SEC’s 2025 Exam Priorities: Emphasis Remains on Registered Investment Advisers

The Securities and Exchange Commission’s (SEC) Division of Examinations has unveiled its 2025 examination priorities, marking the 13^th consecutive year of this initiative to enhance transparency and guide SEC-regulated entities. Announced on Oct. 21, 2024, the priorities underscore a continued emphasis on addressing critical risk areas, with a refined focus on investment advisers, private funds, and registered investment companies. By leveraging advanced data analytics and a specialized team, the SEC aims to pinpoint registrants that pose heightened risks to investors and markets, ensuring a more effective allocation of examination resources.

The announcement notes that the Division continues directing resources to critical risk areas. The preamble to the 2025 examination priorities discusses the Division’s ongoing refinement of its risk assessment and surveillance capabilities to ensure that the registrants selected for examination align with those it believes pose a heightened risk to investors and markets. The announcement discusses the Division’s use of a centralized team of skilled quantitative analysts and financial engineers who perform data analytics to identify potential examination candidates.

The 2025 exam priorities are thematically similar to the 2024 priorities but reflect a more targeted focus on certain areas involving registered advisers. This article will expand on the following exam priorities expected to have a powerful impact on investment advisers of private funds:

• Areas of focus in investment adviser examinations, generally
• Areas of focus in examinations of investment advisers to private funds
• Areas of focus in examinations of registered investment companies
• Other risk areas impacting various market participants (including investment advisers)

Happy Anniversary to the Division of Exams

The announcement reflects on the 30 years that have elapsed since the creation of the Division of Exams. The announcement states, “Since that time, the securities markets have undergone significant transformations, evolving from brokers using fax machines and open outcry floor trading to an online, globally interconnected high-speed marketplace.”

• Impact of technology. The announcement notes that technology has transformed how people invest over the last 30 years. The internet was just entering the mainstream years 30 years ago, whereas today, some registrants employ investment strategies driven by algorithms, artificial intelligence is proliferating, and investors can trade using just a smartphone.
• Division staff. The announcement cites the increase in the number and specializations of Division Staff since the creation of the Division of Exams in 1995. In the nineties, the Division had approximately 500 staff across three programs. Today, the Division has more than 1,100 staff across five programs. In recent years, the Division has added specialized knowledge in cybersecurity, security-based swaps, crypto assets, national securities exchanges, private funds, and clearing agencies.

Exam Priority: Investment Advisers, Generally

1.Fiduciary Standard

The exam priorities announcement notes that, as a fiduciary, an investment adviser must serve the best interest of its clients and not subordinate its clients’ interests to its own. An adviser is, therefore, obligated to eliminate or make full and fair disclosure of all conflicts of interest. Concerning the fiduciary standard, the Division intends to focus on the following in its 2025 examinations:

• Investment advice provided to clients. This covers all forms of recommendations, including recommendations of specific investment products, investment strategies, and account types. The SEC intends to apply special scrutiny to an adviser’s advice to clients if it involves (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, including commercial real estate.
• Dual registrants and advisers with affiliated broker-dealers. Recurring focus areas include: (1) evaluating investment recommendations regarding certain products to determine whether they are suitable for clients’ advisory accounts; (2) reviewing disclosures to clients regarding the capacity in which recommendations are made; (3) reviewing the appropriateness of account selection practices (e.g., brokerage versus advisory), including rollovers from an existing brokerage account to an advisory account; and (4) assessing whether and how advisers mitigate and disclose conflicts of interest.
• Economic incentives of the adviser. Examiners will consider advisers’ financial conflicts of interest and the resulting impact on providing impartial advice and best execution, with a heightened focus on non-standard fee arrangements.

2.Compliance

The exam priorities announcement notes that the Division’s assessment of the effectiveness of advisers’ compliance programs is a “fundamental part of the examination process” and a perennial focus of examiners, including the following aspects of compliance programs.

• Core areas of advisers’ compliance programs. These areas may include marketing, valuation, trading, portfolio management, disclosure and filings, and custody.
• Advisers’ annual reviews of the effectiveness of their compliance programs. The announcement notes that the annual review is a “critical element” for identifying and surveilling conflicts of interest, including those stemming from the advisers’ business and compensation arrangements, arbitration clauses, and/or affiliations with certain parties and transactions.
• Focus on specific scenarios. The announcement notes that the Division will have an elevated interest in certain fact patterns, such as (1) fiduciary obligations of advisers that outsource investment selection and management; (2) alternative sources of revenue or benefits advisers receive, such as selling non-securities-based products to clients; and (3) 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.
• Focus areas driven by an adviser’s practices or products. The announcement provides examples of adviser practices or products that may attract attention from the Division, such as (1) If clients invest in illiquid or difficult-to-value assets, such as commercial real estate, examiners may display a greater interest in valuation; (2) If advisers integrate artificial intelligence into advisory operations, including portfolio management, trading, marketing, and compliance, examiners may devote more time and effort to the review of compliance policies and procedures and investor disclosures related to those areas; and (3) If an adviser engages a significant number of independent contractors working from geographically dispersed locations, examiners may hone in on supervision and oversight practices. If advisers change their business models or are new to advising particular types of assets, clients, or services, this may inspire examiners to focus on related compliance practices.

