Investment advisers, broker-dealers, fund managers and other financial professionals could be impacted in 2025 by the U.S. Securities and Exchange Commission’s (SEC) continued focus on upcoming examinations, presenting a solid reason for many to review their current policies and operations. On October 21, 2024, the SEC announced its approach in its annual publication 2025 Priorities. While the document specifically identifies certain practices, products and services that the SEC believes present heightened risk to investors, it is not an exhaustive list for the year. Instead, the 2025 Priorities represent certain areas or topics that the SEC anticipates will continue to be of significant importance.

Five topics applying to a wide range of companies and financial market participants are highlighted and include: (a) information security and operational resiliency including cybersecurity, Regulation S-ID and Regulation S-P; (b) emerging financial technologies, including the use of artificial intelligence (AI); (c) compliance related to regulation systems and integrity; (d) crypto assets; and (e) anti-money laundering (AML).

Particularly, the SEC will evaluate broker-dealer compliance with both Rule 15c6-1 (effective May 28, 2024), which reduced the standard settlement cycle from most securities to the day after trade date (T+1), and Rule 15c6-2. which requires broker-dealers engaging in the allocation, confirmation, or affirmation process to have written agreements or written procedures reasonably designed to ensure completion of the process as soon as practicable and no later than the end of day on trade date (T+0).

Overall, the SEC will continue to prioritize examinations of advisers and investment companies that have never been examined (including new registrants) as well as those who have not been examined for a few years. The SEC will also continue to focus on advice that is provided by advisers to “older investors and those saving for retirement” which may overlap with a review of advice related to ERISA with respect to retirement funds or investments.  

As such, if your firm is registered with the SEC and has not been examined in a few years, now is the time to review your compliance programs, policies and procedures manual, and internal operations to ensure that all are up to date.

Investment Advisers

Investment advisers’ fiduciary duties continue to remain at the forefront for the SEC. In the 2025 Priorities, the SEC identified that it will be considering compliance with, and adherence to, both the duty of care and the duty of loyalty.

Specifically, the SEC will look at:

• Investment advice relating to high-cost products, unconventional instruments, illiquid and difficult to value assets and assets sensitive to higher interest rates;
• Dual registrants and advisers affiliated with broker-dealers- particularly in regards to suitability, disclosures regarding recommendations, appropriateness of account selection and mitigation of conflicts of interest;
• The impact of adviser’s financial conflicts of interest on providing impartial advice and best execution, with consideration given for non-standard fee arrangements;
• Compliance programs and the investment advisers’ annual review of the effectiveness of such, and whether the investment adviser’s policies and procedures are reasonably designed, implemented and tailored to the adviser’s business; and more specifically:
• Fiduciary obligations of advisers that outsource investment selection and management;
  • Alternative sources of revenues or benefits advisers receive such as selling non-securities-based products;
  • Appropriateness and accuracy of fee calculations and the disclosure of fee- related conflicts;
  • Valuation of illiquid or difficult to value assets such as commercial real estate;
  • Integration of AI into advisory operations including portfolio management, trading, marketing and compliance;
  • Independent contractor oversight and supervision; and
  • Change in business models or new types of assets, clients or services.

Private Fund Advisers

Investment advisers to private funds make up a significant portion of the investment adviser population, and as such have been, and continue to be, an area of focus for the SEC. These investment advisers should review the following in order to prepare for a future examination:

• Whether disclosures are consistent with actual practices and if an adviser met its fiduciary obligations in times of market volatility;
• Whether a private fund is exposed to interest rate fluctuations;
• Funds or investments with poor performance, significant withdrawals and/or that hold more leverage or difficult-to-value assets;
• Accuracy of calculations and allocations of fund fee and expenses, focusing on post commitment period management fees, offsetting of such fees and expenses and the adequacy of disclosures re same; and
• Disclosures of conflicts of interests, risks and adequacy of policies and procedures including use of debt, investments held by multiple funds and use of affiliated service providers.

Broker-Dealers

In the 2025 Priorities, the SEC has indicated that it will focus on a broker-dealer’s (and dual-registrants’) compliance with standing regulatory priorities, including Regulation Best Interest, the Net Capital Rule and Customer Protection Rule, Regulation SHO, Regulation ATS, and Exchange Act Rule 15c2-11.

Regulation Best Interest

Regulation Best Interest establishes the standard of conduct for broker-dealers at the time a recommendation is made to a retail customer in connection with a securities transaction or investment strategy. In future examinations, the SEC will focus on compliance with Regulation Best Interest relating to:

• Recommendations with regard to products, investment strategies and account types and whether there is a reasonable basis to believe the recommendation is in the best interests of the customer;
• Conflicts-of-interest disclosures;
• Conflict identification and mitigation practices;
• Processes for reviewing reasonably available alternatives; and
• Factors considered in light of the investor’s goals, age, sophistication, etc.

In particular, the SEC will look closely at recommendations concerning complex, high-cost, illiquid, proprietary and microcap securities investments and products; especially those made to investors saving for specific goals, such as college or retirement.

The SEC will also focus on dual-registrants and encompass reviews of firms’ process for identifying and mitigating and eliminating conflicts of interest, account allocation practices and account selection processes.

Form CRS

In 2025, the content of the customer relationship summary (Form CRS) will continue to be an examination priority; specifically, to confirm whether both broker-dealers (or investment advisers, as applicable) have met their filing and delivery requirements for the Form CRS. Also, the SEC intends on reviewing Form CRS disclosures relating to:

• The relationships and services that are disclosed and provided to retail customers;
• Fees and costs;
• Conflicts-of-interest; and
• Whether the Form CRS includes disclosures regarding disciplinary history.

Financial Responsibility — Net Capital Requirement

The SEC will continue to prioritize an examination of a broker-dealer’s compliance with the Net Capital Rule and the customer protection rule looking at a broker-dealer’s credit, market and liquidity risk management controls. Areas of review will also include accounting practices impacted by recent regulatory changes, timeliness of financial notifications and required filings.  Reviews will also include supervision of third-party or vendor provided services that contribute to the records firms used to prepare their financial reporting information.

Trading Practices

The 2025 Priorities also suggest that broker-dealer’s trading practices will be a key subject of examinations in 2025, including:

• Regulation SHO, including whether the broker-dealers are appropriately relying on the bona fide market making exception;
• Fixed income trading practices;
• Practices associated with trading in pre-IPO companies and the sale of private company shares in secondary markets;
• Execution of retail orders including:
  • Whether orders marked as “held” or “not held” and consistency of the marking with retail instructions; and
  • The pricing and valuation of illiquid or retail-focused instruments such as variable rate demand obligations, other municipal securities and non-traded REITS.

Key Takeaways

Although the 2025 Priorities provide a roadmap for the SEC’s examination priorities and agenda, it is not an exhaustive list of the issues that the SEC may consider. It is vital that all investment adviser firms, private fund advisers, broker-dealers, and all other firms subject to SEC oversight carefully evaluate the focused topics that may apply to them, and consider whether their compliance programs and policies and procedures meet current standards. Firms are urged to consult with legal counsel to review their policies and procedures in connection with emerging risks, enforcement activities, and agency risk alerts to best mitigate risks in 2025 and thereafter.