Publications

On October 21, 2024, the Securities and Exchange Commission’s (the “SEC”) Division of Examinations (the “Division”) published its examination priorities for 2025. The published priorities inform SEC registrants, investors, and other industry participants of the practices, products, and services the Division believes pose unique or emerging risks to investors and U.S. capital markets and therefore will be a focus area of examinations for the upcoming year. Notably, the Division published the examination priorities prior to the election of President Donald Trump in November 2024, and his announcement of key administration nominees, including SEC Chair nominee Paul Atkins and US Treasury Department Secretary nominee Scott Bessent. In this piece, we summarize the Division’s identified areas of focus with respect to its examinations of SEC registered investment advisers (“RIAs”) and discuss how the new administration under President Trump may impact some of these stated priorities. The complete description of the Division’s 2025 priorities can be found here.

RIA Examinations Generally

As has been the case in prior examination priorities, the Division emphasized the importance of an RIA adhering to the standard of conduct for a fiduciary. In this regard, an RIA must at all times act in the best interests of its clients, not place its own interests ahead of the interests of its clients, and eliminate or make full and fair disclosure of all conflicts of interest which may cause the RIA, regardless of intentionality, to provide biased advice. In evaluating an RIA’s compliance with its fiduciary duties, the Division will continue to focus on:

1. Advice provided to clients focusing on certain investment strategies, including recommendations and advice related to (1) high-cost products; (2) unconventional instruments; (3) illiquid and hard-to-value assets; and (4) assets sensitive to rising interest rates or fluctuating market conditions, including commercial real estate.
2. Dual registrants and RIAs with affiliated broker-dealers, with a specific focus on (1) reviewing investment advice and recommendations to determine whether they are suitable for client accounts; (2) reviewing disclosures made to clients regarding the capacity in which recommendations are being made; (3) assessing the appropriateness of account selection practices (e.g., a brokerage account versus an advisory account); and (4) determining whether RIAs adequately mitigate and fairly disclose conflicts of interest.
3. The impact of an RIA’s financial conflicts on its ability to provide clients with impartial advice and best execution, with a focus on “non-standard fee arrangements.”[1]

Examinations will also continue to assess an RIA’s compliance program, with the Division staff evaluating “core areas” of such compliance program, including marketing, valuation, trading, portfolio management, disclosures, filings and custody. The Division will also evaluate an RIA’s annual review of the effectiveness of its compliance programs, indicating this is a “critical element for addressing and monitoring conflicts of interests” including those conflicts arising out of various business and compensation arrangements, arbitration clauses, and affiliated transactions. Other areas of focus include:

1. Evaluation of whether an RIA’s policies and procedures address compliance with the Advisers Act and the applicable rules thereunder and are reasonably tailored to prevent the RIA from placing its own interests ahead of its clients.
2. Examination of (1) RIAs that outsource investment selection and management, and compliance with fiduciary duties in connection with such practices, (2) the alternative sources of revenue or benefits that RIAs may receive (e.g., selling non-securities based products to clients), and (3) the appropriateness and accuracy of fee calculations and the disclosure of fee-related conflicts, such as those associated with certain clients negotiating lower fees when similar services are provided to other clients at a higher rate.
3. Valuation of illiquid or other difficult to value assets, such as commercial real estate.
4. For those RIAs who use artificial intelligence (AI) in their operations (including portfolio management, trading, marketing, and compliance) examining the compliance policies and procedures and investor disclosures related thereto.
5. Supervision and oversight practices for RIAs who use a large number of independent contractors working from geographically dispersed locations.
6. Compliance practices when RIAs change their business models or begin providing advice regarding a new type of asset, client, or service.
7. RIAs who have never been, or have not recently been, subject to examination.

Private Funds

The Division will continue to prioritize examinations of RIAs to private funds, with particular focus on those areas noted below:

1. Assessing whether an RIA’s disclosures are consistent with the RIA’s practices and whether the RIA is complying with its fiduciary obligations during times of market stress and interest rate fluctuations. Strategies and situations which may warrant specific attention include: private funds with commercial real estate or private credit strategies; private funds that are performing poorly or experiencing substantial withdrawals; private funds maintaining high leverage levels; and private funds holding illiquid investments.
2. Reviewing the accuracy of calculation and allocation of private fund fees and expenses (both on an investment-level and fund-level), including illiquid asset valuation, management fee step-down calculations post-commitment period, any offsetting of such fees and expenses, and the sufficiency of disclosures regarding the foregoing.
3. Evaluating disclosures for conflicts of interests and risk factors, and the adequacy of the policies and procedures to address those conflicts and risks. Certain products and practices that may give rise to conflicts, controls, and risk reviews include: (1) use of debt and fund-level lines of credit, (2) related party transactions (including between funds) and advisor-led secondary transactions, (3) allocation of investments, (4) investments held across multiple funds and (5) the use of affiliated service providers.
4. Examining compliance with recent SEC rules and regulations, including amendments to Form PF and the Marketing Rule to determine whether RIAs have sufficiently robust policies and procedures to address the recently adopted rules and whether an RIA is complying with these rules.

With the U.S. Fifth Circuit Court of Appeals vacating the Private Fund Adviser Rules last summer, industry participants considered whether the SEC would attempt to enforce certain elements of the vacated rules through the Advisers Act’s anti-fraud rule and the SEC’s examinations of RIAs advising private funds. With the new administration, this is unlikely to be a priority.

