The Securities and Exchange Commission (SEC) has released its exam priorities for 2025, providing a roadmap for investment advisers to align their compliance programs with the regulator's expectations. While the political transition under President Donald Trump may result in fewer enforcement actions than under the Biden administration, certain core priorities remain steadfast, regardless of the administration.
For investment advisers, understanding and addressing these priorities is not optional—it is essential for maintaining compliance, minimizing regulatory risks, and upholding fiduciary duties. Below, we break down the SEC's key areas of focus and what they mean for investment advisers in the year ahead.
1. Fee Transparency and Accuracy
The SEC will continue to scrutinize fee arrangements to ensure clients are charged transparently and accurately. Key points for advisers to consider include:
- Clear Disclosures: Advisers must provide clients with written disclosures about all fees, including direct fees and indirect benefits, such as revenue sharing from third-party services.
- Proper Valuation: Fees must be based on accurately valued assets, with extra diligence required for illiquid or hard-to-value assets.
- Conflict Management: If fee structures differ among clients or asset classes, advisers must disclose these conflicts and ensure they are not incentivizing actions that benefit the firm at the client's expense. For example, advisers must avoid allocating assets in a way that maximizes fees instead of meeting client needs.
Takeaway: Regularly audit your fee arrangements to ensure compliance and fairness. Failing to address discrepancies in fee structures could result in regulatory scrutiny.
2. Managing Conflicts of Interest
As fiduciaries, advisers must prioritize their clients' best interests, disclosing and mitigating conflicts of interest. The SEC's focus includes:
- Compensation Disclosures: Advisers receiving incentives, such as 12b-1 fees or soft dollars, must clearly disclose these arrangements in Form ADV Part 2A.
- Dual Registration Clarity: Advisers who are also brokers must clearly outline their role when making recommendations, so clients understand the standard of care being applied.
- Client-Centric Decisions: Regulators will closely examine activities where advisers may prioritize their own or their employees' interests over those of their clients.
Takeaway: Robust disclosure practices and clear documentation of decision-making processes are critical to managing conflicts and avoiding enforcement actions.
3. Compliance Program Effectiveness
A firm's compliance program remains a cornerstone of regulatory examinations. The SEC will evaluate whether compliance programs:
- Proactively Identify Issues: Compliance must integrate into all aspects of the firm, finding and addressing potential issues before they harm clients.
- Document Resolutions: Firms must keep detailed records of identified issues and their resolutions.
- Have Management Support: A strong compliance program must have direct access to management and sufficient resources to implement necessary changes.
Takeaway: Regular testing and thorough documentation are essential to demonstrating compliance program effectiveness during examinations.
4. Cybersecurity and Privacy Protections
Cybersecurity remains a top priority for the SEC, as advisers are entrusted with sensitive client information. Key focus areas include:
- Incident Prevention and Response: Firms must have robust cybersecurity policies, conduct penetration testing, and implement annual training for employees. An Incident Response Plan should outline steps to address breaches, tested annually to ensure preparedness.
- Vendor Due Diligence: Advisers must ensure that third-party vendors protect client information through initial and ongoing assessments. Annual questionnaires are a useful tool to evaluate vendor compliance.
Takeaway: Cybersecurity is not just an IT issue—it is a compliance requirement. Firms must invest in resources to safeguard data and prepare for potential incidents.
What Does This Mean for Investment Advisers?
The SEC's exam priorities signal a continued emphasis on protecting investors through robust compliance, transparency, and accountability. While enforcement may decrease under the current administration, regulatory expectations remain high. Advisers should view these priorities as an opportunity to strengthen their practices and avoid potential pitfalls.
Practical Steps for Advisers:
- Conduct a Comprehensive Compliance Review: Assess your firm's adherence to the SEC's focus areas, including fee arrangements, conflict disclosures, and cybersecurity protocols.
- Enhance Documentation: Ensure all compliance activities, decisions, and issue resolutions are thoroughly documented.
- Train Your Team: Regular training for employees and management ensures that everyone understands their role in maintaining compliance.
- Monitor Regulatory Developments: Stay updated on changes in SEC enforcement trends and adjust your compliance program accordingly.
Looking Ahead
The SEC's 2025 exam priorities reflect a commitment to investor protection and market integrity, regardless of the political landscape. For investment advisers, staying ahead of these priorities is essential not only to pass examinations but to build client trust and maintain a competitive edge.
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.
