With the dawn of a new fiscal year, the U.S. Securities and Exchange Commission's (SEC) Division of Examinations has unveiled its 2025 examination priorities. This annual roadmap serves as both a warning and a guide for firms navigating the ever-evolving regulatory landscape. The 2025 priorities not only highlight long-standing risk areas like fiduciary duty and cybersecurity, but also shine a spotlight on cutting-edge issues such as artificial intelligence and the growing complexities surrounding crypto assets.
At Anderson P.C., we specialize in helping firms navigate the complex world of securities enforcement and regulatory compliance. In this article, we dive deep into the SEC's 2025 examination priorities, offering not just a breakdown of what to expect, but also practical advice on how to prepare.
Preview: Key Takeaways from the SEC's 2025 Examination Priorities
This year's agenda is marked by a blend of traditional regulatory concerns and a forward-looking focus on technological disruption. The SEC will intensify its examination of:
- Fiduciary Duty and Standards of Conduct: Investment advisers must ensure that their advice and practices serve the best interests of their clients, with a particular focus on high-cost products, unconventional instruments, and complex fee structures.
- Cybersecurity and Operational Resiliency: As cyberattacks and operational disruptions continue to escalate, the SEC will scrutinize firms' cybersecurity measures, emphasizing data protection, governance, and incident response protocols.
- Artificial Intelligence: The use of AI in investment strategies is on the rise, and the SEC is watching closely. Firms must ensure that their AI tools are properly supervised and that they comply with fiduciary obligations and transparency requirements.
- Crypto Assets: With the ongoing evolution of digital assets, the SEC will focus on how firms handle the offer, sale, and trading of crypto-related products, ensuring compliance with securities laws and mitigating investor risks.
In this comprehensive guide, we provide actionable insights on these priorities and offer a roadmap to help firms align their compliance efforts with the SEC's heightened expectations.
Investment Advisers: Strengthening Fiduciary Standards and Compliance
Investment advisers are once again at the center of the SEC's examination efforts. The Division's priorities emphasize the need for firms to adhere to their fiduciary duty, ensuring that all investment advice and actions are in the best interests of clients. This includes:
- High-Cost and Illiquid Products: The SEC will focus on investment recommendations involving high-cost products, illiquid assets, and those sensitive to changing market conditions. Commercial real estate, private credit, and other difficult-to-value assets are likely to come under scrutiny.
- Dual Registrants: Firms that are registered as both advisers and broker-dealers will be examined for conflicts of interest, particularly regarding account type recommendations (e.g., advisory vs. brokerage) and rollover practices.
- Non-Standard Fee Arrangements: Advisers offering non-traditional fee structures must ensure transparency and proper disclosure, particularly where conflicts of interest may arise.
Compliance program effectiveness is another focal point. Firms must review their policies and procedures, particularly in areas like valuation, portfolio management, and marketing, to ensure they are robust and aligned with the SEC's expectations under Rule 206(4)-7 of the Investment Advisers Act of 1940.
Actionable Advice for Advisers:
- Conduct a thorough review of your compliance program, focusing on conflicts of interest and fee transparency.
- Ensure that AI tools and other advanced technologies used in advisory functions are fully integrated into your compliance protocols and are accompanied by clear disclosures to clients.
Broker-Dealers: Maintaining Best Interest and Financial Integrity
Broker-dealers will face continued scrutiny under Regulation Best Interest (Reg BI). The SEC's focus will be on how firms make investment recommendations, ensuring that the advice provided aligns with the clients' best interests without prioritizing the firm's financial gain. Expect examinations to target:
- High-Risk Products: The SEC will pay close attention to the sale of complex, high-risk products such as leveraged or inverse exchange-traded funds (ETFs), crypto assets, and other structured products.
- Form CRS: Broker-dealers must ensure that their relationship summaries (Form CRS) are accurate, comprehensive, and up-to-date, particularly concerning fees, services, and conflicts of interest.
Additionally, broker-dealers' compliance with financial responsibility rules, including liquidity management and risk controls, will be reviewed to ensure firms can withstand market stress and protect investor assets.
Actionable Advice for Broker-Dealers:
- Revisit your Reg BI compliance procedures, with a focus on conflict disclosure and the suitability of recommended products.
- Strengthen internal controls around financial responsibility rules, especially those related to liquidity risk management.
Private Funds: Focus on Transparency and Valuation
Private funds remain a key area of interest for the SEC, particularly regarding disclosure accuracy and fee structures. Firms managing private funds must ensure that their disclosures align with actual practices, especially during periods of market volatility. Specific areas of focus include:
- Fee and Expense Calculations: Examinations will assess whether private fund advisers accurately calculate and allocate fees and expenses, particularly in relation to illiquid or hard-to-value assets.
- Leverage and Risk Management: Private funds employing high leverage or investing in volatile asset classes, such as commercial real estate, will be examined for how they manage these risks and disclose them to investors.
Actionable Advice for Private Fund Managers:
- Ensure that fee and expense disclosures are clear, consistent, and reflective of actual practices.
- Review valuation processes for illiquid assets, and be prepared to justify them during SEC examinations.
Emerging Risk Areas: Cybersecurity, AI, and Crypto Assets
As technology reshapes the financial industry, the SEC is placing new emphasis on cybersecurity, AI, and crypto assets. These areas pose unique challenges for firms, and the SEC is committed to ensuring that registrants are adequately prepared.
Cybersecurity
Operational resiliency and cybersecurity remain top priorities as firms face increasingly sophisticated cyberattacks. The SEC will review firms' incident response plans, data protection protocols, and the security of third-party service providers.
Artificial Intelligence
The use of AI in investment strategies presents both opportunities and risks. The SEC will evaluate how firms deploy AI tools, ensuring that they comply with regulatory standards, particularly in areas of client transparency and risk management.
Crypto Assets
With the rapid growth of crypto assets, the SEC will continue to examine how firms handle the offer, sale, and custody of digital assets. Firms must ensure that they are meeting their regulatory obligations and addressing the risks associated with these highly volatile assets.
Actionable Advice for Firms Using Emerging Technologies:
- Review cybersecurity protocols, focusing on access control, third-party oversight, and incident response capabilities.
- Ensure AI tools are fully compliant with regulatory standards, and provide clear disclosures to clients about their use and potential risks.
- For firms engaged with crypto assets, ensure robust compliance practices are in place for custody, valuation, and risk disclosures.
Conclusion: Navigating the SEC's 2025 Agenda with Confidence
The SEC's 2025 examination priorities reflect the complexity and rapid evolution of today's financial markets. Firms must remain vigilant, continuously assessing and updating their compliance programs to address both perennial risks and emerging challenges. At Anderson P.C., we are dedicated to helping firms navigate these regulatory waters with confidence, ensuring compliance while staying ahead of the curve.
As we move into FY 2025, it's essential for firms to proactively engage with these examination priorities, building stronger, more resilient compliance programs that can withstand regulatory scrutiny. Reach out to us at Anderson P.C. for tailored guidance and support in meeting the SEC's heightened expectations.
For more insights on regulatory compliance, cybersecurity, and navigating the SEC's evolving priorities, contact Anderson P.C. today. Let us help you safeguard your firm's future and thrive in a complex regulatory environment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.