This winter, Latham’s Investment Funds Practice provided guidance on the Securities and Exchange Commission’s (SEC) 2025 examination priorities for private fund advisers in the latest installment of the Private Funds Breakfast Series. The quarterly series is designed to unite senior members of leading private capital firms and financial sponsors for networking and market-focused insights.
The discussion, led by partners Aaron Gilbride, Brian Kowalski, and Ivana Kovacevic Rouse, centered on the SEC’s 2025 exam priorities (exam priorities), highlighting several critical areas of focus for private fund advisers, including compliance programs, fiduciary obligations, fees and expenses, and the use of emerging financial technologies, such as artificial intelligence. It remains to be seen whether any of these exam priorities will shift under the new administration.
Key Takeaways
- Heightened Focus on Compliance Programs: The SEC Exam Staff is set to rigorously evaluate the adequacy and effectiveness of compliance policies, with a keen emphasis on the annual review process to ensure that policies are robustly designed to prevent any violations.
- Fiduciary Duty Under Close Scrutiny: The Exam Priorities state that advisers are required to strictly adhere to fiduciary standards, ensuring their interests do not supersede those of their clients. We expect SEC Exam Staff to focus on full and transparent disclosure of conflicts of interest to ensure the adviser is rendering disinterested advice, particularly during times of market volatility.
- Thorough Examination of Fees and Expenses: As in the past, the SEC will scrutinize the accuracy of fee calculations and the clarity of fee-related disclosures. In upcoming exams, advisers should be ready to justify the appropriateness of fee allocations and address any financial conflicts that could affect impartial advice.
- Integration of Emerging Financial Technologies: SEC Exam Staff will closely monitor the use of artificial intelligence and other technologies to ensure that disclosures are both fair and accurate. Exam Staff will assess whether advisers have taken steps to ensure their operations and controls are in alignment with disclosed strategies and regulatory obligations to safeguard client information.
- Emphasis on Information Security and Operational Resiliency: Cybersecurity remains a critical priority, with the SEC examining measures to protect investor information and effectively respond to cyber incidents. Compliance with Regulation S-P amendments is required by the specified deadlines.
- Focus on Commercial Real Estate: Repeated references to commercial real estate exposure during examinations, specifically highlighting their potential for sensitivity to higher interest rates and changing market conditions as well as the liquidity and valuation considerations that may be associated with such investments.
Previous installments in the Texas Private Funds Breakfast series include the SEC’s updated rules for private fund advisers and financing options and considerations for funds and portfolio companies.
