The U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”) released its 2025 examination priorities on October 21, 2024 (the “2025 Priorities”). The 2025 Priorities highlight a wide range of topics for entities subject to SEC examinations, particularly investment advisers and broker-dealers. The topics should be very familiar, as they largely continue recent focus areas for not only the Examinations Division but also the Enforcement Division.
Investment Advisers
Private fund advisers continue to receive special focus, and the trend of heightened SEC scrutiny in examinations, particularly with respect to activities that would have been prohibited or restricted by the Private Fund Adviser Rules, will continue in this examination cycle – regardless of the outcome of the U.S. elections.[1]
Key areas highlighted in the 2025 Priorities for private fund advisers include:
- Exposure to Market Volatility & Interest Rate Fluctuations. Private fund advisers experience poor performance and significant withdrawals and/or hold more leverage or difficult-to-value assets will see particular focus in exams. In the SEC’s view, private fund advisers that employ strategies focused on commercial real estate, illiquid assets, or private credit may be particularly sensitive to market volatility or interest rate changes. We expect SEC Staff to use the new information it will receive in the amended Form PF to inform examination issues for particular advisers.
- Calculation and Allocation of Private Fund Fees and Expenses. This is a repeat area from the 2024 examination priorities, and continues to be the subject of SEC enforcement actions. Specific topics for 2025 include valuation of illiquid assets, calculation of post-commitment period management fees, offsetting of such fees and expenses, and the adequacy of disclosures.
- Conflicts of Interest Disclosures and Related Policies and Procedures. Particular points of focus in this perennial topic include (i) fund-level lines of credit, which has been the subject of a marketing rule examination sweep, (ii) adviser-led secondaries, which was the subject of one of the (now vacated) Private Fund Adviser Rules, and (iii) the use of affiliated service providers, which has been a heavy focus areas in 2024 exams and Enforcement Division investigations. Other points of focus are the use of debt, investment allocations, transactions between funds and/or other affiliated entities, and investments held by multiple funds.
- Recently Adopted SEC Rules. As expected, compliance with recently adopted SEC rules will be a priority. These include recent amendments to Form PF, the Marketing Rule (and related FAQ), and recent amendments to Regulation S-P.[2]
The 2025 Priorities also highlight areas on which all investment advisers should expect special focus—nearly all of which map to rules that the SEC or other regulators have recently proposed or finalized:
- Effectiveness of Advisers’ Compliance Programs. The Division noted the following areas of advisers’ compliance programs: marketing, valuation, trading, portfolio management, disclosure and filings, and custody. Particular issues cited include:
- Fiduciary obligations relating to outsourcing of investment selection and management. The SEC has proposed a rule imposing due diligence, recordkeeping, and reporting obligations on registered investment advisers that outsource these functions. This topic seems likely to be used in support of a final rule.
- Alternative sources of revenue, such as selling non-securities based products to clients.
- The appropriateness and accuracy of fee calculations and the disclosure of fee‑related conflicts, such as certain clients negotiating lower fees when similar services are provided to other clients at a higher fee rate. This was a focus area in the vacated Private Fund Adviser Rules, and the Examination Priorities signal that the Staff will be using existing tools to target these activities.
- Artificial Intelligence. The Division noted that examinations of advisers that integrate AI into advisory operations will look in-depth into compliance policies and procedures, as well as disclosures to investors, related to their use of AI. The Division highlighted four assessments it will make when conducting reviews: (1) whether representations are fair and accurate (echoing Chair Gensler’s public warnings to advisers against “AI-washing”); (2) whether operations and controls in place are consistent with disclosures made to investors; (3) whether algorithms produce advice or recommendations consistent with investors’ investment profiles or stated strategies; and (4) whether controls to confirm that advice or recommendations resulting from digital engagement practices are consistent with regulatory obligations.
- The SEC has also proposed a rule relating to the use of AI as well as other “covered technology” (the “Predictive Data Analytics Proposal”) which would require investment advisers to “eliminate or neutralize” any conflicts of interest posed by the use of such technology. While the Division’s planned assessments do not explicitly encompass a review of this standard, the fourth assessment regarding controls to confirm that advice or recommendations are consistent with regulatory obligations overlaps with the Predictive Data Analytics Proposal. Chair Gensler has previewed that the SEC plans to re-propose the rule following intense criticisms of the initial proposed version (also almost certainly affected by the Fifth Circuit’s opinion on SEC statutory authority in the Private Fund Adviser Rules decision).
