US SEC Division of Exams Announces 2025 Examination Priorities

On October 21, 2024, the U.S. Securities and Exchange Commission (SEC or Commission) Division of Examinations (Division) published its annual examination priorities (Priorities) outlining areas of perceived risk and topics that the Division plans to focus on in the new fiscal year. The Priorities were published just weeks before the U.S. presidential elections, and, while the SEC’s examination program does not change significantly with changes in administration, new leadership will undoubtedly announce their own priorities for the Commission. Registrants should stay tuned for new priority announcements starting in the new year. Furthermore, while the published Priorities are not “an exhaustive list of all the areas the Division will focus on in the upcoming year,” they provide market participants insight into the topics that are the Division’s main area of interest. This year’s announced examination Priorities include, among others, advisers’ fiduciary duty and conflicts of interest, standards of conduct, cybersecurity, and artificial intelligence (AI)¹. 

Our Take

The Priorities published on October 21 contain many similarities to those of the past few years, with a few subtle but important changes. Notably, the Priorities include an entire new section focused on “Examinations of Advisers to Private Funds.” In light of the June 5, 2024, ruling by the U.S. Fifth Circuit Court of Appeals (Fifth Circuit) vacating the SEC Private Fund Adviser Rules (PFAR), the SEC appears to be seeking opportunities to achieve the objectives of the PFAR through examination (and related enforcement activity). With this in mind, the Priorities focus on the many of disclosure components of the PFAR through examination. While new SEC leadership may have differing views on private funds priority topics, private fund examinations are core to the examination program and will not go away.  

March 2025 also marks 30 years since the creation of the Division of Examinations (under its predecessor office designation the Office of Compliance Inspections and Examinations). The Division reflects on the change in technology since its inception, and this focus translates into priorities that relate to AI and other emerging financial technologies. The Priorities also underscore that investment advisers are fiduciaries and emphasize those duties with respect to illiquid assets and the changing technology in the financial services sector.

This Sidley Update provides a summary of upcoming examination priorities and perennial issues that registrants can anticipate in this year’s examinations. Based on the full scope of the Division’s Priorities, and subject to the next administration’s articulated priorities, registrants should note the following themes for 2025:

• The Division’s core Priorities remain largely the same as in prior years.
• Registrants should be ready to show how they have implemented compliance controls for new rules.
• There is a focus on valuation of assets, with a particular focus on illiquid or hard-to-value assets like commercial real estate.

Investment Advisers

Adherence to Fiduciary Standards of Conduct

Examining all advisers’ adherence to their fiduciary duty obligations to clients remains a key priority. Specifically, the Division will focus on investment advice provided to clients with regard to high-cost products, unconventional instruments, illiquid and difficult-to-value assets, and assets sensitive to higher interest rates or changing market conditions, including commercial real estate. For dual registrants and advisers with affiliated broker-dealers, the areas of focus will be assessing investment advice and products and their suitability, reviewing disclosures to clients regarding the capacity in which recommendations are made, reviewing appropriateness of account selection practices, and assessing conflicts of interest disclosure and mitigation. 

Effectiveness of Advisers’ Compliance Programs

The Division remains focused on advisers’ compliance programs, including policies related to marketing, valuation, trading, portfolio management, disclosure and filings, custody, and whether their policies and procedures appropriately address and monitor conflicts of interest. The Division identifies other particular areas of examination focus including on fiduciary obligations of advisers that outsource investment selection and management, their alternative sources of revenue, and the appropriateness and accuracy of fee calculations and the disclosure of fee-related conflicts.

Private Fund Advisers

For private fund advisers, in addition to the topics above, the Division will prioritize specific topics, such as

• reviewing whether disclosures are consistent with actual practices with a focus on fiduciary obligations in times of market volatility and with respect to interest rate fluctuations 
• the accuracy of calculations and allocations of private fund fees and expenses (again underscoring the focus of valuation of illiquid assets, calculation of postcommitment-period management fees, and offsetting of fees and expenses) 
• disclosure of conflicts of interests and adequacy of policies and procedures, for example, conflicts associated with products such as use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between funds
• investments held by multiple funds; use of affiliated service providers 

Additionally, there will be a focus on compliance with recently adopted SEC rules, including amendments to Form PF and the Marketing Rule. 

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

Advisers that have never been examined will continue to be a priority for the Division, with a focus on newly registered advisers.

Investment Companies

The Division continues to focus on examinations of registered investment companies (RICs), due to their importance to retail investors. 

