By George C. Miller, Partner of Shustak Reynolds & Partners, P.C. posted on Tuesday, November 12, 2024.

George C. Miller

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email: [email protected]

On October 21, 2024, the U.S. Securities and Exchange Commission (SEC) Division of Examinations released its annual examination priorities for the fiscal year 2025, outlining areas of risk and focus for market participants. As in past years, the SEC’s areas of focus include upholding fiduciary obligations, avoiding conflicts of interest, and cybersecurity. The SEC’s newer areas of focus include ensuring proper use of artificial intelligence (AI) and private fund adviser regulations. The SEC’s priorities reflect both longstanding concerns and emerging risks in the financial markets.

Key Priorities

1. Fiduciary Duties and Conflicts of Interest:

The SEC will continue examining investment advisers' adherence to fiduciary standards, especially regarding high-cost products, illiquid assets, and complex financial instruments. The SEC will focus particularly on the suitability of investment recommendations and the mitigation of conflicts of interest, especially for dual registrants—e.g., those affiliated with both investment adviser and broker-dealer firms.

2. Private Fund Advisers:

After a ruling vacating the SEC’s Private Fund Adviser Rules (PFAR), the SEC plans to examine private fund advisers' compliance with disclosure requirements, fee and expense calculations, and fiduciary obligations, particularly in times of market volatility or interest rate fluctuations. The Division also will focus on compliance with newly adopted SEC rules, including amendments to Form PF and the Marketing Rule.

3. Cybersecurity and Operational Resiliency:

Cybersecurity remains a significant concern. The SEC will focus on firms' data protection practices, including access controls, account management, and responses to cyber incidents like ransomware attacks. Special attention will be paid to third-party risks and compliance with data protection regulations (e.g., Regulations S-ID and S-P).

4. Emerging Financial Technologies:

The SEC is increasingly concerned with AI, automated investment tools, and trading algorithms. The Division will examine how firms use AI and digital engagement tools, ensuring their compliance with fiduciary obligations and the accuracy of their disclosures.

5. Cryptoassets:

Given ongoing volatility in the crypto market, the SEC will monitor firms' activities in cryptoassets, assessing their compliance with fiduciary standards, risk disclosures, and operational resiliency in the handling of crypto and related products.

6. Private Funds and Valuation Issues:

There will be a continued emphasis on valuation issues, particularly for illiquid or difficult-to-value assets like commercial real estate. This will include scrutiny of how private funds and investment advisers manage these valuations and related disclosures.

7. Broker-Dealers:

Regulation Best Interest (Reg BI) and Form CRS disclosures will remain key examination areas for broker-dealers. The SEC will assess whether firms are meeting their obligations to retail investors, particularly with complex or illiquid products, and how they handle conflicts of interest in digital engagement tools.

8. Anti-Money Laundering (AML):

The SEC will continue to scrutinize firms' AML programs, focusing on compliance with customer identification procedures and suspicious activity reporting, particularly for broker-dealers and registered investment companies (RICs).

The Division’s priorities reflect both longstanding regulatory objectives and responses to evolving risks in the financial markets, such as technological advances and market instability. Registrants should work with counsel to ensure they have robust compliance programs in place to address the foregoing, as the SEC will closely examine compliance with both new and existing regulations.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.

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