On October 21, 2024, the Division of Examinations (the “Division”) of the U.S. Securities and Exchange Commission (the “SEC”) announced its annual 2025 examination priorities (the “Examination Priorities”).[i] First published by the Division in 2013, the Examination Priorities are an industry outreach initiative by the SEC providing advisers and other market participants with valuable resources designed to assist them in updating their compliance policies, procedures, and practices to address current regulatory concerns. Many of the priority areas from last year remain the same in 2025, although as stated, the Examination Priorities are more centered around investment advisers’ compliance programs, including in the areas of cybersecurity and artificial intelligence, and conflicts disclosures, with reduced emphasis on custody and due diligence practices.

As customary, the Examination Priories reflect the Division’s attempt at leveraging data and information to identify firms and practices that the Division believes present elevated risk to investors. As a result, it is not surprising to see a renewed focus on cybersecurity and privacy as well as artificial intelligence (and associated areas of vendor management) perceived by the Division as high areas of risk. The Division is also interested in seeing that its newly adopted regulations, such as amendments to Form PF and marketing rules, have successfully become a part of advisers’ compliance practices and procedures.

While as customary, the Examination Priorities address a variety of market participants, including broker-dealers, self-regulatory organizations, clearing agencies, security-based swap dealers, and execution facilities, we will focus our review on 2025 priorities affecting private fund advisers, followed by some other priority areas of note.

Investment Advisers to Private Funds

The Examination Priorities name several focus areas directly affecting private fund advisers. As a general matter (and consistent with past practice), the Division will continue to emphasize examinations of advisers who have never been examined and those who have not been examined for several years. More specifically, the report includes the following priority areas that the Division will review during private fund adviser examinations in 2025:

Investment Disclosures. The Division will continue to assess whether disclosures provided by private fund advisers to their advisory clients are consistent with actual practices and whether advisers have met their fiduciary obligations, particularly (consistent with last year’s examination priorities) in times of market volatility and in instances where the adviser’s private funds are exposed to interest rate fluctuations. The Division indicates that it will focus on examinations of private fund advisers whose funds are experiencing poor performance and significant withdrawals or hold relatively more leverage and difficult-to-value assets.

Fees and Expenses. The Division intends to continue its historical focus on whether private fund advisers are accurately calculating and allocating fees and expenses, at both the fund and investment level. In this regard, private fund advisers should be particularly mindful of their valuation of illiquid assets, calculation of post-commitment period management fees, potential management fee offsets, and the adequacy of fees and expenses disclosures.

Conflicts of Interests, Controls and Risks. As part of its examination program, the Division plans to continue to assess private fund advisers’ disclosures of conflicts of interest and risks, and the adequacy of policies and procedures in place to mitigate such conflicts and risks. The Division has specifically highlighted fund-level lines of credit, investment allocations, adviser-led secondary transactions, transactions between an adviser’s funds, investments held by multiple funds, and the use of affiliated service providers as particular areas of concern.

Compliance with Recent SEC Rules. The Division plans to assess private fund advisers’ compliance with recently adopted SEC rules, including amendments to Form PF[ii] and the modernized rules regarding investment adviser advertising activities (i.e., the “Marketing Rule”),[iii] including whether advisers have adopted (and actually follow) policies and procedures to ensure compliance with said rules. Specifically, the Division indicated that in fiscal year 2025, it anticipates conducting targeted outreach to the securities industry, focusing on implementation of the requirements contained in the SEC’s updates to Regulation S-P.

Other Investment Adviser Priority Areas

Investment Companies. The Division continues to prioritize examinations of registered investment companies (“RIC”), including mutual funds, generally focusing on the review of their compliance programs, disclosures, governance practices, and certain developing areas of interest, such as RICs with exposure to commercial real estate and compliance with new and amended rules. Particular examination focus areas may include a review of specific topics or characteristics involving: (1) fund fees and expenses, and any associated waivers and reimbursements; (2) oversight of service providers (both affiliated and third-party); (3) portfolio management practices and disclosures, for consistency with claims about investment strategies or approaches and with fund filings and marketing materials; and (4) issues associated with market volatility.

