The SEC Announces its 2025 Exam Priorities

On October 21, 2024, the Securities and Exchange Commission’s (“SEC”) Division of Examinations (“Division”) published its 2025 examination priorities (“Exam Priorities”). Although President-elect Trump has pledged to dismiss SEC Chair Gary Gensler on “day one” and significant changes are anticipated for the SEC’s regulatory agenda, the Exam Priorities remain largely relevant and important guidance for firms subject to SEC examination authority because the Division focuses on firm compliance with existing rules and regulations. But the new administration may cause a shift in the types of violations that would be referred to the Enforcement Division for investigation (including crypto assets). In its press release accompanying the Exam Priorities, the SEC highlighted its continued prioritization of examinations in emerging risk areas, including cybersecurity and crypto assets,¹ vowing to examine registered entities for their “compliance with new rules”, use of emerging technologies, and soundness of controls intended to protect investor information, records, and assets.”² The SEC further identified “Emerging Financial Technologies” like artificial intelligence (“AI”) as a new focus area. Through the Exam Priorities, the SEC also reiterated its long-standing focus on “disclosures and governance practices.” The Division will continue to prioritize review of investment advisers’ adherence to their fiduciary standards, effectiveness of their compliance programs, calculation and allocation of fees and expenses, and conflicts of interest. Advisers to private funds will continue to be subject to particular focus in these areas as well, including now facing scrutiny for meeting their fiduciary obligations in times of market and/or interest rate volatility. Broker-dealer examinations will continue to focus on assessing compliance with Regulation Best Interest, Form CRS, as well as new rules relating to the shortening of the settlement cycle. Below is a summary of the 2025 Exam Priorities.

I. Notable Areas of Risk 

Artificial Intelligence: The Division introduced a new risk section, “Emerging Financial Technologies,” specifically identifying AI and warning that the Division will review firms’ AI capabilities disclosures and policies and procedures to monitor or supervise uses of AI, including for tasks related to fraud prevention, back-office operations, anti-money laundering, and trading functions. The Division will scrutinize the use of AI for advisory services, including portfolio management, trading, marketing, and compliance. According to SEC Chair Gary Gensler, the SEC is concerned that AI exposes capital markets to systemic risks of financial institutions relying on the same AI models, inaccurate AI predications, conflicts of interest, and fraud.³ Gensler also warned against using boilerplate AI disclosures, making misleading claims about whether technology is AI-driven, and reporting AI-related projections without a reasonable basis. Several recent SEC enforcement actions underscore this focus, as discussed in a prior client alert.

Cybersecurity: The Division will continue to assess firms’ practices and procedures—as well as third-party products and sub-contractor practices—to manage cybersecurity risks, including identifying and reporting data breaches; safeguarding customer information, records, and assets; and responding to ransomware attacks. As discussed in prior client alerts, in the past year, the SEC has been turning its attention to the growing threat of cyberattacks and system intrusions, bringing enforcement actions against corporations and individuals for alleged cybersecurity control shortcomings. The Exam Priorities confirms that the SEC will continue to scrutinize registrant cybersecurity deficiencies in 2025.

Crypto assets: The Division will continue to focus on the “offer, sale, recommendation, advice, trading, and other activities involving crypto assets” and identified “spot Bitcoin, and Ether exchange-traded products” as examples scrutinized assets.⁴ Among other measures, the Division staff will review whether registrants meet and follow their respective standards of conduct when advising clients regarding crypto assets, as well as whether registrants routinely review and update their compliance practices, risk disclosures, and operational resiliency practices.

