SEC Division of Examinations: 2025 Priorities and Their Implications for Private Funds

On October 21, 2024, the U.S. Securities and Exchange Commission (SEC) Division of Examinations unveiled its examination priorities for fiscal year 2025. This announcement is particularly significant for private funds and investment advisers, as it outlines the areas of focus that will shape regulatory scrutiny in the coming year. While the SEC has refrained from identifying specific focus areas or emphasizing environmental, social, and governance (ESG) investing, it has made it clear that its examination priorities are not exhaustive. Instead, the Division will assess risk factors unique to individual entities during its examinations.

Overview of 2025 Examination Priorities

The SEC’s 2025 examination priorities reflect a commitment to investor protection and the integrity of U.S. capital markets. Key areas of focus include:

1. New Rules Regarding Form PF and Regulation S-P
2. Fiduciary Duties and Compliance Programs of Registered Investment Advisers (RIAs) and Registered Investment Companies (RICs)
3. Cybersecurity
4. Crypto Assets
5. Emerging Financial Technologies, including Artificial Intelligence (AI)

These priorities are designed to address heightened risks that the SEC believes could adversely affect investors and the broader market.

New Form PF and Regulation S-P Rules

One of the most significant changes for 2025 involves new reporting requirements under Form PF and amendments to Regulation S-P. Effective March 12, 2025, RIAs managing private funds will be required to provide additional information in their Form PF filings. This includes:

• Quarterly Event Reports: Advisers must report on adviser-led secondary transactions, the removal of a fund’s general partner, and investor elections to terminate a fund or investment period.
• Adverse Event Reporting: Large hedge fund advisers must report certain adverse events within 72 hours, while large private equity fund advisers will need to include a new section detailing adverse events.

The Division will also evaluate whether RIAs have established adequate written policies and procedures to comply with these new requirements, as well as their adherence to marketing rules and other SEC regulations.

In addition, amendments to Regulation S-P will require covered institutions to implement written incident response programs to address unauthorized access to customer information. Compliance deadlines vary, with larger entities expected to comply by December 2025 and smaller entities by June 2026. The SEC will review registrants’ policies, internal controls, and governance practices as part of its examinations.

Fiduciary Duties and Compliance Programs

The SEC’s focus on fiduciary duties underscores the importance of RIAs and RICs placing their clients’ best interests first. Examinations will scrutinize:

• High-Cost Products: RIAs must justify recommendations involving high-cost or unconventional investment products.
• Illiquid Assets: The Division will assess how RIAs handle illiquid and difficult-to-value assets, particularly in volatile market conditions.

The SEC will also evaluate the effectiveness of compliance programs, ensuring that RIAs have robust policies and procedures in place. This includes compliance with the Office of Foreign Assets Control sanctions and annual reviews of compliance practices.

For RICs, the examination will focus on fund fees and expenses, oversight of service providers, and consistency in portfolio management practices. The Division will also pay close attention to RICs with exposure to commercial real estate, reflecting broader market concerns.

Cybersecurity

Cybersecurity remains a critical area of concern for the SEC, particularly in light of geopolitical tensions and economic uncertainties. Examinations will assess how registrants manage information security and operational risks, focusing on:

• Policies and Procedures: Registrants must demonstrate effective governance and data loss prevention strategies.
• Incident Response: The SEC will evaluate how firms respond to cyber incidents and protect confidential trading information.

The Division will also scrutinize third-party products and services, particularly those used without proper oversight.

Crypto Assets

The SEC’s examination priorities reflect ongoing volatility in the crypto asset markets. Examinations will focus on:

• Client Understanding: The SEC will assess whether clients fully understand the risks associated with crypto assets being offered as securities.
• Compliance Programs: Registrants must conduct routine reviews and enhancements of their compliance programs related to crypto assets.

The technological risks associated with the security of crypto assets will also be a focal point during examinations.

Emerging Financial Technologies

The rise of AI and other emerging financial technologies presents both opportunities and challenges for the SEC. The Division will evaluate:

• Adequacy of Disclosures: Registrants must ensure that representations about AI capabilities are fair and accurate.
• Client Services: The SEC will prioritize ensuring that AI-driven services align with clients’ investment profiles and strategies.

Additionally, firms utilizing AI must have written policies to prevent illegal activities, such as fraud or money laundering, and to safeguard client data.

Conclusion

The SEC’s 2025 examination priorities signal a proactive approach to addressing the evolving landscape of investment management and regulatory compliance. For private funds and investment advisers, understanding these priorities is crucial for ensuring compliance and protecting investor interests. As the SEC continues to adapt to emerging risks and technologies, registrants must remain vigilant in their compliance efforts and be prepared for increased scrutiny in the coming year.