Fiduciary Obligations. The Division will focus on the fiduciary duties of all investment advisers. Advisers are required to abide by their duties of care and loyalty, and advice must serve the best interests of their clients. The staff will assess these duties in various contexts, such as recommendations to advisory clients of high-cost products or unconventional instruments or investment advice and disclosure issues arising for dual registrants or advisers with affiliated broker-dealers. The staff will also evaluate how advisers address conflicts of interest, including whether and how advisers adequately mitigate, eliminate, or make full and fair disclosure of all conflicts of interest “which may lead the adviser—consciously or unconsciously—to render advice that is not disinterested such that a client can provide informed consent to the conflict.”

Compliance Rule. SEC examinations remain focused on the effectiveness of SEC-registered investment advisers’ compliance programs and their annual reviews of the same, as required under Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940, as amended. Examinations of advisers’ compliance policies and procedures will typically include an evaluation of marketing, valuation, trading, portfolio management, disclosures and filings, and custody matters. The Division’s review of an adviser’s compliance program may focus on or go into greater depth depending on its practices or products. For example, in reviewing advisers’ compliance programs, the Division may focus on the fiduciary obligations of advisers that outsource investment selection and management to third parties, alternative sources of revenue and related benefits that advisers receive, appropriateness and accuracy of fee calculations and disclosure of fee-related conflicts. If clients invest in illiquid or difficult-to-value assets, such as commercial real estate, examinations may have a heightened focus on valuation.

Cybersecurity and Operational Resiliency. The SEC continues to focus on the increased usage of technology across the investment management industry and various associated risks. The Examination Priorities list cybersecurity as “a perennial examination priority.” Cybersecurity attacks, weather-related events, and geopolitical concerns remain areas of concern for the Division. The staff’s review will include registrants’ practices related to prevention of interruptions to mission-critical services; protection of investor information, records, and assets; maintenance of related policies and procedures; data loss prevention; access controls; governance policies; account management; responses to cyber-related incidents and oversight of third-party vendors.

Crypto Assets and Emerging Financial Technology. The SEC will continue to observe the development of crypto assets and other emerging financial technologies in the market. Examinations will assess such aspects as compliance with applicable standards of conduct, risk disclosures, operational resiliency, the custody rule, automated investment tools, and artificial intelligence. The Division will also assess whether adequate policies and procedures are in place to monitor and/or supervise investment advisers’ use of artificial intelligence.

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This client alert is intended to serve only as a general overview of priorities pertaining to private fund advisers and does not purport to be a full and complete discussion of the SEC’s 2025 examination priorities. Should you have any questions regarding the contents of this alert, please do not hesitate to contact a member of Foley’s Fund Formation and Investment Management team.

[i] Sec. & Exchg. Comm’n Div. of Examinations, 2025 Examination Priorities (21 October 2024), https://www.sec.gov/files/2025-exam-priorities.pdf.

[ii] For further information regarding the foregoing amendments to Form PF, see “Form PF Changes Ahead – the SEC Keeps its Focus on Private Fund Advisers” (8 February 2022), https://www.foley.com/insights/publications/2022/02/form-pf-changes-ahead-sec-private-fund-advisers/.

[iii] For further information regarding the Marketing Rule, see the following articles:

• “SEC Adopts Modernized Marketing Rule for Investment Advisers” (22 December 2020), https://www.foley.com/insights/publications/2020/12/sec-adopts-modernized-marketing-rule/

• “The SEC Signals it is Ready to Enforce the New Marketing Rule” (26 September 2022), https://www.foley.com/insights/publications/2022/09/sec-signals-ready-enforce-new-marketing-rules/

• “The SEC Renews its Emphasis on Compliance with the New Marketing Rule” (18 July 2023), https://www.foley.com/insights/publications/2023/07/sec-compliance-new-marketing-rule/

• “New SEC Marketing Rule FAQ: IRR Calculations When Using Subscription Lines” (26 February 2024), https://www.foley.com/insights/publications/2024/02/sec-marketing-rule-irr-calculations-subscription-lines/