EXAMS Publishes 2025 Priorities

Authors: Michael L. Sherman, Michael Gershberg, Nihal Patel, Joanna Rosenberg

On October 21, 2024, the Division of Examinations ("EXAMS") of the Securities and Exchange Commission ("SEC") published its examination priorities for 2025 (the "2025 Priorities").[1] EXAMS' examination priorities are released annually and are designed to preview key areas where EXAMS intends to focus its resources. Similar to the examination priorities for 2024, EXAMS has aligned publication of the 2025 Priorities with the start of the SEC's fiscal year as opposed to the start of the calendar year. The 2025 Priorities significantly overlap with the 2024 examination priorities, and include focus areas for investment advisers, broker-dealers and other SEC registrants. This memorandum focuses on the examination priorities applicable to investment advisers and broker-dealers.

Similar to prior years, certain of the priority topics for investment adviser exams follow recent rulemaking by the SEC under the Investment Advisers Act of 1940, as amended ("Advisers Act"), including Form PF amendments[2] and the marketing rule.[3] The 2025 Priorities also continue prior years' focus on registered investment advisers to private funds, as described in more detail below, and on the use of "complex" and illiquid products by investment advisers and broker-dealers. Other examination priorities include investment adviser fiduciary duty, effectiveness of compliance policies and procedures, information security and operational resiliency, emerging technologies and crypto-assets, and anti-money laundering programs.

Investment Advisers and Advisers to Private Funds

Fiduciary Duty. Examinations of investment advisers will review adherence to the Advisers Act fiduciary duty, with particular focus on three core areas:

• Investment advice with respect to high cost, illiquid and unconventional products, and assets sensitive to higher interest rates or changing market conditions, including commercial real estate.
• With respect to dual registrants and advisers with affiliated broker-dealers, suitability assessments, account selection practices, and conflicts disclosures.
• The impact of advisers' financial conflicts of interest on providing impartial advice and best execution, with consideration given for non-standard fee arrangements.

Compliance Programs. EXAMS will prioritize review of core areas of advisers' compliance programs such as marketing, valuation, trading, portfolio management, disclosure and filings, and custody. In addition to these core focus areas, examiners will review:

• Advisers' policies and procedures regarding fiduciary obligations of advisers that outsource investment selection and management
• Alternative sources of revenue or benefits advisers receive (e.g., 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.
• Compliance practices when advisers change their business models or are new to advising particular types of assets, clients, or services.

EXAMS' review of an adviser's compliance program may focus on or go into greater depth depending on its practices or products. As in previous years, EXAMS will prioritize advisers that have never been examined, including recently registered firms, and those that have not been examined for a number of years.

Investment Advisers to Private Funds. Exams of private fund managers will prioritize the following areas, many of which align with issues the SEC sought to address via the now-vacated private fund adviser rules:[4]

• Whether disclosures are consistent with actual practices.
• If an adviser met its fiduciary obligations in times of market volatility and whether a private fund is exposed to interest rate fluctuations, particularly with respect to illiquid assets, including commercial real estate private credit.
• The accuracy of calculations and allocations of private fund fees and expenses (both fund-level and investment-level), with particular focus on valuation of illiquid assets, calculation of post commitment period management fees, and offsetting of such fees and expenses.
• Disclosure of risks and conflicts, and adequacy of policies and procedures, relating to the use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, investments held by multiple funds, and use of affiliated service providers.
• Compliance with recently adopted SEC rules, including amendments to Form PF and the marketing rule.

Broker-Dealers

EXAMS highlighted three core priority areas for broker-dealer examinations: Reg BI and Form CRS; financial responsibility rules (capital and custody); and trading practices and services.

Regulation Best Interest & Form CRS. In reviewing whether broker-dealer recommendations are in customers' best interest, EXAMS will continue an ongoing trend of the SEC and FINRA and focus on recommendations with respect to complex, illiquid and high risk products such as highly leveraged or inverse products, crypto assets, structured products, alternative investments, products with complex fee structures or return calculations, products based on exotic benchmarks, and products that represent a growth area for retail investment.

Examinations may also focus on recommendations using automated tools or other digital engagement practices, recommendations related to opening different account types (such as option, margin and self-directed IRA accounts), and recommendations made to older investors and those saving for retirement or college.

Examinations of broker-dealers are also expected to prioritize:

• conflicts of interest (disclosures, identification and mitigation);
• processes for reviewing reasonably available alternatives; and
• factors considered in light of the investor's investment profile, such as investment goals and account characteristics.

