2025 Exam Priorities Related to the Investment Management Industry

On October 21st, 2024, the SEC’s Division of Examinations (“EXAMS”) released their 2025 Examination Priorities (the “Priorities”). This note will focus on the priorities relevant to the investment management industry.

Key Takeaways:

Priorities are Not a Roadmap: EXAMS priorities offer more of a glimpse into the past than a guide for the future. Since the examination program is fragmented across regional offices, examiners often focus on their own areas of interest, which may not align with the stated priorities. Advisers should concentrate on the specific risks tied to their individual business models.
Focus on Esoteric Private Equity Issues: This year highlighted several complex management fee calculation issues commonly found in private equity business models. The Private Funds Unit will likely focus on topics such as the application and disclosure of management fee offsets, the handling of dispositions, valuation and the construction of the management fee basis.
Examinations Targeted Based on Market Dynamics: Though the Private Funds Unit has long followed this practice, this year’s priorities highlight concerns about specific market dynamics. For instance, interest rate-sensitive products like credit may be a focus of examinations. Commercial real estate was also repeatedly mentioned as a potential area of scrutiny. We anticipate that examiners will use Form PF and other data to identify areas of stress to target examinations.
Election Sensitivity: Many key priorities in this cycle depend on the outcome of the November election. Issues related to private funds, fiduciary responsibilities, and more complex topics like management fee calculations could be reversed if a new Republican chair takes control of the SEC.

Priority	Description and Interpretation	Who might be selected	Potential Exam Focus Areas	Election Sensitivity
Fiduciary Issues	Fiduciary issues for the SEC often center on managing conflicts of interest. These can be hard to address because they’re sometimes difficult to spot and require a high level of judgment, which can later be questioned by EXAMS. Specifically, the SEC flagged: (1) high-cost products; (2) unconventional instruments; (3) Illiquid and difficult-to-value assets; (4) assets sensitive to higher interest rates or changing market conditions, including commercial real estate; (5) affiliated broker-dealers; and (6) financial conflicts of interest.	• Private credit managers; • Real estate managers, especially those well known for having large commercial real estate portfolios; • Managers with affiliated broker dealers; • Large, complex managers with potentially significant conflicts of interest; • Managers reporting poor performance on Form PF, as that may be a sign of distress; • Private equity managers.	• Management fee calculations at closed end funds including: (a) The timely removal of disposed-of assets from the management fee base; (b) The inappropriate capitalization of costs into the management fee basis; (c) Treatment of dividend recapitalizations; and (d) Disclosure offset application for fees that are not 100% offset. • Affiliated service providers including related party brokers- dealers; • Vertical integration in real estate; • Co-investment allocation; • Continuation Funds.	High – Aside from clear cases of fraud, a Republican administration may reduce focus on this priority, as enforcement in this area often involves significant judgment and second- guessing by examiners and investigators. Some staff may believe that high level disclosure may be sufficiently robust to mitigate risk.
Compliance Program	Reviewing compliance programs is a key part of every examination. These reviews typically take two forms: (1) A qualitative assessment of the compliance programs; (2) A retrospective review of the controls related to issues uncovered during an examination.	We expect that this type of review will be part of every investment adviser examination. However, three types of firms where this is particularly important are: • New registrants; • Quickly growing firms; • Firms with outsourced CCOs.	• Adequacy and documentation of an annual compliance review; • Oversight of sub-advisers and of any outsourcing of investment selection and management; • Policies, procedures and oversight related to any alternative sources of revenue or benefits; • Appropriateness and accuracy of fee calculations and the disclosure of fee- related conflicts; • Compliance with technical rules including custody and marketing; • Valuation; • Use of AI; • Updates to compliance program to account for business changes.	Low – Republican administrations typically see EXAMS as partners with the industry, and compliance reviews of this nature are seen as fostering that partnership. If Republicans win the next election, we expect these types of reviews to increase.
Private Funds Program	Fiduciary issues are the primary concern for private funds. These products are often complex, and examinations of private funds are more likely to lead to enforcement investigations compared to traditional asset managers.	• Private fund advisers • Private funds reporting adviser led secondaries in their Form PF.	• Management fee calculations, including mid period step downs, post commitment management fee calculations, dispositions, fulsome disclosure of offset allocations; • Expense allocation and expense shifting issues; • Valuation risks, including risks associated with rising interest rates; • Continuation funds; • Investment allocation; • Use of leverage including subscription lines of credit and NAV loans; • Capital stack investing; • Investment allocation; and • Regulatory filings including the new Form PF.	High – Republican administrations often view private fund investors as large, sophisticated institutions capable of protecting their own interests. As a result, they may shift EXAMS’ focus away from private funds and towards retail products.
Investment Companies	EXAMS continues to prioritize examinations of registered investment companies (RICs or funds), including mutual funds and exchange-traded funds, due to their importance to retail investors, particularly those saving for retirement. Investment companies have also grown in importance as more RICS have been used to package alternative investment products.	• Business Development Companies • Interval funds • New registrants • RICs managed alongside private funds	• Section 17 co-investment arrangements; • 38a-1 reviews; • 15(c) processes; • Rule 2a-5 and valuations; and • 12b-1 distribution in guise.	Low – Republican administrations consider registered products to be a priority given their nexus of retail investors.
Cybersecurity	A perennial examination priority, the Division’s focus on cybersecurity practices by registrants remains vital to ensure the safeguarding of customer records and information. Examinations citing significant cybersecurity failures or cyber breaches may lead to enforcement investigations. The current Acting Director of Examinations formally headed theTechnology Controls Program –EXAMS’ cyber security team.	• Selection is often event based – press stories about cyber breaches are frequently followed by examinations.	• Policies and procedures; • Governance practices; • Data loss prevention; • Access controls; • Account management; • Responses to cyber-related incidents; and • Vendor diligence	Low – There is broad bipartisan agreement on the importance of cybersecurity.
Emerging Technologies / AI	Previously, the focus on emerging technologies has been largely on companies promoting AI capabilities. This time, however, it’s possible that an ‘AI-washing’ approach may be paired with a reassessment of AI model risk management.	• Firms advertising the use of AI or describing AI as a risk in their Form ADV. • Firms whose use of AI is identified during a routine examination.	• Marketing and representations are fair and accurate; • Operations and controls in place are consistent with disclosures made to investors; • Algorithms produce accurate output and testing, management and oversight of models is sufficient; and • Any investment advice is consistent with objectives.	Low – We expect compliance reviews of Emerging Technologies/AI to be focused on disclosure, governance, and oversight. Compliance programs will still be expected to address business risks, including the use of emerging technologies.
Crypto	Crypto has been the focus of numerous SEC enforcement cases,as it is viewed as vulnerable to fraud and difficult to regulate.	• Firms specializing and holding themselves out as crypto advisers; • Firms which invest in crypto as part of a broader investment program.	• Suitability; • Custody; • Valuation; • Operational Resiliency	Medium – While risks abound, there is currently disagreement over the crypto regulatory framework, with a Republican administration possibly believing that the SEC lacks sufficient jurisdiction in this area.