Examination Priorities for 2025

In October 2024, the U.S. Securities and Exchange Commission (SEC) Division of Examinations released its annual list of examination priorities, identifying key areas of focus for the fiscal year 2025. These priorities are part of the SEC’s broader mission to protect investors, maintain fair and efficient markets, and promote capital formation. By highlighting emerging risks and areas of particular concern, the Division’s priorities offer guidance to financial firms, investment advisers, and broker-dealers on where they may face regulatory scrutiny in the year ahead. This year’s priorities, published just before the U.S. presidential election, reflect a commitment to continuity in investor protection, yet may evolve under new leadership. Firms should pay close attention to these priorities and prepare accordingly, as they provide valuable insight into the Division’s focus on compliance with fiduciary duties, conduct standards, cybersecurity practices, and the responsible use of artificial intelligence. Each of these areas represents both a challenge and an opportunity for market participants to reinforce regulatory compliance and bolster investor confidence.  

Examination Priorities for 2025 

1. Advisers’ Fiduciary Duty and Conflicts of Interest Focus: The SEC emphasizes investment advisers’ duty to act in the best interest of their clients. Examiners will likely investigate whether firms have policies that ensure transparency and fair dealing, especially where conflicts of interest might arise. 

Specific Areas of Scrutiny: Examiners will look at fee structures, compensation models, and whether advisers are disclosing any conflicts of interest that may affect their impartiality. For example, conflicts could include recommendations that benefit the adviser financially, such as advising clients to invest in affiliated products or high-fee funds. 

Actionable Steps for Firms: Firms should prepare by ensuring that all conflicts are clearly disclosed to clients and that there are internal policies to manage and mitigate these conflicts effectively. Documentation of efforts to comply with fiduciary obligations will also be critical during examinations. 

2. Standards of Conduct Focus: This priority targets compliance with the Regulation Best Interest (Reg BI) standard for broker-dealers and fiduciary standards for investment advisers, which mandate that financial professionals prioritize client interests. 

Specific Areas of Scrutiny: Examiners will investigate how firms are implementing and enforcing these standards, focusing on suitability of investment recommendations, client risk tolerance assessments, and disclosures. Firms’ marketing materials and communications may also be reviewed for potential misrepresentation or exaggeration of returns and risks. 

Actionable Steps for Firms: Firms should ensure robust training for representatives on Reg BI and fiduciary standards and maintain clear documentation to support suitability determinations and client communications. Firms should also review advertising materials for any misleading claims. 

3. Cybersecurity Focus: As cyber threats grow more sophisticated, the SEC will scrutinize firms’ cybersecurity measures to protect client data, intellectual property, and firm integrity. 

Specific Areas of Scrutiny: Examiners will review firms’ cybersecurity policies, procedures for handling data breaches, and practices for assessing third-party risks. They will also look at employee training on cybersecurity protocols and the adequacy of response plans for cyber incidents. 

Actionable Steps for Firms: Firms should conduct regular cybersecurity risk assessments and ensure that they have an incident response plan in place. It’s also crucial to provide cybersecurity training for employees and ensure data protection practices comply with regulatory standards. Firms should document efforts to test and improve their cybersecurity measures to present a robust defense during examinations. 

4. Artificial Intelligence (AI) Focus: As AI tools become more prevalent in financial services, the SEC will assess how firms implement and oversee AI technologies, particularly regarding fairness, transparency, and governance. 

Specific Areas of Scrutiny: Examiners will examine how firms govern and audit their AI tools, ensuring that these technologies do not lead to unintended biases or conflicts. The focus will also be on how firms disclose their use of AI in decision-making processes and whether adequate safeguards are in place to prevent misuse. 

Actionable Steps for Firms: Firms should establish clear governance frameworks for AI implementation, ensuring transparency in how these tools influence client recommendations and decisions. Documenting efforts to test and evaluate AI for biases or errors and disclosing AI use to clients will be important steps toward compliance. 

These priorities provide a clear roadmap for where the SEC’s focus will be in the coming year. By proactively addressing these areas, registrants can help minimize examination risks and align with regulatory expectations.

 If you have questions about these changes or need assistance navigating compliance under the amended rules, please reach out to our team for tailored guidance.