II. Examination Priorities for Investment Advisers, Investment Companies, and Broker-dealers

Investment Advisers: One key focus among the Exam Priorities for investment advisers, as it was for 2024, is adherence to fiduciary standards of conduct, specifically recommendations relating to high-cost, illiquid, and hard-to-value products, as well as unconventional instruments and assets sensitive to interest rates and changing market conditions.⁵ The Division will continue to assess the effectiveness of advisers' compliance programs, policies and procedures in addressing conflicts of interest, management of third-party service providers, and valuation of difficult-to-assess assets.⁶ For the first time, however, the Division will be scrutinizing private fund advisers’ procedures related to conflicts of interest involving the use of debt and fund-level lines of credit.⁷ Private fund advisers’ compliance with newly adopted SEC rules, including amendments to Form PF, will also be reviewed.⁸

Registered Investment Companies (“RICs”): The Division will review RICs’ compliance programs, disclosures, and governance practices 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.”⁹

Broker-Dealers: The Division will continue to examine broker-dealer practices around Regulation Best Interest, including those related to product and investment recommendations, disclosure and mitigation of conflicts of interest, review of reasonably available alternatives, and factors considered such as investors’ goals and account characteristics.¹⁰ Specifically, the Division will review products that are complex, illiquid, or present higher risk to investors, including highly leveraged or inverse products, crypto assets, structured products, and alternative investments. Starting in 2025, the Division will also evaluate broker-dealers’ compliance with amended books and records requirements associated with Rule 15c6-1 under the Exchange Act, which reduced the standard settlement cycle for most securities to the day after trade date (T+1).¹¹ Examinations will also assess associated technology changes and areas that need further attention (e.g., not settling in the required timeframe).¹²

III. Implications

To be prepared for upcoming exams, firms should evaluate, confirm, and regularly assess that they have, among other things:

• Complied with, if applicable, Regulation Best Interest, Regulation S-ID and Regulation S-P, Form CRS, financial responsibility rules, Rule 15c6-1, and Anti-Money Laundering rules;
• Evaluated disclosures and compliance programs concerning conflicts of interest;
• Made operational disclosures and have adequate controls that comport with current practices and functionality;
• Implemented and are maintaining appropriate controls, policies and procedures with respect to their cybersecurity practices, data loss prevention measures, and proper responses to cybersecurity incidents—including those involving third-party products and services;
• Made accurate disclosures regarding AI capabilities and implemented controls, policies and procedures to monitor uses of AI; and
• Made accurate risk disclosures and have adequate controls regarding crypto asset-related services and comply with relevant laws (e.g., custody, BSA/AML, valuation).

¹SEC, “SEC Division of Examinations Announces 2025 Examination Priorities” (Oct. 21, 2024) available at https://www.sec.gov/newsroom/press-releases/2024172?utm_medium=email&utm_source=govdelivery. 

²Id.

³The National Law Review, “Recent Gensler Speech Highlights SEC’s Two-Fold AI Disclosure Concerns” (Mar. 28, 2024) available at https://natlawreview.com/article/recent-gensler-speech-highlights-secs-two-fold-ai-disclosure-concerns.

⁴SEC, “Fiscal Year 2025 Examination Priorities” (Oct. 21, 2024) available at https://www.sec.gov/files/2025-exam-priorities.pdf, at 14.

⁵Id. at 5.

⁶Id. at 6.

⁷Id. at 7.

⁸Id.

⁹Id. at 7.

¹⁰Id. at 8.

¹¹Id. at 13. See also SEC, “Shortening the Securities Transaction Settlement Cycle” (Feb. 15, 2023) available at https://www.sec.gov/investment/settlement-cycle-small-entity-compliance-guide-15c6-1-15c6-2-204-2. 

¹²“Fiscal Year 2025 Examination Priorities” at 13.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jim Bowman, an O’Melveny partner licensed to practice law in California; Sharon M. Bunzel, an O’Melveny partner licensed to practice law in California; Jorge deNeve, an O’Melveny partner licensed to practice law in California; Andrew J. Geist, an O’Melveny partner licensed to practice law in New York; Mia N. Gonzalez, an O’Melveny partner licensed to practice law in New York; Tracie Ingrasin, an O’Melveny partner licensed to practice law in New York; Mark A. Racanelli, an O’Melveny partner licensed to practice law in New York; Michele W. Layne, an O’Melveny of counsel licensed to practice law in California; Bill Martin, an O’Melveny counsel licensed to practice law in New York; and Vy N. Malette, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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