Dinsmore & Shohl LLP
  October 28, 2024 - Louisville, Kentucky

Division of Examinations: SEC Fiscal Year 2025 Examination Priorities for Investment Advisers
  by Kevin S. Woodard

Division of Examinations: SEC Fiscal Year 2025 Examination Priorities for Investment Advisers

On October 21, 2024, the Division of Examinations of the United States Securities and Exchange Commission (the “Division”) published the Fiscal Year 2025 Examination Priorities.  In addition to investment advisers, the Division has examination responsibility for broker-dealers, investment companies, self-regulatory organizations, clearing agencies and other market participants such as municipal advisors.  This alert only addresses the examination priorities applicable to investment advisers.   

As with previous years, the 2025 Examination Priorities provides a high level summary of the activities of the Division, as well as general priorities.  The following are highlights from the Examination Priorities:

Focus Areas For 2025

Adherence to Fiduciary Standards of Conduct

As a fiduciary, an investment adviser owes a duty of care and a duty of loyalty to clients.  In fulfilling this fiduciary obligation an investment adviser must:

In examining advisers’ compliance with fiduciary standards, the Division will focus on recommendations regarding products, investment strategies and account types.  In addition, the Division will focus on recommendations related to:

The Division will also focus on dual registrants and advisers with affiliated broker-dealers.  Areas of focus will include:

Furthermore, the Division will review the impact of advisers’ financial conflicts of interest on providing impartial advice and for best execution, with an additional focus on non-standard fee arrangements.

Effectiveness of Advisers’ Compliance Programs

The Division will assess advisers’ compliance programs pursuant to Advisers Act Rule 206(4)-7, the “Compliance Rule.”  In evaluating advisers’ compliance programs, the Division will review such areas as:

The Division’s review of a compliance program will be driven by an adviser’s practices and products.  As examples, the Division notes the following practices and products:

Examinations of Advisers to Private Funds

Advisers to private funds remain a focus of the Division, with priority given to the following areas.

Never Examined Advisers, Recently Registered Advisers and Advisers Not Recently Examined

The Division will continue to prioritize examinations of advisers that have never been examined, not recently examined and newly registered advisers.

Cybersecurity

The Division will continue to review procedures and practices to assess whether advisers are reasonably managing information security and operational risks, as well working to prevent client service interruptions.  In addition, the Division continues to assess adviser practices to protect client information, records and assets.  The Division notes that particular attention will be paid to advisers’:

With respect to third-party products and services, the Division will continue to assess cybersecurity risks and resiliency goals associated with:

The Division will focus on how advisers identify and address these risks.

Regulation S-ID and Regulation S-P

Regulation S-ID addresses client identity theft detection and prevention.  Regulation S-P is the privacy regulation applicable to investment advisers.  The Division will focus on advisers’ policies and procedures regarding safeguarding customer records and information, including:

In addition, the Division provides that in preparation for the compliance date of the amendments to Regulation S-P, the Division will inquire with firms during examinations about their progress in establishing incident response programs.  The amended Regulation S-P compliance date is December 3, 2025 for investment advisers with $1.5 billion or more in assets under management, and June 3, 2026 for investment advisers with less than $1.5 billion in assets under management.

Shortening of the Settlement Cycle

The Division will evaluate investment advisers’ compliance with the amended books and records requirements associated with T+1.

Emerging Financial Technologies

The Division remains focused on advisers’ use of automated investment tools such as AI, and trading algorithms and platforms, as well as risk related to the use of emerging technologies and alternative sources of data.  In reviewing the use of such tools, assessments by the Division will include whether:

With respect to AI, the Division will review adviser representations regarding their AI capabilities or AI use for accuracy.  In addition, the Division will review how advisers 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

In light of the volatility and activity in the crypto asset markets, the Division will monitor and examine registrants offering crypto asset-related services.  These examinations will review whether advisers:

Here is the link to the Fiscal Year 2025 Examination Priorities.




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