- Cybersecurity. As in prior years, the Division highlighted the continued risks for cyberattacks, as well as other operational disruption risks due to, for example, weather-related events and geopolitical concerns. Examinations will continue to consider cybersecurity risks and resiliency goals associated with third-party products, sub-contractors, and services. The SEC continues to have an enhanced cybersecurity proposal outstanding for investment advisers, and we expect that examination activity with respect to information security will be used to bolster the case for the rule when adopted—and allow the SEC to impose its desired standards in the meantime.
- Regulation S-P. The Division plans to focus examinations on firms’ policies and procedures, internal controls, oversight of third-party vendors, and governance practices. In addition, in advance of the compliance dates for the amendments to Reg S-P (December 3, 2025 for larger entities and June 3, 2026 for smaller entities), the Division plans to engage with firms during examinations about their progress in preparing to establish incident response programs as required by the amendments.
- Cryptocurrency. The Division is continuing its focus on the crypto area. Examinations in this area, like in prior years, will focus on the offer and sale, recommendations of, advice regarding, trading in, and other activities in crypto assets or related products, with a specific focus on meeting standards of care and routinely reviewing and updating compliance procedures regarding these activities. The Division highlighted that examinations will review whether the registrants (1) meet and follow their respective standards of conduct when recommending or advising clients regarding crypto assets with a focus on retail investors and investments involving retirement assets; and (2) routinely review, update, and enhance their compliance practices (including crypto asset wallet reviews, custody practices, Bank Secrecy Act compliance reviews, and valuation procedures), risk disclosures, and operational resiliency practices (i.e., data integrity and business continuity plans), if required.
- Anti-Money Laundering. While the 2025 Priorities did not discuss FinCEN’s recent rule requiring investment advisers to adopt anti-money laundering and countering the financing of terrorism programs pursuant to the Bank Secrecy Act, we expect that this will be an area of focus in future examination cycles once the rules become effective in January 2026.
Finally, the Division again expressed its intent to continue to focus examinations on newly registered advisers, as well as advisers that have never been examined or that have not recently been examined.
Broker-Dealers
The 2025 Priorities for broker-dealers continue several points of focus from 2024, including Regulation Best Interest and trading practices. With several new measures implemented in 2024, broker-dealers should revisit their policies and procedures to ensure they address new rules, especially as they relate to the 2025 Priorities.
Key areas highlighted in the 2025 Priorities for broker-dealers include:
- Financial Responsibility Rules and Accounting Practices. The Staff noted that, in light of recent regulatory changes, broker-dealer accounting practices will be a focus for reviews. With the recent implementation of a T+1 settlement cycle, we expect that the Division will focus on ensuring that broker-dealers have the proper procedures in place to implement the shortened settlement cycle, including the new obligations related to same-day allocation, confirmation and affirmation codified in Rule 15c6-2. In addition, we expect that the Division may focus on issues raised by the proposed amendments to the Customer Protection Rule, such as mismatches between amounts deposited in reserve accounts and the amount broker-dealers owe customers and PAB account owners. The Division has also indicated a focus on the timely filing of all financial notifications and other required filings.
- Trading Practices and Regulation SHO. As in recent years, Regulation SHO remains a focus of the Division. While the Division has previously focused more generally on locate requirements, the 2025 Priorities indicate a particular focus on the bona fide market marker exception, including on whether quoting activity is away from the inside bid/offer. This coincides with the compliance dates for the associated CAT NMS plan which requires firms to report reliance on the bona fide market maker exception in July 2025, and the new Form SHO reporting requirements in January 2025. Broker-dealers should ensure that, if required to file the new reports, they are prepared to demonstrate compliance with the new amendments, as well as all other aspects of Regulation SHO. For broker-dealers with retail clients, the Division also plans to continue to focus on equity and fixed income trading practices and associated conflicts, fees, and marketing.
- Shortening of the Settlement Cycle. In addition to the accounting focus noted above, the Division will focus more broadly on broker-dealer compliance with Rule 15c6-1, including relevant operational and technology changes in implementing the settlement cycle and any specific products or counterparties that are not settling within the new timeframe.
- Regulation BI and Form CRS. Broker-dealers with retail customer should be aware that the Division is continuing its focus from 2024 on compliance with both Regulation Best Interest and Form CRS.
