2025 Division of Examinations Exam Priorities

SEC Releases

Introduction

On October 21st, 2024, the Division of Examinations (EXAMS) released their 2025 Examination Priorities.

There is detailed coverage on many important areas and we have compiled key takeaways on certain focus areas below based off of the release.

Who Is This Applicable To?

• Registered Investment Advisers (“RIAs”)
• Registered Investment Companies (“RICs”)
• FINRA Registered Broker Dealers

Examination Priorities Key Takeaways

(Focus Areas During Examinations)

• Registered Investment Advisers (“RIAs”)
  • Effectiveness of Advisers’ Compliance Programs – Rule 206(4)-7
    • Examinations focused on:
      • Marketing, Valuation, Trading, Portfolio Management, Disclosure and Filings, and Custody.
      • Fiduciary obligations of Advisers that outsource Investment Selection and Management.
      • Alternative sources of Revenue or benefits Advisers receive.
      • Fee Calculators and the Disclosure of Fee-Related Conflicts.
  • Private Fund Adviser Examinations
    • Examinations focused on:
      • Disclosures consistent with actual Practices.
      • Accuracy of Calculations and Allocations of Private Fund Fees and Expenses.
      • Disclosure of Conflicts of Interest and Risks, and adequacy of Policies and Procedures.
      • Compliance with newly adopted Rules (i.e., Form PF Amendments).
  • New, Never Examined and Advisers Not Recently Examined
    • There was a clear focus on EXAMS prioritizing their Examinations on Firms that are newly Registered Advisers as well as Firms that have never been examined and those that have not recently been examined.
• Registered Investment Companies (“RICs”)
  • Continued focus on RICs including Mutual Funds and ETFs.
  • RIC Examinations generally include a review of the following:
    • Compliance Programs, Disclosures, and Governance Practices.
  • More specific RIC Examination focus areas may be the following:
    • Fund Fees and Expenses
    • Oversight of Service Providers
    • Portfolio Management Practices and Disclosures
    • Issues associated with Market Volatility
    • Developing areas of interest (i.e., compliance with new and amended Rules, RICs with exposure to Commercial Real Estate)
  • Consistent with RIAs, EXAMS will continue to focus on Funds that are newly Registered as well as Funds that have never been examined or recently examined.
• Risk Areas Impacting Various Market Participants
  • Cybersecurity
    • Examination focus areas may be the following:
      • Procedures and Practices.
      • Policies and Procedures.
      • Governance Practices.
      • Data Loss Prevention.
      • Access Controls.
      • Account Management.
      • Responses to Cyber-Related Incidents, including Ransomware Incidents.
      • Alternative Trading Systems’ Safeguards to protect Confidential Trading Information.
  • Emerging Financial Technologies
    • Continued focus on Automated Investment Tools, such as AI, and the risks associated with it.
    • Firms that employ certain Digital Engagement Practices, assessments generally include whether representations are fair and accurate, operations and controls in place are consistent with disclosures made to investors, and more.
    • EXAMS will review to see if Firms have implemented adequate policies and procedures to monitor and/or supervise their use of AI. They will also focus on how registrants protect against loss or misuse of Client Records and information that may occur from the use of Third Party AI Models and Tools.
• FINRA Registered Broker Dealers
  • Regulation Best Interest (“Reg BI”)
    • EXAMS will continue to examine Broker Dealer Practices related to Reg BI that include the following areas listed below:
      • Recommendations with regard to Products, Investment Strategies and Account Types (making sure the Broker has reasonable basis to believe the recommendation is in the best interest of the customer).
      • Disclosures made to Investors regarding Conflicts of Interests.
      • Conflict Identification and Mitigation and Elimination Practices.
      • Processes for reviewing reasonably available alternatives.
      • Factors considered in light of the Investor’s Investment Profile.
    • Focus on Broker Dealer Practices related to the Recommendation of Products:
      • Products examples are those that are complex, illiquid or present higher risk to investors.
    • Recommendations of the following may also be a focus during Examinations:
      • Use of Automated Tools or other Digital Engagement Practices.
      • Opening of different Account Types.
      • Made to certain types of Investors (i.e., those saving for retirement or college).
    • Dual Registrants may have a focused review during Examinations of the following:
      • Process for identifying and mitigating and eliminating Conflicts of Interest, Account Allocation Practices and Account Selection Practices.
    • Broker Dealer Supervision of Sales Practices at Branch Office Locations is another Examination areas that may occur.
  • Form CRS
    • EXAMS will review the following content of a Broker Dealer’s CRS:
      • Relationships and Services that it offers to Retail Customers, Fees and Costs, and Conflicts of Interest.
  • Broker Dealer Financial Responsibility Rules
    • Continued focus on the following:
      • Net Capital Rule;
      • Customer Protection Rule; and
      • Related Internal Processes, Procedures, and Controls.

Vigilant’s Conclusion

It is vital that Firms carefully evaluate the focused topics we have discussed in detail and consider whether their compliance programs will meet regulatory requirements, as applicable.

Successful compliance relies on a proactive approach that anticipates potential investigative actions and adjusts accordingly.

In such a dynamic regulatory environment, compliance professionals can provide invaluable support to limit the business risks from potential compliance failures.

Leveraging deep industry insights and decades of combined compliance experience, Vigilant can help your firm properly prepare for 2025.

Through our initial gap analysis for on-going engagements, Mock SEC Examinations, and other compliance tools, our professionals can identify areas of weakness and assess the strengths and weaknesses of your compliance programs.

Please reach out to us for any questions or concerns related to this announcement.

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