RIA Compliance Blog
The SEC recently announced its annual Examination Priorities for the 2025 year. This annual release provides insight into the areas that the SEC plans to highlight when inspecting investment advisers, investment companies, broker-dealers, and other entities subject to examination by the SEC’s Division of Examinations. For investment advisers, the 2025 priorities largely are unchanged from the announced 2024 priorities, which we have previously discussed.
For FY25, the SEC again intends to focus on investment advisers who have never been examined, newly registered investment advisers, and investment advisers who have not been examined recently.
The SEC will continue to review how investment advisers adhere to their fiduciary duty, paying particular attention 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. Dual registrants and investment advisers associated with broker-dealers will face additional scrutiny of its fiduciary duty with regards to the disclosures made to clients about the capacity in which the recommendation is made, the appropriateness of rollover recommendations, and the disclosure of conflicts of interest.
In addition to an adviser’s fiduciary duty, the FY25 examinations will continue to focus on an adviser’s compliance program, inspecting whether an adviser’s policies and procedures are reasonably tailored to the adviser’s business, scope of services, client base, operational risks, and market risks. Particularly with respect to an adviser’s compliance program, the SEC has indicated that it will highlight certain areas, including marketing, valuation, trading, portfolio management, disclosure and filings, and custody. The SEC notes that deeper focus will depend on the individual practices and products of the investment adviser and whether those particular risks are reflected in the investment adviser’s compliance program. One such example of a potential heightened focus area is advisers who choose to incorporate artificial intelligence into its advisory operations. These advisers can expect the SEC to inquire about how their compliance program has been updated to reflect the use of AI and how disclosure of such use is made to clients.
Advisers to private funds will again face additional study by the SEC. FY25 will be an interesting year in light of the 5th Circuit Court of Appeal June 2024 decision to stay implementation of the SEC’s updated rules for private fund advisers. While the SEC’s ability to implement these changes by rulemaking has stalled, the SEC’s ability to influence change through enforcement actions, in this context, is yet to be seen. The SEC has highlighted that it intends to examine private fund advisers for the accuracy of calculations and associated allocation of fees and expenses as well as their compliance programs associated with conflicts of interest, the fund’s use of debt, and the use of affiliated service providers. The SEC has noted that it will pay specific attention to private fund advisers who experience poor performance or significant withdrawals, utilize significant leverage, or hold difficult to valuate assets such as real estate, illiquid assets, or private debt. Not coincidently, there is significant crossover between the announced FY25 examination priorities for private fund advisers and subject matter proposed by the halted revisions to the private fund adviser rules.
The SEC’s announcement also discusses several operations areas that the SEC expects to highlight in the coming year. The SEC believes that these practice areas are vital to preventing operational disruptions and to protecting client information, records, and assets. The SEC will continue to examine market participants’ cybersecurity policies and procedures in light of the risks created by the participants’ operations. When applicable, the SEC will review participants’ compliance with Reg S-ID and Reg S-P, paying particular attention to the safeguarding of client records and information. Finally, the SEC plans to review the use of AI by market participants, looking for how that use is disclosed to clients and incorporated into the compliance policies and procedures.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.