Information Security and Operational Resiliency

As in recent years, the Division will focus on an RIA’s business continuity practices intended to prevent interruptions to “mission critical services” and protect client information, records and assets, particularly in light of elevated operational disruption risks due to increased cybersecurity attacks, weather-related outages, geopolitical conflicts, and the dispersed operations of advisory firms. The Division noted safeguarding customer information is a “perennial examination priority” and that the Division’s examinations will continue to focus on reviewing an RIA’s policies and procedures, governance practices, data loss prevention, access controls, account management and the RIA’s responses to any cyber-related incidents, including those connected to a ransomware attack. In addition, the Division will analyze the cybersecurity risks and resiliency goals linked to third-party products and services, sub-contractors and any IT resources used by the business side of an RIA without the IT department’s knowledge, review, or approval. As part of this analysis, the Division will assess how an RIA identifies and addresses the foregoing risks to critical business operations. Furthermore, the Division will focus on compliance with Regulations S-ID and S-P (as applicable), emphasizing the oversight of third-party vendors and practices and procedures regarding safeguarding customer records, and whether the policies address technology operational failures. The Division also discussed training on identity theft prevention and recent amendments to Regulation S-P, compliance with which will become mandatory for larger RIAs on December 3, 2025.

Emerging Financial Technology and Crypto Assets

The use of financial technologies, including automated investment tools, AI, and trading algorithms or platforms continue to be an area of emphasis for the Division. The Division will assess whether an RIA’s representations regarding the use of AI and other financial technology are fair and accurate and whether the operations and controls an RIA has implemented are consistent with its disclosures to investors and clients, including with respect to the RIA’s AI capabilities and utilization. Additionally, the Division will evaluate whether the RIA has implemented adequate policies and procedures to monitor and supervise the use of AI, including AI’s use in fraud prevention and detection, back-office functions, and anti-money laundering and trading operations. Examinations will also focus on how an RIA protects against potential loss or misuse of client records and information resulting from the use of third-party AI models and tools.

In addition, examinations will prioritize those RIAs who offer crypto asset-related services, including those who offer, sell, trade, and recommend crypto assets, with the Division reviewing whether RIAs in the crypto space follow their internal standards of conduct when advising on such assets and whether those RIAs routinely review, update, and enhance their compliance practices (including with respect to the Bank Secrecy Act, custody practices and valuation procedures), risk disclosures, and operational resiliency practices.

AML and Sanctions Compliance

Compliance with anti-money laundering laws and regulations is another priority for the Division. The Division highlighted the need for RIAs to have AML programs reasonably tailored to address the risks associated with their customers and their business as well as ensuring that RIAs conduct independent testing and establish adequate customer identification programs, including for beneficial owners of legal entity customers. The Division will also review whether RIAs are monitoring Office of Foreign Assets Control sanctions and ensuring compliance with such sanctions.

Potential Shifts with New Administration

New presidential administrations bring with them new SEC chairs and a new balance of power within the SEC. As a result, shifts in priorities are to be expected. Under former SEC Chairman Gary Gensler, the SEC staff focused on regulating the cryptocurrency industry, private fund advisers, and environmental, social and governance (ESG) practices for SEC registrants, all of which will likely change under Scott Atkins, who is expected to be confirmed as SEC Chairman.

In light of President Trump’s favorable statements on the campaign trail regarding crypto, as well as Paul Atkins’ and Scott Bessent’s involvement in the crypto industry prior to their nominations as SEC Chairman and Treasury Secretary, respectively, the flurry of SEC enforcement actions targeting the cryptocurrency industry is likely to subside. Instead, the SEC appears poised to regulate crypto through rulemaking, with acting Chairman Mark Uyeda announcing on January 21, 2025 the creation of a crypto task force dedicated to creating a “comprehensive and clear regulatory framework for crypto assets”. Commissioner Hester Peirce, a member of the Republican party, will lead the task force.

In addition, there does not appear to be the same desire to regulate the private fund industry under the Trump Administration as there was under the former Biden Administration. As commissioners, both Pierce and Uyeda voted against adopting the SEC’s Private Fund Advisor Rules, which were subsequently vacated by the U.S. Fifth Circuit Court of Appeals (a court that is generally thought to be comprised of conservative judges) on the basis that the SEC lacked the statutory authority to promulgate such rules.

Given that President Trump has nominated or appointed several prominent anti-ESG figures to serve in his administration and campaigned on ending certain ESG policies including the U.S.’ participation in the Paris Climate Agreement, implementing and enforcing SEC rules regarding ESG practices and disclosures will presumably not be a top priority in the new administration.

With that said, certain core focus areas will remain perennial concerns for the SEC, regardless of administration, such as adequacy of investor disclosures, accuracy of fee calculations, an RIA’s adherence to its fiduciary duties and cybersecurity, as discussed above

Takeaways

The examination priorities outlined in the 2025 publication are generally consistent with those publicized in prior years. Notably, the Division did not specifically identify the use of electronic communications—specifically the use of unapproved or “off-channel” communications for advisory purposes, but RIAs should continue to focus on compliance with the recordkeeping provisions of the Advisers Act, especially as off-channel communications have been the subject of several enforcement actions in the past years. RIAs should review their current compliance policies and procedures, filings, and any private fund documents and disclosures with the foregoing priorities in mind to ensure the compliance matters included in the priorities are appropriately addressed.

The Division’s published description of priorities is not exhaustive. The staff of the Division will conduct examinations focused on new or emerging risks, products, services, market events and investor concerns, as well as referrals from examinations, regulators, or other sources, including tips and complaints.

[1] The Division did not provide an example of what it believes would constitute a “non-standard fee arrangement.”

For more information on the topic discussed, contact:

• Beth Smigel  |  smigel@thsh.com  |  212-702-3176
• Haylie Gordon  |  gordon@thsh.com  |  212-508-6745