Anticipated Focus Areas and How RIAs Can Prepare.
The Securities and Exchange Commission (SEC) outlines annual examination priorities to guide financial firms in compliance efforts, protect investors, and uphold market integrity. In 2025, the SEC’s focus is expected to address evolving market dynamics, technological advancements, and the need for enhanced transparency. For Registered Investment Advisers (RIAs), understanding these priorities is not just a compliance exercise—it’s essential to mitigating risk and maintaining a competitive edge. Below, we take a deeper dive into anticipated priorities and offer detailed guidance for preparation.
1. ESG Investment Practices: Scrutiny and Best Practices
As ESG (Environmental, Social, and Governance) investing grows in popularity, the SEC is intensifying its focus on ensuring accuracy and transparency in ESG-related claims. Previous examinations revealed inconsistencies in how firms define and apply ESG criteria, prompting regulators to prioritize this area.
What to Expect:
- Examination of how RIAs integrate ESG factors into investment processes.
- Scrutiny of marketing materials to ensure claims align with actual practices.
- Assessment of governance structures overseeing ESG strategies.
Actionable Steps for RIAs:
- Policy Alignment: Develop or refine ESG policies, ensuring they are clearly defined and consistently applied across portfolios.
- Disclosure Accuracy: Review and verify the accuracy of ESG disclosures in Form ADV, marketing materials, and investor reports.
- Documentation: Maintain detailed records demonstrating how ESG factors influence investment decisions.
- Third-Party Oversight: Evaluate ESG data providers to confirm reliability and adherence to best practices.
2. Cybersecurity and Technology Risk: Mitigating Growing Threats
The increasing digitization of financial services brings heightened risks of cyberattacks. The SEC remains focused on how RIAs protect client data, secure systems, and manage incidents.
What to Expect:
- Rigorous reviews of cybersecurity policies and procedures.
- Assessments of incident response and recovery plans.
- Examination of third-party vendor relationships and their security measures.
Actionable Steps for RIAs:
- Cyber Risk Assessments: Conduct regular evaluations of cybersecurity vulnerabilities and implement necessary upgrades.
- Incident Response Plans: Develop comprehensive response plans detailing protocols for breaches, including communication strategies.
- Employee Training: Implement frequent training sessions to help staff identify phishing attempts and follow data protection best practices.
- Vendor Management: Review contracts with third-party technology providers, ensuring compliance with robust security standards.
Key SEC Guidance: Refer to the SEC’s “Cybersecurity Risk Alert” for detailed recommendations.
3. Anti-Money Laundering (AML) Compliance: Strengthening Safeguards
The SEC collaborates with FinCEN to monitor compliance with the Bank Secrecy Act (BSA), focusing on how firms prevent money laundering and other illicit activities. Given the rise of digital assets and complex transaction networks, the agency is likely to enhance its scrutiny of AML controls.
What to Expect:
- Detailed reviews of Know Your Customer (KYC) and Suspicious Activity Report (SAR) processes.
- Checks for gaps in monitoring transactions and identifying suspicious activities.
- Evaluations of compliance training programs for AML readiness.
Actionable Steps for RIAs:
- Policy Updates: Ensure AML policies are up to date with the latest regulatory standards.
- Transaction Monitoring: Leverage technology to detect unusual patterns indicative of money laundering.
- Training Programs: Regularly train employees on identifying and reporting suspicious activities.
- Audits: Conduct independent audits to assess the effectiveness of your AML program.
4. Artificial Intelligence and Digital Assets: Navigating Innovation
The SEC is expected to expand its focus on how RIAs integrate artificial intelligence (AI) and manage risks associated with digital assets. Concerns about algorithmic biases, lack of transparency, and risks tied to cryptocurrencies remain top of mind.
What to Expect:
- Reviews of AI-driven decision-making tools, including their transparency and effectiveness.
- Scrutiny of disclosures related to the use of digital assets.
- Assessment of risk management frameworks for AI and blockchain technologies.
Actionable Steps for RIAs:
- AI Governance: Document how AI tools are used in client interactions and portfolio management.
- Digital Asset Policies: Develop clear policies addressing risks and regulatory compliance related to cryptocurrencies.
- Disclosure Practices: Ensure clients receive accurate, understandable information about risks linked to AI and digital assets.
- Compliance Reviews: Conduct internal reviews to identify potential algorithmic biases or operational vulnerabilities in AI systems.
5. Conflicts of Interest and Fees: Maintaining Transparency
The SEC continues to scrutinize how RIAs disclose and manage conflicts of interest. Undisclosed revenue-sharing arrangements, referral agreements, and fee structures remain high on the regulator’s radar.
What to Expect:
- Examination of Form ADV disclosures for clarity and completeness.
- Reviews of client account statements for accuracy in fee calculations.
- Scrutiny of compensation models, especially for dual registrants.
Actionable Steps for RIAs:
- Form ADV Updates: Conduct a detailed review of Form ADV Parts 1 and 2 to ensure accurate, up-to-date disclosures.
- Fee Testing: Regularly test client accounts to confirm that fees align with disclosed structures.
- Policy Refinements: Implement policies to address conflicts, particularly those involving third-party payments or cross-selling practices.
Proactive Strategies for SEC Examination Readiness
- Annual Mock Examinations
Simulate an SEC examination to identify weaknesses. Third-party consultants can provide valuable external perspectives. - Comprehensive Training
Offer targeted training aligned with anticipated priorities, such as ESG, AML, and cybersecurity. - Technology Integration
Adopt compliance technology to automate documentation, monitoring, and reporting. This reduces errors and ensures faster responses to SEC inquiries. - Documentation Standards
Maintain detailed, organized records of compliance activities, training logs, and policy updates. Demonstrating a proactive compliance culture can positively influence examination outcomes.
Conclusion
Understanding the SEC’s 2025 examination priorities equips RIAs with the knowledge to address evolving regulatory demands. By taking proactive steps—strengthening policies, enhancing training, leveraging technology, and conducting regular audits—firms can not only meet regulatory expectations but also reinforce trust with clients.
For comprehensive compliance solutions tailored to SEC priorities, contact Corporate Nerd to explore our courses and resources.
Reference
- U.S. Securities and Exchange Commission. Examination Priorities.
- SEC Risk Alert: The Division of Examinations’ Review of ESG Investing. SEC.gov.
- SEC Guidance: Cybersecurity and Resiliency Observations. SEC.gov.
- Financial Crimes Enforcement Network (FinCEN). AML Resources.
- SEC Investor Bulletin: Understanding Digital Assets. SEC.gov.