Examinations by the Division will focus on compliance programs, disclosures, and governance practices. The Division has highlighted focus areas of fund fees and expenses (and any waivers or reimbursements), service provider oversight, portfolio management practices, and market volatility issues. As with examinations of advisers, the Division will look for consistency between claims about investment strategies, filings and marketing materials, and what the RIC actually practices. Commercial real estate (an illiquid asset) will also be a priority for RICs, as it is for private fund advisers.

Broker-Dealers

As in 2024, the Division’s top examination priority in 2025 for broker-dealers will be Regulation Best Interest, which governs recommendations to natural persons, with the second priority being the closely related Form CRS disclosures. The Division states that it will have a particular focus on recommended products that are complex or illiquid or present high risk to investors²  and recommendations based on the use of automated tools or other digital engagement practices. The Division will also look at the types of accounts recommended, especially to more vulnerable investors (including brokerage versus advisory accounts, with a focus on wrap fee accounts), and the processes for mitigating or eliminating conflicts of interest. In the financial responsibility area, the Division will review compliance with the net capital rule, the customer protection rule, and related internal processes, procedures, and controls, with a focus on broker-dealer accounting practices affected by recent regulatory changes. The Division indicates that another focus will be firms’ operational resiliency and their supervision of third-party or vendor services used for financial reporting and credit and liquidity risk management controls. In the trading practices area, the Division will focus on marketing to retail customers of bank sweep programs, fully paid securities lending programs, and mobile apps and online trading platforms. In addition, the Division will look at trading practices in pre–initial public offering companies and the sale of private company shares in secondary markets. The Division also anticipates reviewing broker-dealers’ marking of retail orders as “held” or “not held” and the pricing and valuation of illiquid or retail-focused instruments such as variable rate demand obligations, other municipal securities. and non-traded real estate investment trusts. Finally, the Division will review whether broker-dealers are appropriately relying on the bona fide market-making exception to Regulation SHO, including whether quoting activity is away from the inside bid/offer.   

Risks Areas Affecting All Market Participants

Information Security and Operational Resiliency 

Cybersecurity

As in recent years, cybersecurity remains a perennial priority focus area affecting multiple market participants, including broker-dealers and investment advisers. The Division will focus on registrants’ policies and procedures, governance practices, data loss prevention, access controls, account management, and responses to cyber-related incidents, including those related to ransomware attacks. The Division will focus on assessments of how registrants identify risk related to third-party products and subcontractors. Notably, there was no mention of a focus on the recently adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade to one business day. The compliance date was May 28, 2024.

Regulation S-ID and Regulation S-P

The Division will focus on compliance with Regulations S-ID and S-P. The examinations will focus on firms’ policies and procedures, internal controls, oversight of third-party vendors, and governance practices. Policies and procedures relating to the safeguarding of customer records and information will be a top focus. When conducting reviews of the focus areas, examinations will include whether representations 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, and controls to confirm that advice or recommendations resulting from digital engagement practices are consistent with regulatory obligations. 

Emerging Financial Technologies

The Division will continue to focus on the use of automated investment tools, AI, and trading algorithms or platforms and the risks associated with the use of emerging technologies. Examinations will focus on firms that use certain digital engagement practices including digital investment advisory services, recommendations, and related tools and methods. As with other focus areas, the Division will review registrant disclosure for accuracy and policies and procedures to monitor and/or supervise their use of AI.

Cryptoassets

The Division highlighted continued volatility and activity in cryptoasset markets and indicated that it will monitor and conduct examinations of registrants focusing on the offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto or related products. The Division will specifically review whether registrants (1) meet and follow their respective standards of conduct when recommending or advising customers and clients regarding cryptoassets and (2) routinely review, update, and enhance their compliance practices, risk disclosures, and operational resiliency practices, as required, which could encompass review of a firm’s custody agreement for compliance with Rule 15c3-3. The Division will also assess technological risks associated with the use of blockchain and distributed ledger technology, including the design of related compliance policies and procedures and associated risk disclosures.

Regulation Systems Compliance and Integrity (SCI) 

The Division will continue to evaluate policies and procedures of SCI entities, including whether the policies and procedures of SCI entities are reasonably designed to secure the SCI systems, including the physical security of the systems housed in data centers.

Anti-Money-Laundering (AML)

The Division will continue to focus on AML programs and review whether broker-dealers and certain RICs are appropriately tailoring their AML program, conducting independent AML testing, establishing an adequate customer identification program, and meeting obligations for filing suspicious activity reports. 

¹ U.S. Securities and Exchange Commission 2024 Examination Priorities, available at https://www.sec.gov/files/2025-exam-priorities.pdf.

² The Division’s examples are leveraged or inverse products, cryptoassets, structured products, alternative investments, products that are not SEC-registered, products with complex fee structures or return calculations, and products with “exotic benchmarks.”