The U.S. Securities and Exchange Commission (“SEC”) recently released the list of examination priorities for their 2025 fiscal year[1]. In their release, the SEC stated that their goal for issuing the list to coincide with the beginning of their fiscal year is to “provide more transparency and as early as reasonably possible to allow registered firms more opportunities to evaluate their compliance efforts.”
To help advisory firms do just that, this Risk Management Update will discuss the exam focus areas for investment advisers and provide guidance on what to consider and steps to take to strengthen your compliance program.
Adherence to Fiduciary Standards of Conduct
It is not surprising that the SEC’s first couple of sentences under this section state that investment advisers, as fiduciaries, owe the duties of care and loyalty to their clients, and must always place clients’ interests first. This has been their continued mantra since they issued their interpretive guidance on an investment adviser’s fiduciary duty in 2019.[2]
Their general focus on fiduciary standards during routine exams will cover the following:
- Investment advice pertaining to investment products, strategies, and account types.
- Dually registered firms and advisory firms with affiliated broker-dealers.
- An advisory firm’s conflicts surrounding fees and compensation.
Specifically, they will review:
- Recommendations of high-cost products, unconventional instruments, illiquid and hard to value assets, and investments that can be affected by higher interest rates or changing market conditions, including commercial real estate.
- Suitability of recommendations and investment advice.
- Determinations of appropriateness for recommending brokerage or advisory account.
- Mitigation steps for addressing conflicts of interest.
- Disclosures regarding capacity when making recommendations (i.e., investment adviser representative or registered representative), and conflicts of interest.
Effectiveness of an Adviser’s Compliance Program
This area pertains to the requirements under Rule 206(4)-7 of the Investment Advisers Act of 1940 (the “Advisers Act”), which includes requirements to designate a Chief Compliance Officer, adopt and implement written policies and procedures, and review those annually to determine adequacy and efficacy.
The general focus on compliance programs during routine exams will cover the following:
- Core areas, including portfolio management and trading, marketing, disclosures and regulatory filings, custody, and valuations.
- Whether policies and procedures address Advisers Act requirements and conflicts of interest areas.
- The robustness of an advisory firm’s annual review process in determining the effectiveness of their compliance program.
Specifically, they will review:
- Outsourcing of investment selection and management.
- Alternative sources of revenue or benefits (e.g., selling non-securities-based products to clients).
- Fee calculations and related disclosures, testing for appropriateness and accuracy.
- Heightened focus on illiquid and hard to value assets invested in by clients.
- Integration of artificial intelligence in a firm’s advisory business (including portfolio management, trading, market, and compliance).
- Supervision and oversight of independent contractors that are working from geographically dispersed locations.
- Compliance processes for when an adviser changes business models or adds a new area of business.
Advisers to Private Funds
The SEC emphasizes that private fund advisers continue to be a very large portion of SEC registered investment advisers, so they remain focused on these advisers and specific related topics.
The general focus on private fund advisers during routine exams will cover the following:
- Consistency of disclosures and adherence to fiduciary obligations.
- Accuracy of fees and allocation of expenses.
- Disclosure of risk and conflicts, and adequacy of policies and procedures.
- Compliance with applicable recently adopted SEC regulations.
Specifically, they will review:
- Steps taken during times of market volatility, interest rate changes, significant withdrawals.
- Funds that hold more leverage or hard-to-value assets.
- Fee calculations of post commitment period management fees, and valuation of illiquid assets, along with disclosures of same.
- Disclosures of use of debt, fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between funds and/or others, investments held in multiple funds, and use of service providers.
- Adoption and adequacy of policies and procedures on recently adopted applicable rules and determination of adherence to same.
Compliance Considerations and Steps for Strengthening Your Compliance Program
To have an effective compliance program, a firm’s oversight process needs to adequately address business practices and regulatory changes. Additionally, while the CCO is mainly responsible for oversight and administration, it is necessary that all personnel have a clear understanding of applicable requirements in order to help prevent violations.
Ensuring a strong compliance program takes time, effort, and appropriate resources. For that, advisory firms should:
- Have a good compliance training program in place, which includes but is not limited to distribution and easy access to current compliance policies and procedures, sending periodic emails on various compliance topics, and requiring periodic written certifications from employees on their understanding of requirements.
- Confirm that the compliance testing and review processes in place are dynamic, robust, and tailored to identify any probable or actual violations. Testing should be set up as transactional (i.e., time of activity), periodic (i.e., at appropriate intervals), and forensic (i.e., over time periods to detect any patterns).
- Perform at least annual risk and conflict assessments that have an overarching goal of eliminating as many material risks and conflicts as possible. For the ones remaining, the assessments should determine whether they are adequately addressed and disclosed. The types of risks reviewed should include regulatory, financial, and reputational. For conflicts, look at trading and portfolio management practices, Code of Ethics and insider trading, custody, compensation and benefits both received and provided, revenue sharing and referral arrangements, and service providers being used, among other areas.
- Incorporate the above into the required annual review, which should be documented and outline all the areas reviewed, compliance steps taken during the year to help maintain the program, findings for areas needing enhancement, and recommendations (or steps already taken) for strengthening the area. Documentation of the implementation of recommendations should also be maintained.
- Assess resources (both human and technology) that are dedicated to compliance at least annually. The assessment should consider, at a minimum, whether the testing and review process is effective in preventing violations, the findings and recommendations made by the CCO in the annual review, and the adequacy of the compliance training program for employees.
- Maintain documentation that substantiates in detail the performance of each of the above steps. Without such documentation, it is next to impossible to demonstrate the strength of a compliance program, especially when there have been any violations.
Conclusion
While the SEC’s list of exam priorities is a very helpful tool, it is important to keep in mind that it is not inclusive of all the areas the SEC will review during a routine examination. Some areas not mentioned include advertising and adherence to the requirements of the Marketing Rule,[3] cybersecurity, privacy and safeguarding of client non-public information,[4] proxy voting activity, books and records retention and destruction, code of ethics and insider trading, business continuity, political contributions, electronic communications and social media use, cryptocurrency, and ESG investing.
The Core Compliance consulting team is well versed in helping firms maneuver through an SEC examination and we also perform regulatory mock exams, which is a great exercise for preparing for an eventual exam. For more information, please contact us at info@corecls.com, at (619) 278- 0020 or visit us at www.corecls.com.
Author: Tina Mitchell, Managing Director, Consultation Services; Editor: Matthew Rothchild, Sr. Compliance Consultant, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
[1] FY2025 Division of Examinations Examination Priorities
[2] See Commission Interpretation Regarding Standard of Conduct for Investment Advisers
[3] Rule 206(4)-1 of the Advisers Act.
[4] Amendments to Regulation S-P were recently adopted and carry a compliance date of December 3, 2025 for larger firms that have $1.5 billion in assets under management, and June 3, 2026 for smaller firms.