2025 Examination Priorities Published by SEC Division of Exams

October 22, 2024

What Happened?

On October 21, 2024, the SEC’s Division of Examinations (“EXAMS”) published its 2025 Examination Priorities. The SEC’s fiscal year runs from October 1^st to September 30^th, and this fiscal year marks the 30^th anniversary of the creation of the Division of Examinations, originally established as the Office of Compliance Inspections and Examinations. These annual priorities highlight practices and products viewed by EXAMS as presenting heightened risks to investors and the markets overall. As always, EXAMS uses this annual list of priorities to encourage firms to evaluate their compliance programs in these focus areas and make necessary changes. If you have been following the focus areas highlighted in prior years, you will see some familiar topics. One new focus area, commercial real estate, and other investments sensitive to interest rates, was noted in multiple places for advisers, private fund managers, and registered investment companies.

Firms Prioritized for Examination

EXAMS continues to view the following types of firms as higher priority for selection:

• Never Examined Advisers
• Recently Registered Advisers
• Advisers Not Recently Examined

Risk Areas for All Market Participants

• Cybersecurity: Reviewing efforts to prevent operational risks and protect investor information, records, and assets
• Reg S-P and Reg S-ID: Assessing compliance with Reg S-P and Reg S-ID as applicable, especially the upcoming compliance date for the amendments to Reg S-P, which require advisers to develop, implement, and maintain an incident response program, a vendor management program, and more. (Click here to read our full flash report on Amended Regulation S-P).
• Shortened Settlement Cycle (T+1): Evaluating compliance with recordkeeping, necessary operational changes, and any impacts to transactions involving the allocation, confirmation, or affirmation processes.

Fiduciary Duty and the Duties of Loyalty and Care

Attention will be paid to investment advice provided to clients regarding products, strategies, and account types and whether that advice satisfies the fiduciary obligations owed to clients. Especially:

• High-cost products;
• Unconventional instruments;
• Illiquid and difficult-to-value assets; and
• Assets sensitive to higher interest rates or changing market conditions, including commercial real estate.

EXAMS will also look at the impact of financial conflicts of interest on providing impartial advice and best execution, with non-standard fee arrangements capturing additional attention.

Policies and Procedures

Implementation of adequate policies and procedures is foundational to any compliance program. Policy and procedure implementation challenges identified by EXAMS include:

• Fiduciary obligations of advisers that outsource investment selection and management;
• Alternative sources of revenue or benefits to advisers, such as selling non-securities based products to clients;
• 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.

EXAMS gave the following examples of additional focus areas:

• Difficult-to-Value Assets: If clients invest in illiquid or difficult-to-value assets, such as commercial real estate, examinations may focus on valuation practices.
• Artificial Intelligence: If advisers integrate artificial intelligence (AI) into advisory operations, including portfolio management, trading, marketing, and compliance, an examination may look in-depth at compliance policies and procedures as well as disclosures to investors related to these areas.
• Outsourcing: If an adviser utilizes a large number of independent contractors working from geographically dispersed locations, examinations may focus on supervision and oversight practices.
• Change in Business Models: If advisers change their business models or are new to advising particular types of assets, clients, or services, an examination may also focus on compliance practices.

Private Fund Examinations

Advisers to private funds remain a significant portion of registered investment advisers. EXAMS named the following specific topics concerning private funds:

• Sensitive Investment Strategies: Investment strategies that may be sensitive to market volatility and/or interest rate changes will be assessed, including commercial real estate, illiquid assets, and private credit. EXAMS may also focus on 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: EXAMS will focus on the adequacy of disclosure and on accurate calculations and allocations of private fund fees and expenses (both fund-level and investment-level), especially where it pertains to the valuation of illiquid assets, calculation of post-commitment period management fees, and the offsetting of such fees and expenses.
• Disclosures to Investors: Conflicts of interests and risks and the adequacy of policies and procedures will be reviewed. Areas called out by EXAMS:
  • Use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between fund(s) and/or others;
  • Investments held by multiple funds; and
  • Use of affiliated service providers.
• Enhanced Form PF and The Marketing Rule: Compliance with recently adopted SEC rules was noted and appears to be the path EXAMS will take to review private fund managers’ practices now that the Private Fund Reforms have been defeated in court.

Registered Investment Companies (including Mutual Funds and ETFs)

Examinations of Registered Investment Companies (RICs) will generally review their compliance programs, disclosures, and governance practices. Focus areas may include review of:

• Fund fees and expenses, and any associated waivers and reimbursements;
• Oversight of service providers (both affiliated and third-party);
• 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.

EXAMS will also continue to monitor certain developing areas of interest, such as RICs with exposure to commercial real estate and compliance with new and amended rules.

Emerging Financial Technologies

While crypto and fintech have been referenced before, artificial intelligence and representations of a firm’s use of artificial intelligence will be scrutinized for accuracy.

Anti-Money Laundering (AML)

With FinCEN’s final rule to promote AML programs and countering the financing of terrorism (CFT) and a joint proposal with the SEC to apply Customer Identification Program (CIP) requirements to advisers, it is no surprise that AML is still a priority for EXAMS. Programs will be reviewed for adequate policies and procedures, internal controls and ongoing monitoring in addition to any applicable new requirements of programs to cover AML/CFT or CIP.

What does this mean for me?

Fairview provides comprehensive and ongoing compliance administration services for registered advisers, including complete SEC examination support. Our Cyber Solutions practice specializes in the creation and testing of meaningful cybersecurity and vendor due diligence programs for financial industry businesses in compliance with SEC regulations, including the finalized amendments to Regulation S-P.

Contact us today if you have questions concerning the examination process, 2025 Examination priorities, or if you’re interested in support for your firm.