SEC’s 2025 Exam Priorities Include Fiduciary Conduct, AI Use

The Securities and Exchange Commission will prioritize fiduciary conduct, compliance and the use of artificial intelligence, among other things, as examination priorities in 2025, the regulator’s division of examinations announced Monday.

The SEC’s division of examinations highlighted in its annual report areas on which it will focus when dealing with investment advisers, investment companies and broker/dealers to try and avert what it deems the most relevant “risks in the U.S. capital markets” for investors. The division, which has some 1,500 staffers, focuses on market players—including SEC-registered investment advisers, investment companies, broker/dealers, clearing agencies and self-regulatory organizations—and their compliance with federal securities laws.

The 2025 examinations will prioritize such areas as fiduciary duty, standards of conduct, cybersecurity and artificial intelligence, according to the regulator. The list does not include everything the regulator will address during the year, the SEC noted.

Fiduciary Conduct 

The first area the report highlighted is investment adviser adherence to fiduciary standards of conduct, to ensure advisers are acting in the best interest of their clients. The SEC stated that an adviser “must 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.”

Specifically, the report cited the consideration of high-cost products, unconventional investment instruments, illiquid and difficult-to-value assets, and assets sensitive to higher interest rates or changing market conditions. It also specified dual registrants and advisers with affiliated broker/dealers when assessing investment advice and recommendations and reviewing the appropriateness of account selection practices such as rollovers.

The SEC went on to note areas of focus in terms of an adviser’s compliance program to ensure it is meeting best practices. This could include compliance when dealing with illiquid or difficult to-value-assets or when using artificial intelligence in operations such as portfolio management, trading or marketing.

Off-Channel Communications

One compliance issue on which the SEC has been focused in the past year is off-channel communications among advisers and between advisers and clients, with a series of charges levied against firms for non-compliance.

SEC Chair Gary Gensler on Monday addressed the issue during securities industry trade association SIFMA’s annual conference on Monday.

Kenneth Bentsen, president and CEO of SIFMA, asked Gensler during a question-and-answer session to address the “growing frustration” among firms in trying to deal with the off-channel regulations and asked if the recent charges represented “an area of success, or just a constant liability?”

Gensler responded by saying that “books and records are really important to control the risk at your firms.” The SEC, he said, has found that many firms are communicating off-channel, sometimes for “convenience,” but in other cases with implications of hiding bad practices.

“This is important for risk control for individual firms,” Gensler said. “But it’s not about perfection or something. We have really found that hundreds of people at dozens of firms were just blowing right past the rules that even their firms had in place. So we tried with these settlements to move these market behaviors back to the right zip code.”

Reg BI

The third area of focus spotlighted on Monday was the SEC’s Regulation Best Interest, which regulates broker/dealer practices related to client recommendations, disclosures around conflicts of interest, processes for reviewing reasonable alternatives and consideration of a client’s investment profile and goals.

“In particular, examinations of broker-dealer practices will focus on those recommended products that are complex, illiquid, or present higher risk to investors,” the SEC wrote, pointing to products including cryptocurrency assets, alternative investments, products not registered with the SEC and products that have “complex fee structures or return calculations.”

The SEC also called out recommendations related to opening a self-directed individual retirement account and those made to “certain types of investors, such as older investors and those saving for retirement or college.”

Earlier this year, the Department of Labor’s Retirement Security Rule, otherwise known as the fiduciary rule, was intended to bring certain adviser and broker/dealer recommendations under the Employee Retirement Income Security Act, including IRA rollovers, annuity sales and qualified plan advice to small businesses. That rule was stayed by two federal courts in Texas and is now pending DOL appeal. Many opponents of the rule have pointed, in part, to the SEC’s Reg BI as already policing the standard of care for those retirement-related investment areas.

Trending Areas

Lori Weston, director of product and strategy at STP Investment Services, says the focus areas impact their clients, including private fund advisers and wealth managers. She noted that, while the SEC continues to be focused on the “core tenants of an adviser’s compliance program,” some focus areas came from trending topics such as the integration of AI into operations and procedures.

 “While the SEC did list AI as an emerging technology in its 2024 examination priorities, AI is a lot more prominent in this year’s priorities, accompanied by a list of compliance areas that should be noted by any firm that uses AI or has AI exposure,” she says via email. “[F]irms should pay particular attention to the SEC’s callout regarding the use of AI highlighted in this year’s priorities, including ensuring that they have implemented robust policies and controls, as well as ensuring they have adequate and accurate disclosures.”

Weston also pointed to the importance of advisers reviewing third-party vendors’ use of AI, noting that “these must be understood by the adviser, and the adviser must ensure they are adequately disclosed.”

Another area on which the SEC announced it will focus is cybersecurity and how firms are protecting client information and data, with attention on “firms’ policies and procedures, governance practices, data loss prevention, access controls, account management, and responses to cyber-related incidents, including those related to ransomware attacks.” It will also be focused on Regulation S-ID and Regulation S-P, both related to identity theft and fraud monitoring, protection and timely notification.

“The Commission has indicated it plans to engage firms regarding their preparedness for adoption of the amendments to Reg S-P, released earlier this year,” STP’s Weston says of this focus area. “These amendments broaden the scope of the information covered by Reg S-P and may also impact the firms’ incident response programs.”

Other areas of focus include how firms are complying with a new rule that has implemented a shorter settlement time for most securities to be the “day after trade date,” or T+1, along with investments in cryptocurrency assets, both for clients and among asset managers. Cryptocurrency has been an area of focus for Gensler, who has called for tighter regulation and caution by the market in dealing in digital assets.