On November 21, 2024, the Securities and Exchange Commission (SEC) released its examination priorities for 2025. The release offers critical insights into the areas that the SEC will focus on. The following is a summary of the release’s investment adviser sections, which segment investment adviser reviews into three sections: Investment Advisers, Dually Registered Advisers and Broker-Dealers, and Private Fund Advisers.
Investment Advisers
The SEC will continue to focus on whether that advice satisfies the fiduciary obligations owed to their clients. Specifically, the SEC will focus on recommendations related 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, including commercial real estate.
Dually RIA/BDs or RIAs with affiliated BDs
Focus areas include (1) client suitability; (2) disclosures regarding the capacity in which recommendations are made; (3) Appropriateness of account selection practices (e.g., brokerage versus advisory), rollovers from an existing brokerage account to an advisory account; and (4) assessing the adequacy of disclosures regarding conflicts of interest.
The SEC will review financial conflicts of interest when financial institutions provide advice and best execution, including reviewing non-standard fee arrangements. Effectiveness of advisers’ compliance programs focusing on core areas, including marketing, valuation, trading, portfolio management, disclosure and filings, and custody.
The SEC will analyze annual compliance reviews and monitor conflicts of interest stemming from business and compensation arrangements, arbitration clauses, and/or affiliated parties and transactions. Focusing on: (1) outsourcing investment selection and management; (2) alternative sources of revenue or benefits advisers receive (i.e., selling non-securities-based products); and (3) fee calculations and disclosure of fee-related conflicts (i.e., negotiated lower fees when similar services are provided to other higher paying clients).
The SEC will also review clients invested in illiquid or difficult-to-value assets, such as commercial real estate, with an emphasis on valuation. When artificial intelligence is used, the SEC will review the applicable compliance policies and procedures as well as disclosures. Focusing on supervision and oversight when RIAs use numerous independent contractors working from geographically dispersed locations. Focus on compliance practices when advisers change their business models or offer a new type of asset, client, or service.
Private Fund Examinations
Private fund reviews will focus on disclosures vs. actual practices, including market volatility and whether the private fund is exposed to interest rate fluctuations with scrutiny on commercial real estate, illiquid assets, and private credit. The SEC has indicated that poor performance, significant withdrawals, and/or holding more leverage or difficult-to-value assets are flagged for review.
Other areas of interest include the accuracy of calculations and allocations of private fund fees and expenses (both fund-level and investment-level) with attention to the accuracy of fee calculations for illiquid assets, calculation of post-commitment period management fees, offsetting of such fees and expenses, and the adequacy of disclosures.
The SEC will review disclosure of conflicts of interests and risks and adequacy of policies and procedures, including (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.
The SEC will review compliance with recently adopted SEC rules, including amendments to Form PF and the Marketing Rule, never-examined advisers, recently registered advisers, and advisers not recently examined.
As the financial services industry landscape continues to evolve, so too does the SEC's approach to oversight. The 2025 examination priorities reflect their commitment to addressing both traditional and emerging risks, ensuring that investors are protected and that the markets remain fair and orderly. Registrants are encouraged to take this opportunity to evaluate and enhance their compliance practices.
A third-party assessment is sometimes the best way to evaluate the program you have and any weaknesses that need to be shored up.
