On October 21, 2024, the U.S. Securities and Exchange Commission (SEC) unveiled its 2025 Examination Priorities, shedding light on the areas that will command regulatory attention in the coming year. This announcement underscores the SEC’s current intensified focus on emerging risks, compliance challenges and evolving market dynamics. For investment firms, particularly private fund advisers, these priorities offer a roadmap to proactively address relevant compliance and operational vulnerabilities in this regulatory environment.
The Expanding Role of AI and Digital Engagement Practices
For the first time, the SEC’s Division of Examinations has prioritized the use of artificial intelligence (AI) and digital engagement practices across advisory operations. The focus spans the integration of AI in trading, marketing, back-office operations and fraud prevention. Advisers are expected to ensure the accuracy of representations made to investors and to establish robust compliance oversight for AI-driven processes. This shift reflects growing concerns about the ethical and operational risks associated with AI, urging firms to evaluate their AI strategies and governance frameworks.
This new emphasis highlights the dual nature of AI as both an opportunity and a challenge for private fund advisers. On one hand, AI can improve efficiency and decision-making; on the other, it introduces risks related to bias, errors and regulatory compliance. Firms must also prepare for increased documentation requirements and heightened scrutiny of automated decision-making processes that directly impact investors.
Navigating Challenges with Commercial Real Estate and Illiquid Assets
The SEC’s scrutiny of private funds holding illiquid assets, including commercial real estate and private credit, will deepen in 2025 under these new examination priorities. Amid higher interest rates and volatile market conditions, advisers should employ transparent valuation practices and robust risk management strategies. The Division is particularly focused on how advisers manage exposure to significant withdrawals, leverage and market fluctuations. Firms should also prepare for examinations targeting valuation policies and their alignment with fiduciary obligations.
Valuation practices for illiquid assets remain a perennial concern, especially given the inherent difficulties in determining fair value during periods of market stress. The SEC will closely examine how private fund advisers disclose valuation methodologies to investors and whether these methodologies are consistently applied. Advisers should also be prepared to demonstrate how they mitigate risks associated with liquidity mismatches, particularly in funds with substantial exposure to real estate and private credit.
Increased Focus on Adviser-Led Transactions and Fund-Level Credit
Private fund advisers engaging in adviser-led secondary transactions or utilizing fund-level credit lines can also expect heightened regulatory attention. The SEC will closely examine the disclosure of conflicts of interest, the use of affiliated service providers and adherence to fiduciary standards in transactions between funds. Firms should ensure meticulous documentation and transparent communication with investors to mitigate risks in these complex arrangements.
Adviser-led secondary transactions, where advisers may orchestrate sales of assets between funds they manage, present unique challenges. The SEC’s focus will include whether investors are provided with sufficient information to evaluate the merits of such transactions. Similarly, the use of fund-level credit lines, often employed to enhance liquidity or bridge financing gaps, will be scrutinized for alignment with stated investment strategies and potential conflicts of interest.
Enhanced Compliance Requirements for Crypto Assets
As crypto assets and distributed ledger technologies continue to evolve, the SEC remains vigilant in its oversight of this space. Examination priorities include compliance with custody requirements under the Custody Rule, wallet reviews and adherence to Bank Secrecy Act (BSA) requirements. Advisers that employ crypto-related strategies must demonstrate robust controls, particularly around asset custody and anti-money laundering protocols. The SEC’s sustained focus signals the need for firms to stay ahead of regulatory developments in this rapidly changing domain.
For private fund advisers involved in crypto assets, the regulatory landscape remains a moving target. In particular, custodial practices will be scrutinized to ensure that client assets are safeguarded in accordance with SEC rules. Firms must also address the unique risks posed by digital wallets and decentralized platforms, including vulnerabilities to hacking and fraud. Advisers should consider conducting periodic audits of their crypto-related operations to preempt regulatory concerns.
Strengthened Cybersecurity and Information Security Standards
Cybersecurity and operational resiliency will remain cornerstones of the SEC’s examination agenda in 2025, according to the recent priorities laid out by the Division. With new amendments to Regulation S-P coming into effect, firms are required to establish comprehensive incident response programs. The Division will evaluate firms’ readiness to detect, respond to and recover from data breaches, as well as their management of third-party service providers. Firms must also address ransomware risks and unauthorized access to client and investor data to meet the SEC’s heightened expectations.
