Happy Friday, Funds Family!

Today we’re going to review some of the SEC’s areas of interest in 2025.     

Since 2013, the SEC’s Division of Examinations annually publishes a roadmap outlining critical risk areas where the Division will focus its resources, offering valuable insights for the private funds industry. While not exhaustive, these priorities signal the SEC's perspective on the most pressing market issues and risks.

This article examines certain of the published 🔗2025 Examination Priorities that those operating in the private funds space will want to keep at the top of their lists to align with SEC priorities and mitigate regulatory risk.  While published before last November’s elections, these Examination Priorities will likely remain relevant, even with potential shifts in administration and SEC leadership under the new Trump administration.

⚖️ #1: Fiduciary Standards of Conduct

The Division is prioritizing upholding the fiduciary obligations of regulated investment advisers, ensuring that they serve the best interests of their clients and don’t prioritize their own interests ahead of that of their clients.

Specifically, the Division will prioritize:

• Investment Advice: Scrutinizing advice regarding high-cost products, unconventional instruments, illiquid assets, and assets sensitive to market changes (e.g., commercial real estate).

• Dual Registrants: Examining suitability for advisory accounts, disclosures regarding recommendation capacity, account selection practices, and conflict mitigation processes.

• Financial Conflicts: Assessing how conflicts of interest impact impartial advice and best execution, particularly with non-standard fee arrangements.

🛡️ #2: Effectiveness of Compliance Programs

The Division will continue to prioritize reviewing the effectiveness of compliance programs to ensure compliance with the Investment Advisers Act.

The Division will prioritize review of matters such as:

• Outsourcing: Fiduciary duties of advisers who outsource investment management.

• Fee Transparency: Fee calculations and disclosure of fee-related conflicts, such as preferential fee arrangements for certain clients, to ensure completeness and accuracy.

• AI Integration: Advisers utilizing artificial intelligence (AI) in areas like portfolio management, trading, marketing, and compliance.

• Third-Party Contractors: Firms with a significant number of geographically dispersed contractors.

• Business Model Changes: Firms changing their business model or otherwise expanding into new asset classes, client segments, or services.

🔒 #3: Cybersecurity Processes and Procedures

The Division will continue to scrutinize investment advisers’ ability to prevent disruptions to critical services and protect sensitive investor data. This includes assessing their preparedness for cybersecurity threats, weather events, geopolitical risks, etc., specifically:

• Robust Policies & Procedures: Evaluating the effectiveness of policies and procedures for data security, access control, and incident response.

• Third-Party Risk Management: Assessing the cybersecurity risks associated with third-party vendors and services, including those procured without proper IT oversight.

• Ransomware Resilience: Examining preparedness for and response to ransomware attacks.

• Safeguarding Sensitive Information: Protecting confidential trading information, particularly within alternative trading systems.

🤖 #4: Use of Artificial Intelligence

The Division will closely examine firms utilizing digital investment advisory services, recommendations, and related tools, including the use of AI to confirm:

• Fairness and Accuracy of Representations: Representations regarding digital services are accurate and not misleading.

• Accuracy of Operational Controls: Operations and controls align with disclosures made to investors.

• Algorithmic Advice: AI-powered advice aligns with investor profiles and stated strategies in compliance with applicable regulations the same as if advice was being provided manually.

• Regulatory Compliance: Digital engagement practices comply with all relevant investor protection regulations, particularly for older investors.

🪙 #5: Trading of Crypto Assets

The Division will intensify its examination of registrants offering crypto asset-related services, including the offer, sale, recommendation, and trading of crypto assets that may be considered securities, prioritizing:

• Standards of Conduct: Ensuring registrants adhere to appropriate standards of conduct when advising clients on crypto assets, with a specific focus on retail investors, older investors, and investments in retirement accounts.

• Robust Compliance Frameworks: Evaluating and enhancing compliance practices, including crypto asset wallet reviews, custody practices, Bank Secrecy Act compliance, valuation procedures, and risk disclosures.

• Technological Risk Assessment: Registrant practices to address the technological risks associated with blockchain and distributed ledger technology, including the security of crypto assets.

Of course, we’ll see whether this changes with the new pro-crypto administration. 🤷 

🕵️ #6: AML, KYC & Sanctions

The SEC continues to prioritize examining anti-money laundering, know-your-customer, and sanctions compliance programs. Key areas of focus in this year’s published priorities include:

• Risk-Based Approach: Whether AML programs are appropriately tailored to the firm's business model, customer base, and risk profile.

• Independent Testing: Independent testing of AML programs.

• Customer Due Diligence: Customer identification procedures, including verification of beneficial ownership for legal entity customers.

• SAR Filing Obligations: Compliance with Suspicious Activity Report (SAR) filing requirements.

• Registered Investment Company Oversight: Reviewing registered investment companies' oversight of applicable financial intermediaries.

• Sanctions Compliance: Broker-dealers' and advisers' compliance with the Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctions.

Also note that Registered Investment Advisers and Exempt Reporting Advisers will be subject to 🔗 heightened KYC/AML requirements, starting January 1, 2026.

❓ How do you deal with all of this?

This might seem like a lot…and it is. Instead of dealing with this alone, many private funds retain a compliance consultant to help with filings and compliance policies. They’re experts in this area and can help you stay above board.

 / WRAPPING THE CASE

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.