(Article from Registered Funds Regulatory Update, January 2025)
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On October 21, 2024, the SEC’s Division of Examinations released its 2025 Examination Priorities, aligning the release of the priorities with the start of the SEC’s fiscal year for the second straight year in a row. As was the case last year, the goal with releasing the priorities alongside the start of the fiscal year is to provide earlier insight to its focus areas for the upcoming year. The following sets forth an overview of the Division’s 2025 examination priorities.
Investment Companies. The Division will continue to prioritize examining registered investment companies given their importance to retail investors, particularly those saving for retirement. Examination focus areas may include:
- review of fees and expenses, and any associated waivers and reimbursements, and whether funds have adopted effective written compliance policies and procedures regarding oversight of advisory fees;
- oversight of service providers (both affiliated and third-party);
- review of portfolio management practices and disclosures for consistency with claims about investment strategies or approaches and with fund filings and marketing materials; and
- issues associated with market volatility.
The Division will also continue to monitor certain developing areas of interest, such as registered investment companies with exposure to commercial real estate and compliance with new and amended rules. Further, consistent with the Division’s approach for investment advisers, the Division will continue to have a particular focus on newly registered funds that have never been examined before and those that have not been recently examined.
Investment Advisers. The Division will continue to review a registered investment adviser’s adherence to its duty of care and duty of loyalty to its clients by focusing on:
- investment advice provided to clients regarding products, investment strategies, and account types and whether such advice satisfies the fiduciary obligations owed by the registered investment adviser to their clients. In particular, the Division will focus on recommendations related to: (i) high-cost products; (ii) unconventional instruments; (iii) illiquid and difficult-to-value assets; and (iv) assets sensitive to higher interest rates or changing market conditions, including commercial real estate;
- dual registrants and advisers with affiliated broker-dealers, including in particular the following common areas of focus: (i) assessing investment recommendations regarding certain products to determine whether they are suitable for client advisory accounts; (ii) reviewing disclosures to clients regarding the capacity in which recommendations are made; (iii) reviewing the appropriateness of account selection practices (e.g., brokerage versus advisory), including rollovers from an existing brokerage account to an advisory account; and (iv) assessing whether and how advisers adequately mitigate and fairly disclose conflicts of interest; and
- the impact of advisers’ financial conflicts of interest on providing impartial advice and best execution, with consideration given for non-standard fee arrangements.
The Division also remains focused on adviser compliance programs and compliance program reviews and will assess whether the policies and procedures are sufficient to support compliance with the adviser’s fiduciary obligations. Examinations in relation to an assessment of the effectiveness of advisers’ compliance programs typically include an evaluation of the core areas of such compliance programs, including, as applicable, marketing, valuation, trading, portfolio management, disclosure and filings, and custody, as well as an analysis of advisers’ annual reviews of the effectiveness of their compliance programs. In particular, the Division called out the following as areas in which the Division’s examinations may focus:
- fiduciary obligations of advisers that outsource investment selection and management;
- alternative sources of revenue or benefits advisers receive, such as selling non-securities based products to clients; and
- the appropriateness and accuracy of fee calculations and the disclosure of fee-related conflicts, such as those associated with select clients negotiating lower fees when similar services are provided to other clients at a higher fee rate.
The Division’s review of an adviser’s compliance program may focus on or go into greater depth depending on its specific practices or products. For instance, examinations of advisers in the commercial real estate space may have a heightened focus on valuation given the highly illiquid nature of real estate assets.
Information Security and Operational Resiliency. The Division will continue to review registrant practices to prevent interruptions to mission critical services and to protect investor information, records, and assets. The Division’s exams will focus on firms’ policies and procedures, governance practices, data loss prevention, access controls, account management, and responses to cyber-related incidents, including those related to ransomware attacks. Further, the Division will assess registrant compliance with Regulations S-ID and S-P, which pertain to identity theft protection and safeguarding customer records, respectively. In particular, the Division will review compliance with Regulation S-ID and S-P by focusing on:
- identification and detection to prevent and protect against identity theft during customer account takeovers and fraudulent transfers;
- firm practices to prevent account intrusions and safeguard customer records and information, including personally identifiable information, especially as it pertains to firms with multiple branch offices; and
- firm training relating to its identity theft prevention program and whether its policies and procedures are reasonably designed to protect customer records and information.