- Regulation SCI. The Division also noted that Regulation SCI and SCI entities remain priorities. In particular, the Division is focusing on business continuity planning and testing practices of SCI entities, the effectiveness of response plans, and policies and procedures relating to security operations management tools. The Staff has also indicated a specific focus on an SCI entity’s relationship to third parties, both when the SCI entity is experiencing a cyber event and when the third party is experiencing a cyber event. This reflects a continuing focus of the Commission, with several recently proposed or adopted rules relating to cybersecurity, including a proposal to expand the applicability of Reg SCI to many large broker-dealers, and to amend the substantive requirements under Reg SCI.
- Artificial Intelligence. As with investment advisers, the Division highlighted four assessments it will include when conducting reviews: (1) whether representations are fair and accurate; (2) whether operations and controls in place are consistent with disclosures made to investors; (3) whether algorithms produce advice or recommendations consistent with investors’ investment profiles or stated strategies; and (4) whether controls to confirm that advice or recommendations resulting from digital engagement practices are consistent with regulatory obligations. And while the Division’s planned assessments do not explicitly encompass a review of the requirements expressed in the Predictive Data Analytics Proposal, the fourth assessment regarding controls to confirm that advice or recommendations are consistent with regulatory obligations speaks to issues raised in that proposal.
- Cybersecurity. As with investment advisers, the Division highlighted the continued risks for cyberattacks, as well as other operational disruption risks due to, for example, weather-related events and geopolitical concerns. The Division also noted that it would continue to consider cybersecurity risks and resiliency goals associated with third-party products, sub-contractors, and services. The SEC continues to have an enhanced cybersecurity proposal outstanding for broker-dealers (as well as other market participants), and we expect that examination activity with respect to information security will be used to bolster the case for the rule when adopted.
- Regulation S-P. As with investment advisers, the Division plans to focus examinations on firms’ policies and procedures, internal controls, oversight of third-party vendors, and governance practices. In addition, in advance of the compliance dates for the amendments to Reg S-P (December 3, 2025 for larger entities and June 3, 2026 for smaller entities), the Division plans to engage with firms during examinations about their progress in preparing to establish incident response programs as required by the amendments.
- Cryptocurrency. The Division is continuing its focus on crypto. As with investment advisers, examinations of broker-dealers will focus on the offer, sale, recommendations of, advice regarding, trading in, and other activities in crypto assets or related products, with a specific focus on meeting standards of care and routinely reviewing and updating compliance procedures regarding these activities. The Division highlighted that examinations will review whether the registrants (1) meet and follow their respective standards of conduct when recommending or advising clients regarding crypto assets with a focus on retail investors and investments involving retirement assets; and (2) routinely review, update, and enhance their compliance practices (including crypto asset wallet reviews, custody practices, Bank Secrecy Act compliance reviews, and valuation procedures), risk disclosures, and operational resiliency practices (i.e., data integrity and business continuity plans), if required.
- Anti-Money Laundering. The Division noted that it will continue to focus on AML programs and review whether broker-dealers are appropriately tailoring their AML program to their business, conducing independent testing, establishing an adequate customer identification program, and meeting their SAR filing obligations.
This article was republished by the Harvard Law School Forum on Corporate Governance blog.
[1] We have discussed the ways in which we expect the SEC to pursue the standards it was trying to impose on advisers through PFAR. In particular, we discuss these issues in depth in our client alert on the Fifth Circuit’s decision on the Private Fund Adviser Rules.
[2] For further information on these topics, see Cleary Gottlieb’s prior alerts:
- Recent Amendments to Form PF (discussing the Form PF amendments covering the new current and quarterly reporting requirements) and SEC Ratchets Up Form PF (Again) (discussing the Form PF amendments covering the new annual reporting requirements, including the disaggregation of complex fund structures).
- The Marketing Rule (discussing the Marketing Rule in-depth), SEC Expands the Scope of Its Marketing Rule Examination Sweep – But Still No Guidance (discussing the Division of Examinations’ Risk Alert), and The “VACATED” Heard ‘Round the World: What’s Next after the SEC Private Fund Adviser Rules? (discussing the Division of Investment Management’s Marketing Rule FAQs).
- Recent Amendments to Reg S-P (discussing the amendments to Reg S-P, including the new incident response program requirements).