Division of Examinations Announces 2025 Examination Priorities
Today, the SEC’s Division of Examinations (“Exams”) announced their 2025 examination priorities for investment advisers. These are the areas that Exams has identified as presenting potentially higher risks to investors and to the broader capital markets, and advisers should ensure that their policies, procedures, and practices address these risks as applicable to the adviser’s business activities.
Adherence to Fiduciary Standards of Conduct
Whether an adviser’s advice to clients regarding products, investment strategies, and account types is consistent with the adviser’s fiduciary duty, particularly with regard to (1) high-cost products; (2) unconventional investments; (3) investments that are illiquid and/or difficult to value; and (4) assets that are sensitive to changes in interest rates and other market conditions, including commercial real estate.
Dually-registered advisers and advisers with affiliated broker-dealers, including (1) suitability of recommendations to clients; (2) disclosures to clients regarding the capacity in which a recommendation is made; (3) suitability of account type, including rollovers of clients from an existing brokerage account to an advisory account; and (4) disclosure and mitigation of conflicts of interest.
Handling of financial conflicts of interest, including conflicts associated with non-standard fee arrangements.
Effectiveness of Advisers’ Compliance Programs
Core areas of an adviser’s compliance program, including, as applicable, with respect to marketing, valuation, trading, portfolio management, disclosures and filings, and custody.
The adviser’s annual compliance program review, including with respect to conflicts of interest arising from the adviser’s business and compensation arrangements, arbitration clauses, and/or affiliated parties and transactions.
Written policies and procedures, including with respect to (1) outsourced investment selection and management; (2) alternative sources of revenue or other benefits, such as selling non-securities-based products; and (3) fee calculations and disclosure of fee-related conflicts, such as when certain clients have negotiated lower fees than those paid by other clients for similar services.
Other areas as suggested by an adviser’s practices or products, including (1) valuation practices for investments that are illiquid and/or difficult to value, such as commercial real estate; (2) policies, procedures, and disclosures related to an adviser’s use of artificial intelligence; (3) supervision and oversight of independent contractors; and (4) compliance practices when an adviser changes its business model or begins to provide advice regarding new types of assets, clients, or services.
Examinations of Advisers to Private Funds
Practices and disclosures in times of market volatility and where an adviser is sensitive to changes in interest rates, including for advisers whose strategies involve investing in commercial real estate, private credit, and other illiquid assets. The examination priorities also note that Exams may focus in particular on advisers that have been experiencing poor performance, that have had significant redemptions, and/or that are holding more leverage or difficult-to-value investments.
Calculation and allocation of fees and expenses at both the fund level and the investment level, including, as applicable, the impact of valuing illiquid assets, calculation of post-commitment period management fees, practices for offsetting fees and expenses, and adequacy of disclosures.
Policies, procedures, and disclosures to address relevant conflicts of interest and risks, including (1) use of debt, fund-level lines of credit, allocation of investments, adviser-led secondary transactions, and cross trades; (2) investments held by multiple funds; and (3) use of affiliated service providers.
Compliance with recently-adopted rules, including the amended Marketing Rule and amendments to Form PF.
Never Examined Advisers, Recently Registered Advisers, and Advisers Not Recently Examined
Exams will continue to focus on newly registered advisers and other advisers that have not undergone a recent examination.
These priorities are consistent with the areas Exams has focused on during the past several years, including the new Marketing Rule, amendments to Form PF, and use of artificial intelligence, all of which have been the subject of recent scrutiny. The priorities also reinforce that notwithstanding the demise of the Private Fund Adviser Rules, Exams remains focused on advisers to private funds, and particularly advisers that invest in the private markets, with several of the priorities calling out illiquid assets, commercial real estate, and private credit specifically.