The emphasis on third-party service providers reflects a growing recognition of the interconnectedness of the financial ecosystem. Advisers must ensure that their vendors adhere to rigorous cybersecurity standards and that contractual agreements include clear incident response obligations. Firms should also anticipate inquiries into their data protection practices, particularly in light of increasing ransomware attacks targeting financial institutions.
Spotlight on Compliance with New Rules and Unexamined Advisers
The SEC will place considerable emphasis on compliance with newly adopted rules, including updates to Form PF and the Marketing Rule. Firms must ensure their policies and practices align with these regulations to avoid potential deficiencies. Additionally, advisers who have never been examined, those newly registered and those not examined in recent years will continue to face increased scrutiny. These firms should prioritize updating their compliance programs to withstand the rigors of SEC examinations.
For newly registered advisers, the SEC’s examinations often serve as a baseline assessment of compliance readiness. These firms should conduct thorough internal reviews to identify gaps in their policies and procedures. Similarly, advisers that have not been examined for several years should prepare for comprehensive reviews that may include updated focus areas, such as AI integration and information security.
Impact of Potential Leadership Changes at the SEC
As the SEC prepares for a transition in leadership under the incoming Trump administration, the regulatory focus may shift in response to a new chair’s agenda. Paul Atkins, a former SEC commissioner known for his market-friendly approach, is widely regarded as a likely candidate for the role. There could be a recalibration of examination priorities in 2025 if Atkins’ leadership prioritizes a less litigious regulatory stance, particularly in certain areas of scrutiny such as crypto enforcement and AI-driven processes.
While a more lenient approach may ease regulatory pressures for some, private fund advisers should remain vigilant. Regulatory priorities often evolve incrementally and the Division of Examinations’ foundational focus on investor protection and market integrity is unlikely to waver significantly. Firms are encouraged to monitor developments closely, or to work with outside consultants that specialize in regulatory compliance, in order to align their compliance programs with any emerging trends or shifts in enforcement philosophy.
Silver’s Recommendations
Given the evolving regulatory landscape and potential leadership changes, Silver recommends the following for private fund advisers:
- Stay Proactive: Continuously monitor updates to SEC priorities and anticipate areas of focus that may carry forward, regardless of changes in leadership.
- Enhance Documentation: Ensure that all disclosures, particularly those related to valuation practices, conflicts of interest and the use of AI, are thoroughly documented and readily accessible.
- Invest in Cybersecurity: Strengthen incident response programs and vendor oversight to meet heightened cybersecurity expectations, including compliance with Regulation S-P amendments.
- Engage in Scenario Planning: Prepare for both leniency and heightened enforcement scenarios by conducting internal audits and addressing compliance gaps preemptively.
- Consult Experts: Partner with legal and compliance professionals to interpret regulatory developments and implement best practices tailored to firm-specific risks.
By following these recommendations, private fund advisers can position themselves to navigate the complexities of the SEC’s 2025 Examination Priorities while remaining adaptable to any changes in regulatory leadership or focus.
The Broader Industry Implications
Beyond private fund advisers, the SEC’s 2025 priorities reflect a broader commitment to safeguarding investors and maintaining market integrity. Fiduciary standards of conduct, conflict management and the suitability of product recommendations will be under the microscope. The Division will also assess the effectiveness of compliance programs, particularly for geographically dispersed firms and those outsourcing key functions.
As the SEC continues to adapt its focus to address emerging risks and regulatory challenges, firms must remain vigilant and proactive. By aligning with the Division’s priorities, investment advisers can not only ensure compliance but also enhance their operational resilience in an era of intensified regulatory scrutiny.
The evolving regulatory landscape offers investment firms, including private fund advisers, an opportunity to distinguish themselves through strong compliance practices and transparency. Firms that invest in robust risk management frameworks and forward-looking governance structures will be well-positioned to navigate the complexities of the 2025 examination priorities, ensuring long-term success in an increasingly regulated industry.
If you have any questions or concerns about anything mentioned above, or about how the 2025 Examination Priorities might impact your firm’s compliance program, please email a member of Silver’s Compliance Team or contact us at [email protected].
As we head into the New Year, we hope the key takeaways we highlighted will help to elucidate where the Silver team thinks the SEC will be focused in the year ahead with tips on how private fund advisers can remain compliant and remain outside of the crosshairs of regulators.