In addition, the Division will assess registrant compliance with adopted rule changes that reduced the standard settlement cycle for most broker-dealer transactions from T+2 to T+1 and requires broker-dealers engaging in the allocation, confirmation, or affirmation process to have written agreements or written procedures reasonably designed to ensure completion of the process as soon as practicable and no later than end of day on the trade date (T+0).
Crypto-Assets and Emerging Financial Technology. Given the continued volatility of, and activity around, the crypto asset markets, the Division will continue to monitor and, when appropriate, conduct examinations of registrants focusing on the offer, sale, recommendation of, or advice regarding trading and other activities in crypto assets or related products and include whether the firm (i) met and followed its respective standards of conduct when making recommendations or providing advice to customers or clients regarding crypto assets, and (ii) routinely reviewed, updated, and enhanced its compliance practices, risk disclosures, and operational resiliency practices. The Division will also assess whether any technological risks associated with the use of blockchain and distributed ledger technology have been addressed. Additionally, the Division remains focused on registrants’ use of automated investment tools, AI, and trading algorithms or platforms. With respect to AI, the Division will review registrant representations regarding their AI capabilities or AI use for accuracy. Further, the Division will assess whether firms have implemented adequate policies and procedures to supervise their use of AI, including for tasks related to fraud prevention, back-office operations, anti-money laundering, and trading functions.
Investment Advisers to Private Funds. The Division will continue to focus on advisers to private funds and prioritize specific topics, such as reviewing:
- whether disclosures are consistent with actual practices and if an adviser met its fiduciary obligations in times of market volatility and whether a private fund is exposed to interest rate fluctuations. The Division noted that investment strategies, such as commercial real estate, illiquid assets, and private credit, may be particularly sensitive to market volatility and/or interest rate changes and highlighted that examinations in particular may focus on private funds experiencing poor performance and significant withdrawals and/or holding more leverage or difficult-to-value assets;
- the accuracy of calculations and allocations of private fund fees and expenses (both fund-level and investment-level) through the review of certain areas impacting the accuracy of such fee calculations, including the valuation of illiquid assets, calculation of post-commitment period management fees, offsetting of such fees and expenses, and adequacy of disclosures related thereto;
- disclosure of conflicts of interest and risks and adequacy of policies and procedures. Examples of products or practices for the focus of such reviews include: (i) use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between funds, and/or others; (ii) investments held by multiple funds; and (iii) use of affiliated service providers; and
- compliance with recently adopted SEC rules, including amendments to Form PF and amended rules governing investment adviser marketing, to assess whether advisers have established adequate policies and procedures related thereto and whether actual practices conform to such policies and procedures.
The Division noted in particular that, as with previous years, it will continue to prioritize examinations of advisers that have never been examined before and those that have not been recently examined, with continued focus on newly registered advisers.
Broker Dealers. The Division will continue to focus on standards of conduct for broker-dealers, specifically related to compliance with Regulation Best Interest. The Division’s examinations will assess practices regarding review of investment alternatives, management of conflicts of interest, and consideration of investment goals and account characteristics. The Division notes the following areas of assessment for its examinations:
- recommendations with regard to products, investment strategies, and account types and whether the broker has a reasonable basis to believe the recommendation is in the best interest of the customer and does not place the broker’s interests ahead of the customer’s interests;
- disclosures made to investors regarding conflicts of interest;
- conflict identification and mitigation and elimination practices;
- processes for reviewing reasonably available alternatives; and
- factors considered in light of the investor’s investment profile, such as investment goals and account characteristics.
Additionally, the Division’s examinations will review the content of a broker-dealer’s relationship summary, such as how the broker-dealer describes (i) the relationships and services that it offers to retail customers; (ii) its fees and costs; and (iii) its conflicts of interests, and whether the broker-dealer discloses any disciplinary history. The examinations will also evaluate whether broker-dealers met their obligations to file their relationship summary with the SEC and deliver it to retail customers.
2025 Examination Priorities (Oct. 21, 2024),
available at: https://www.sec.gov/files/2025-exam-priorities.pdf.