SEC Division of Examinations 2025 Priorities

In a November 4, 2024, risk alert, the Division of Examinations (the “Division”) of the U.S. Securities and Exchange Commission (SEC) unveiled its strategic, risk-based approach to selecting registered investment companies for examination. The Division also shed light on its methodology for scoping exams and shared notable examples of common deficiencies encountered during recent reviews.

While not an exhaustive checklist for every fund examination, the alert serves as a strategic guide, spotlighting areas of emphasis that currently hold the Division's attention. Understanding these priorities can help funds and advisers better prepare for exams and bolster their governance and compliance initiatives. By tailoring each examination to address high-priority concerns, the Division customizes its document requests and areas of focus accordingly.

I. Examination Selection and Scoping

The Division elaborated on the factors influencing its selection process for fund candidates, which include:

1. Investment Strategy and Holdings: The extent to which these align with the Division’s annual examination priorities.

2. Regulatory Developments: The impact of new regulatory requirements on the fund.

3. Past Examination History: Findings from prior examinations of the fund complex.

4. Additional Risk Indicators: Potential conflicts of interest, regulatory history, and complaints or referrals.

Core Areas Under Review

• Compliance Programs: Evaluating the effectiveness of policies and procedures, especially around expense allocation.

• Disclosure and Reporting: Verifying that fund operations and conflicts are transparently disclosed.

• Fund Governance: Assessing the robustness of board oversight and the thoroughness of the advisory agreement approval process.

II. Observations from Examinations

The risk alert highlighted prevalent issues and areas where funds commonly fall short:

1. Compliance Program Deficiencies

• Lack of effective oversight and failure to complete mandated assessments.

• Policies that are outdated, incomplete, or not aligned with current practices.

• Codes of ethics that are not properly enforced or reported to the board as required.

2. Disclosure and Filing Gaps

• Inaccurate or outdated registration documents and misleading sales materials.

• Missed deadlines or entirely neglected regulatory filings.

3. Governance Shortcomings

• Boards not timely reviewing or adequately evaluating advisory agreements.

• Insufficient information to effectively oversee fund practices.

• Failure to document board actions or meet critical governance responsibilities, such as insurance policy evaluations.

III. Typical Document Requests

The Division’s alert outlines the categories of documents often requested, summarized below:

1. Organizational and Operational Details: Fund structure, complaints, regulatory interactions, and ETF-specific data.

2. Compliance Materials: Policies, risk assessments, internal audits, and service provider oversight reports.

3. Portfolio Management Data: Trade logs, brokerage arrangements, and performance analysis.

4. Valuation Documentation: Policies, third-party recommendations, and pricing communication.

5. Conflict of Interest Records: Codes of ethics, transaction reports, and fee-sharing arrangements.

6. Fee and Expense Information: Expense caps, adviser compensation, and affiliated expenses.

7. Marketing and Sales Materials: Fund fact sheets, commentaries, and advertisements.

8. Board Governance Documents: Minutes, advisory contracts, and service provider details.

9. Disclosure Documents: Prospectuses, shareholder reports, and regulatory filings.

10. Financial Records: Financial statements, cash flow ledgers, and NAV error reports.

    The SEC’s risk-focused examination strategy is a wake-up call for investment companies to refine their compliance and governance practices. By concentrating on high-impact risk areas, funds can better align their operations with regulatory expectations and minimize the likelihood of deficiencies.

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