SEC’s Division of Examinations identifies areas of increased investor risk in fiscal 2025 - 22 October 2024

The SEC’s Division of Examinations on Monday released its fiscal 2025 examination priorities, an annual publication designed to inform investors and registrants of potential risks in the U.S. capital markets and make them aware of the Division’s planned focus in the new fiscal year.

“Our 2025 examination priorities identify the key areas of potentially increased risks and related harm for investors,” said Keith Cassidy, acting director of the Division of Examinations, in a statement. “We hope that registrants will evaluate their compliance programs in the areas we identified and make the changes necessary to protect investors and maintain fair and orderly capital markets.”

For fiscal year 2025, in addition to conducting examinations in core areas such as disclosures and governance practices, the Division said it will also examine for compliance with new rules, the use of emerging technologies, and the soundness of controls intended to protect investors’ information, records and assets.

Who is evaluated. The Division examines nearly a half-dozen SEC-registered entities, including investment advisers, investment companies, broker-dealers, clearing agencies and self-regulatory organizations, for compliance with federal securities laws. It then prioritizes examinations of the practices, products and services found, through risk-based assessment, to present heightened risk to investors or to the integrity of the U.S. capital markets.

Investment advisors. For example, the Division looks at the advice that investment advisers provide to clients regarding products, investment strategies and account types, and whether that advice satisfies the fiduciary obligations owed to their clients. In particular, the SEC said, the Division will focus on recommendations related to high-cost products, unconventional instruments, illiquid and difficult-to-value assets, and assets sensitive to higher interest rates or changing market conditions.

In addition, the Division’s assessment of advisers’ compliance programs is a key part of the examination process. Examinations focusing on this topic typically include an evaluation of the core areas of advisers’ compliance programs which include, as appropriate for each examination, marketing, valuation, trading, portfolio management, disclosures and filings, and custody.

Registered investment companies. The Division also prioritizes examinations of registered investment companies (RICs or funds), including mutual funds and exchange-traded funds. Examinations of RICs look at their compliance programs, disclosures and governance practices. Focus areas may include a review of specific topics or characteristics involving fund fees and expenses, associated waivers and reimbursements, oversight of service providers, portfolio management practices, and issues associated with market volatility.

The Division said it will also continue to monitor certain developing areas of interest, such as RICs with exposure to commercial real estate and compliance with new and amended rules.

Broker dealers. As for broker dealers, the Division said it will continue to examine broker-dealer practices related to Regulation Best Interest, a rule the SEC implemented in 2020 to protect investors and standardize the conduct of broker-dealers and financial advisors, including recommendations regarding products, investment strategies, account types and whether the broker has a reasonable basis to believe their recommendation is in the best interest of the customer.

Also evaluated are disclosures made to investors regarding conflicts of interest; conflict identification and mitigation and elimination practices, and processes for reviewing reasonably available alternatives. In particular, examinations of broker-dealer practices focus on recommended products that are complex, illiquid, or may present a higher risk to investors.

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