post-commitment period management fees, fee offsets, and the adequacy of related disclosures.
Disclosure of Conflicts and Adequacy of Controls: The Division may focus on the disclosure of risks and conflicts of interest, as well as the adequacy of related policies and procedures. Areas of concern may include: (1) the use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between fund(s) and/or third parties; (2) if the adviser manages more than one fund, then the investments held by multiple funds and (3) the use of affiliated service providers.
Compliance with Recent SEC Rule Changes: The Division may focus on compliance with recently adopted SEC rules, including amendments to Form PF, updated investment adviser marketing rules, and recent amendments to Regulation S-P. In doing so, the Division may seek to assess whether an adviser has implemented adequate policies and procedures and whether its actual practices align with these requirements.
Cybersecurity and Operational Risks: The Division intends to continue to focus on cybersecurity risks, including (x) threats from cyberattacks and (y) operational disruptions, such as weather events or geopolitical issues. Examinations will likely also assess resiliency plans for third-party products and services.
Regulation S-P Compliance: The Division intends to focus on firms’ policies, internal controls, third-party vendor oversight, and governance practices under Regulation S-P. Ahead of the compliance deadlines for Reg S-P amendments (December 3, 2025 for larger firms, and June 3, 2026 for smaller ones), examinations will assess firms' progress in preparing incident response programs as required by the amendments.
Anti-Money Laundering (“AML”) Compliance: The Division intends to focus on ensuring that financial institutions: (1) tailor their AML programs to business risks; (2) conduct independent testing of AML policies and procedures; (3) implement effective customer identification programs; and (4) meet suspicious activity reporting (SAR) filing obligations.