As also cited above with respect to investment advisers, EXAMS also indicated it will look at dual registrants, particularly as to account allocation and selection practices (e.g., allocation of investments where an investor has more than one type of account and whether an account should be brokerage versus advisory), and supervision of sales practices at branch office locations.

EXAMS will review the content of broker-dealers' Form CRS and whether broker-dealers have met their filing and delivery obligations.

Risk and Accounting. EXAMS indicated that it will continue to focus on net capital and 15c3-3 (customer protection/custody) in its examinations. In particular, the 2025 Priorities cite accounting practices relating to recent rule changes, operational resilience programs, supervision of third-party vendors; and risk controls (for addressing credit, market, liquidity risk).

Trading-Related Practices and Services. As with Reg. BI, EXAMS said it will focus on retail customer trading matters, including marketing of bank sweep programs, fully-paid lending programs and mobile apps and trading platforms. EXAMS also will look at the marking of retail-instructed orders and on pricing and valuation of illiquid instruments such as VRDOs, municipals and non-traded REITS.

In addition, EXAMS said it would focus on trading in pre-IPO companies and other sales of private company shares in secondary markets.

No exam priority list would be complete without a Reg. SHO reference: EXAMS said it would look at whether broker-dealers are appropriately relying on the bona fide market making exception.

Risk Areas Impacting Various Market Participants

The 2025 Priorities list the following additional areas as priorities for examinations of investment advisers and broker-dealers, among other market participants.

• Operational Resiliency. EXAMS will review firms' practices designed to prevent interruptions to critical services and to protect investor information, records, and assets. Reviews will focus on firms' policies and procedures for overseeing third-party vendors and resources, governance practices, responses to cyber-related incidents.
• Data Privacy. EXAMS will also stress compliance with Reg S-ID and Reg S-P (including firms' progress in preparing to establish incident response programs as required by the recently adopted amendments to Regulation S-P).
• T+1 Settlement (15c6-1 & 15c6-2). EXAMS said it will look at whether broker-dealers are complying with the shortened settlement cycle under Rule 15c6-1 (T+1) as well as broker-dealer and investment adviser compliance with requirements under 15c6-1 and 15c6-2 relating to allocation, confirmation and affirmation requirements.
• Emerging Financial Technology. EXAMS will focus on firms' use of certain services, such as automated investment tools, artificial intelligence ("AI"), and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative sources of data. In particular, EXAMS will examine firms that employ certain digital engagement practices, such as digital investment advisory services, recommendations, and related tools and methods, reviewing whether:
  • Representations (including representations regarding AI capabilities and AI use) are fair and accurate.
  • Operations and controls in place are consistent with disclosures made to investors.
  • Algorithms produce advice or recommendations consistent with investors' investment profiles or stated strategies.
  • Controls are in place to confirm that advice or recommendations resulting from digital engagement practices are consistent with regulatory obligations to investors, including older investors.
  • Firms have implemented adequate policies and procedures to monitor and/or supervise their use of AI, including for tasks related to fraud prevention and detection, back-office operations, anti-money laundering, and trading functions.
  • Firms have integrated regulatory technology to automate internal processes and optimize efficiencies.

In addition, EXAMS will review how firms protect against loss or misuse of client records and information that may occur from the use of third-party AI models and tools.

• Crypto Assets. It should come as no surprise that EXAMS remains skeptical of digital assets. Examinations will focus on the offer, sale, or recommendation of, advice regarding and trading in crypto or crypto-related assets. EXAMS will assess whether firms (1) met and followed their respective standards of conduct; and (2) routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices, including custody practices, when applicable. EXAMS will also consider whether any technological risks associated with the use of blockchain and distributed ledger technology have been addressed through compliance policies and procedures and accurate disclosures.
• Anti-Money Laundering. The 2025 Priorities state that EXAMS will focus on anti-money laundering programs to assess whether relevant financial institutions, are (1) appropriately tailoring their anti-money laundering programs to their business and associated risks; (2) conducting independent testing of their programs; (3) establishing adequate customer identification programs; and (4) fulfilling their SAR filing obligations. Examinations will also review broker-dealers' procedures for monitoring and complying with Office of Foreign Assets Control (OFAC) sanctions. We note that beginning in 2026, most investment advisers will also become subject to anti-money laundering compliance requirements.[5] The SEC has been delegated authority to enforce these requirements, as it currently does for broker-dealers.

This communication is for general information only. It is not intended, nor should it be relied upon, as legal advice. In some jurisdictions, this may be considered attorney advertising. Please refer to the firm's data policy page for further information.