The SEC’s Division of Examinations (the “Division”) announced its 2025 exam priorities yesterday. These SEC exam priorities are announced each year to help promote and improve compliance and protect investors. The exam priorities also indicate what specific areas SEC examiners may be focusing on during upcoming examinations this year and cover not only investment advisors but also broker-dealers and transfer agents.
Exam Priorities for Investment Advisors
One focus area relates to whether the advice provided by investment advisors satisfies the fiduciary obligations owed to clients. In particular, the SEC stated that it would focus on recommendations relating 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.
Another focus area concerns investment advisors with affiliated broker-dealers and whether investment advice and recommendations regarding certain products are suitable for client accounts, the disclosures to clients regarding the capacity in which recommendations are made, the appropriateness of the account selection processes (e.g., advisory vs brokerage), and whether conflicts of interest are adequately mitigated and fairly disclosed.
With regard to advisors’ compliance programs, the SEC stated that exam priorities may include (1) the fiduciary obligations of advisors that outsource investment selection and management; (2) alternative sources of revenue or benefits that investment advisors receive (e.g., the sale of non-securities based products to clients); and (3) the appropriateness and accuracy of fee calculations and the disclosure of fee-related conflicts, including those relating to select clients that have negotiated lower fees when similar services are provided to other clients at a higher fee rate. Other areas of focus may include valuation with regard to illiquid or difficult-to-value assets, policies and procedures and disclosures relating to the use of artificial intelligence, and supervision and oversight practices if an advisor has a large number of independent contractors working from geographically dispersed offices.
Focus Areas for Investment Advisors to Private Funds
With regard to advisors to private funds, examination staff may look at: (1) whether disclosures are consistent with actual practices; (2) the accuracy of calculations and allocations of private fund fees and expenses (both fund-level and investment-level), particularly with regard to the valuation of illiquid assets; (3) the calculation of post commitment period management fees; (4) the offsetting of such fees and expenses; (5) and the adequacy of disclosures. Other exam priorities relating to private funds include the disclosure of conflicts of interest and the adequacy of controls with regard to the use of debt, fund-level lines of credit, investment allocations, advisor-led secondary transactions, transactions between fund(s) and/ or others, investments held by multiple funds; and the use of affiliated service providers.
Please click on the link below to access the full report issued by the Division.
https://www.sec.gov/files/2025-exam-priorities.pdf
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
