On October 21, 2024, the U.S. Securities and Exchange Commission (the “SEC”) Division of Examinations (the “Division”) announced its 2025 examination priorities. For Registered Investment Advisers (“RIAs”), the significant focus of the examination priorities will remain on designing, implementing, testing, and documenting robust policies and procedures. We outline the key takeaways below.
As in years past, the priorities will focus on the RIA’s compliance program, including the adequacy of its policies and procedures, whether it is abiding by its fiduciary obligations, disclosures of conflicts of interest, compliance with recently adopted rules, the accuracy of calculations and allocations of fund-level fees and expenses, and whether disclosures are consistent with actual practices, among others.
Additional focus areas included in the SEC’s 2025 examination priorities include:
- Cybersecurity practices to ensure the safeguarding of customer records and information.
- The use of artificial intelligence throughout the adviser’s operations, investment management, trading, compliance, and/or for marketing processes.
- Illiquid or hard to value assets, especially when valuation is used as a basis to calculate management and performance fees.
- The shortening of the settlement cycle to T+1 and whether the RIA’s books and records are amended to be in compliance.
- Compliance with rules relating to Marketing, Form PF, and other required filings.
RIAs to Private Funds
RIAs overseeing private funds continue to represent a substantial segment of the SEC-registered investment adviser landscape. The Division will maintain its focus on advisers to private funds and prioritize specific areas, including:
- Managing portfolio risks associated with market volatility and higher interest rates.
- Ensuring compliance with contractual obligations related to partnership advisory committees or similar structures, such as advisory boards.
- Accurate calculation of private fund fees and expenses (both fund-level and investment-level).
- Evaluating due diligence practices for consistency with policies, procedures, and disclosures, particularly with respect to private equity and venture capital fund assessments of prospective portfolio companies.
- Review of conflicts, controls, and disclosures regarding private funds managed side-by-side with registered investment companies and use of affiliated service providers.
- Assessing the adequacy of policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events.
Emerging Financial Technologies
The Division remains focused on evaluating the use by RIAs of automated investment tools, AI and trading algorithms or platforms, and the risks associated with the use of emerging technologies, including:
- Review of documentation to assess whether representations are fair and accurate.
- Review of operations and controls to assess whether they are consistent with disclosures made to investors.
- Evaluation of algorithms that are used to produce recommendations consistent with investors’ investment profiles or strategies.
- Review of the controls in place to confirm that recommendations resulting from digital engagement practices are consistent with regulatory obligations to investors.
With respect to the use of AI, the Division will conduct a more in-depth review of the RIA's operations and documentation, including:
- Review the accuracy of representations against a RIA’s capabilities or use of AI.
- Review the effectiveness of policies and procedures to monitor and/or supervise a RIA's use of AI, including for tasks related to fraud prevention and detection, back-office operations, anti-money laundering, and trading functions, as applicable.
- Evaluation of the integration of regulatory technology to automate internal processes and optimize efficiencies.
- Ascertain how RIAs protect against loss or misuse of client records and information that may occur from the use of third-party AI models and tools.
Crypto Assets
The Division will continue its focus on crypto assets and their associated products and services. Examination focus areas are expected to review RIA’s practices and policies around:
- Whether the RIA adhered to and maintained standards of care in making recommendations, referrals, or providing investment advice.
- Whether the RIA consistently reviewed, updated, and enhanced their compliance, disclosures, and risk management policies and procedures.
- A determination of whether advice or recommendations given to investors were in their best interest, taking into account the investor's financial circumstances.
- An evaluation to confirm the alignment of operational processes and controls with the disclosures presented to investors.
How Petra Can Help
Petra Funds Group’s compliance team has decades of experience managing SEC regulatory compliance programs for private fund advisers. Our expertise enables us to provide insight and guidance on a wide range of regulatory compliance services, from investment adviser registration to ongoing compliance support to performing SEC mock examinations. Learn more about Petra’s comprehensive compliance offering here. Reach out to Jesse Brown to learn more about our Regulatory Compliance solutions for private funds.
