Miami, Fla. (October 29, 2024) - On October 21, 2024, the U.S. Securities and Exchange Commission's ("SEC") Division of Examinations ("Division") released its 2025 examination priorities. The examination priorities outline the key risks, examination topics and priorities that the Division intends to focus on in the coming year when conducting examinations and inspections of SEC-registered investment advisers, investment companies, broker-dealers, transfer agents, municipal advisers, securities-based swap dealers, clearing agencies, and self-regulatory organizations.
For fiscal year 2025, in addition to typical areas such as disclosures and governance practices, the Division plans to also examine for compliance with new rules, the use of emerging technologies, and controls intended to protect investor information, records, and assets.
Investment Advisers
Adherence to Fiduciary Standards of Conduct
The Division will continue to examine advisers for adherence to fiduciary standards of conduct - including their duty of loyalty and care to clients - with a focus on:
- Investment advice provided to clients regarding products,
investment strategies, and account types, and whether that advice
satisfies the fiduciary obligations owed to clients.
- Recommendations related to high-cost products, unconventional
instruments, illiquid and difficult-to-value assets, and assets
sensitive to higher interest rates or changing market conditions
such as commercial real estate.
- Dual registrants and advisers with affiliated broker-dealers
focusing on:
o suitability of investment advice and recommendations regarding certain products;
o disclosures to clients regarding the capacity in which recommendations are made;
o appropriateness of brokerage versus advisory account selection and rollover practices; and
o measures taken to mitigate and disclose conflicts of interest.
- Financial conflicts of interest and impact on providing
impartial advice and best execution.
- Non-standard fee arrangements.
Effectiveness of Advisers' Compliance Programs
The Division indicated that it will continue to focus on the effectiveness of advisers' compliance programs as required by Rule 206(4)-7 (the "Compliance Rule") under the Investment Advisers Act of 1940 (Advisers Act). The Division will focus on whether the adviser's policies and procedures address compliance with the Advisers Act and the rules thereunder and are reasonably designed to prevent the adviser from placing their interests ahead of clients. Advisers that outsource their investment selection and management functions or receive alternative sources of revenue and/or benefits, such as selling non-securities- based products to clients may face increased scrutiny from the Division. The Division may also focus on the appropriateness and accuracy of fee calculations and the disclosure of fee-related conflicts (e.g., if some clients pay higher/lower fees for similar services).
Advisers with clients invested in illiquid or difficult-to-value assets, such as commercial real estate, should expect examinations to have a heightened focus on the valuation of such assets.
Examinations of advisers using artificial intelligence (AI) in their advisory operations, including portfolio management, trading, marketing, and compliance, may involve a rigorous review of the advisers' compliance policies and procedures and investor disclosures related to the use of AI in these areas.
Examinations of advisers with large numbers of independent contractors working from many different locations may focus on the advisers' supervision and oversight practices.
The Division may also focus on compliance practices when advisers change their business models or start advising on new types of assets, clients, or services.
Continued Focus on Investment Advisers to Private Funds
The Division noted that it will continue to focus on advisers to private funds and prioritize specific topics during examinations, such as:
- Consistency of Disclosures: Ensuring that
disclosures align with actual practices.
- Fiduciary Obligations: Assessing if advisers
meet their fiduciary duties during market volatility and evaluating
exposure to interest rate fluctuations, particularly in strategies
involving commercial real estate, illiquid assets, and private
credit.
- Poor Performance and Withdrawals: Focusing on
advisers to private funds with poor performance, significant
withdrawals, high leverage, or difficult-to-value assets.
- Fee Calculations and Allocations: Verifying
the accuracy of private fund fees and expense calculations (both
fund-level and investment-level), including the valuation of
illiquid assets, calculation of post-commitment period management
fees, fee and expense offsets, and the adequacy of
disclosures.
- Disclosure of Conflicts of Interests and Risks,
Adequacy of Policies and Procedures: Focusing on debt
usage, fund-level credit lines, investment allocations, adviser-led
secondary transactions, inter-fund transactions, investments held
by multiple funds, and use of affiliated service providers.
- Compliance with SEC Rules: Assessing compliance with recently adopted SEC rules, including amendments to Form PF and updated rules governing investment adviser marketing, to assess whether advisers have established adequate policies and procedures and whether their practices conform to these rules.
New and Never-Examined Advisers, and Advisers not Recently Examined
The Division will continue to prioritize examinations of advisers that have never been examined and advisers that have not been recently examined, with a focus on newly registered advisers.
Additional Risk Areas Impacting Market Participants
The Division's 2025 priorities include a number of additional focus areas applicable to multiple market participants, including advisers, which advisers should review and be aware of when preparing for the 2025 examination cycle including:
- Information Security and Operational
Resiliency
o Cybersecurity
o Compliance with Regulations S-ID and S-P
o Shortening of the Settlement Cycle(T+1): The Division noted it will evaluate advisers' compliance with amended books and records requirements associated with T+1 settlement cycle under the Exchange Act Rule 15c6-1 and it will also examine advisers' operational changes, or impacts related to adviser facilitation of institutional transactions involved in the allocation, confirmation, or affirmation processes subject to Exchange Act Rule 15c6-2(a).
- Emerging Financial Technologies
- Crypto Assets
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