Exam Priority: Investment Advisers to Private Funds

With respect to advisers to private funds, the announcement imparted the following 2025 examination priorities:

• Whether disclosures are consistent with actual practices. This includes whether an adviser satisfies its fiduciary obligations during periods of market volatility and whether a private fund is exposed to interest rate fluctuations. The announcement provides the following examples of investment strategies that may be sensitive to market volatility and/or interest rate changes: (1) commercial real estate; (2) illiquid assets; and (3) private credit. The announcement also relays that the Division may devote greater attention to advisers to private funds that are experiencing poor performance and significant withdrawals and/or hold more leverage or difficult-to-value assets.
• Fees and expenses. This includes fees and expenses calculated at the fund and investment levels. Staff will review the valuation of illiquid assets and their related impact on the calculation of fees and expenses, the calculation of post-commitment period management fees, the offsetting of such fees and expenses, and the adequacy of disclosures.
• Conflicts of interest. The Division will evaluate the sufficiency of disclosure of conflicts of interest and risks and the adequacy of policies and procedures. Potential sources of conflicts of interest include: (1) use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between fund(s) and/or others; (2) investments held by multiple funds; and (3) use of affiliated service providers.
• Compliance with recently adopted SEC rules. This includes inspection of adviser compliance with amendments to Form PF and the updated marketing rule to assess whether advisers have designed and implemented adequate policies and procedures.

Exam Priority: Registered Investment Companies

The announcement notes the importance of registered investment companies (RICs), including mutual funds and ETFs, to retail investors, especially those saving for retirement. The SEC will incorporate the following examination priorities in 2025 for this subpopulation of registrants:

• RIC compliance programs, disclosures, and governance practices. Specific focal points cited in the announcement include: (1) fund fees and expenses, and any associated waivers and reimbursements; (2) oversight of service providers (both affiliated and third-party); (3) portfolio management practices and disclosures for consistency with claims about investment strategies or approaches and with fund filings and marketing materials; and (4) issues associated with market volatility.
• Developing areas of interest. This includes RICs with exposure to commercial real estate and compliance with new and amended rules.

Additional Examination Priorities

The Division of Exams intends to continue to focus on the following exam priorities in 2025 that impact the entire population of registrants:

• Cybersecurity
  • Registrant practices to prevent interruptions to mission-critical services and to protect investor information, records, and assets, including registrants’ procedures and practices to assess whether they are reasonably managing information security and operational risks.
  • Safeguarding customer records and information, including firms’ policies and procedures, governance practices, data loss prevention, access controls, account management, and responses to cyber-related incidents, including ransomware attacks. The Division will also consider safeguards for alternative trading systems intended to protect confidential trading information.
  • Cybersecurity risks associated with third-party products, subcontractors, services, and any information technology (IT) resources used by the business without the IT department’s approval, knowledge, oversight, or non-supported infrastructure.
• Regulation S-ID and S-P²
  • The Division will assess registrant compliance with Regulations S-ID and S-P, as applicable. Special attention will be paid to policies and procedures relevant to safeguarding customer records and information at firms providing electronic investment services, including:
    • Monitoring for customer account takeovers and fraudulent transfers.
    • Practices to prevent account intrusions and protect customer records and information, including personally identifiable information.
    • Firm training on identity theft prevention.
    • Efforts to address operational risk, including technology risks, as operational failures may impact a firm’s ability to safeguard customer records and information.
  • In preparation for the compliance date of the SEC’s amendments to Regulation S-P, the Division will engage with firms during examinations about their progress in preparing to establish incident response programs reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information.
• Shortening of the settlement cycle
  • The Division will inspect broker-dealer compliance with new and amended rules under the Exchange Act, which reduced the standard settlement cycle for most securities to the day after trade date (T+1).
  • The Division will consider advisers’ compliance with amended books and records requirements associated with T+1.
  • Examiners will evaluate registrant technology changes associated with shortening the settlement cycle.
• Emerging financial technologies
  • Focus areas include automated investment tools, Artificial Intelligence (AI), trading algorithms or platforms, digital investment advisory services, recommendations, and related tools and methods.
  • Concerning AI, the Division will examine registrant representations regarding their AI capabilities or AI use versus actual practices.
• Crypto assets
  • Conducting exams of registrants offering crypto asset-related services, focusing on the offer, sale, recommendation, advice, trading, and other activities involving crypto assets that are offered and sold as securities or related products, such as spot bitcoin or ether exchange-traded products.
  • The Division will look at registrant practices to address the technological risks associated with the use of blockchain and distributed ledger technology, including risks pertaining to the security of crypto assets.
• Regulation Systems Compliance and Integrity (SCI)
  • Regulation SCI entities include national securities exchanges, registered and certain exempt clearing agencies, FINRA, MSRB, plan processors, and alternative trading systems that meet certain volume thresholds. The Division will review:
    • The policies and procedures regarding the operational, business continuity planning, and testing practices of SCI entities.
    • The effectiveness of incident response plans.
    • The policies and procedures pertaining to the security operations management tools employed by SCI entities.
• Anti-Money Laundering
  • The Bank Secrecy Act (BSA) requires certain financial institutions, including broker-dealers and certain RICs, to establish anti-money laundering (AML) programs customized to address entity-level risks. The Division will continue to focus on registrants’ AML programs.
  • The Division will also review whether broker-dealers and advisers are monitoring the Department of Treasury’s Office of Foreign Assets Control sanctions and ensuring compliance with such sanctions.

  Conclusion

  The SEC is making a concerted effort to increase the transparency of its examination programs. The publication of exam priorities equips registrants with information that can be used to achieve compliance with securities laws. Disseminating the exam priorities increases the reach of the SEC’s exam program by enabling registrants not selected for examination to access the SEC’s priorities, focus areas, and concerns and incorporate these insights into their compliance programs.

¹All information cited in this article is sourced from 2025 Examination Priorities published by the Securities and Exchange Commission’s Division of Examinations.

²Regulation S-ID and Regulation S-P protect consumer financial information and identities. S-ID requires firms with covered accounts to create identity theft prevention programs, while S-P mandates that broker-dealers and investment advisers establish written policies to safeguard customer records.