Navigating SEC Examination Priorities for 2025

As fiscal year 2025 unfolds, the U.S. Securities and Exchange Commission’s Division of Examinations has published its annual examination priorities, shedding light on key areas of focus that aim to protect investors and enhance market integrity. For real estate fund managers and accountants, understanding these priorities is critical to maintaining compliance, anticipating risks, and leveraging opportunities in a rapidly evolving regulatory environment. This blog delves into the most pertinent examination areas and offers practical guidance to navigate them effectively.

The Importance of SEC Examination Priorities

The SEC’s Division of Examinations plays a pivotal role in monitoring compliance across financial markets. Its annual priorities reflect insights from previous examinations, market events, and emerging trends. For real estate fund managers, these priorities highlight areas that require immediate attention, particularly regarding fiduciary duties, cybersecurity, and the management of illiquid assets like commercial real estate.

Key Examination Areas for 2025

1. Fiduciary Standards for Investment Advisers

Investment advisers are bound by fiduciary duties to act in their clients' best interests, prioritizing their needs above all else. For real estate funds, this includes:

• Conflict Disclosure: Ensuring full transparency around potential conflicts of interest, particularly in fund-level decisions or transactions involving affiliated entities.
• Investment Strategies: Demonstrating that recommendations, especially concerning high-cost or illiquid assets like real estate, align with client goals.
• Fee Structures: Clearly outlining all fees and justifying their appropriateness relative to services rendered.

Takeaway for Fund Managers: Regularly review and update disclosures, focusing on clarity and completeness. Consider implementing robust policies to mitigate conflicts and align practices with fiduciary standards.

2. Compliance Program Effectiveness

Under Rule 206(4)-7 of the Investment Advisers Act, advisers must implement compliance programs tailored to their operational risks. The SEC’s 2025 focus includes:

• Valuation Practices: Especially relevant for funds managing illiquid assets like commercial real estate.
• Annual Reviews: Evaluating whether compliance programs adapt to emerging risks, such as market volatility or changing interest rates.
• Technology Integration: Examining policies around the use of AI in investment decision-making and compliance monitoring.

Practical Advice: Fund managers should conduct detailed annual compliance reviews, paying close attention to valuation policies for illiquid assets. Additionally, assess the use of digital tools for transparency and accuracy.

3. Examinations of Private Fund Advisers

Private fund advisers remain a focal point due to their influence on market dynamics. The SEC will scrutinize:

• Fee and Expense Allocations: Ensuring accuracy and fairness in the calculation of fund-level and investment-level fees.
• Market Volatility Preparedness: Assessing fund resilience to interest rate changes and volatility, particularly in commercial real estate investments.
• Use of Leverage: Evaluating risk exposure from debt instruments or other leveraged strategies.

Recommendation: Establish transparent methodologies for fee calculations and document the rationale for fund expenses. Proactively stress-test portfolios against market shifts to demonstrate resilience.

4. Cybersecurity and Operational Resilience

With cyber threats intensifying, information security remains a top priority. The SEC’s focus includes:

• Data Safeguards: Protecting investor records and ensuring operational continuity during disruptions.
• Vendor Oversight: Addressing risks posed by third-party service providers, particularly those handling sensitive data.
• Incident Response Plans: Implementing robust protocols to detect, respond to, and recover from cyber incidents.

Steps to Strengthen Cybersecurity:

• Audit your IT infrastructure to identify vulnerabilities.
• Train staff regularly on cybersecurity best practices.
• Engage third-party vendors in detailed discussions about their security measures and include them in your incident response plans.

5. Emerging Financial Technologies

As financial technology evolves, the SEC is monitoring the integration of AI, automated tools, and blockchain. Key areas of interest include:

• AI in Decision-Making: Ensuring algorithms align with investors’ objectives and comply with regulatory standards.
• Blockchain and Distributed Ledger Technology: Managing risks associated with crypto assets and tokenized real estate investments.

For Tech-Savvy Funds: Ensure AI tools used for investment or operational purposes have clear oversight policies. When dealing with blockchain technologies, prioritize secure custody practices and transparent risk disclosures.

Actionable Strategies for Compliance

1. Conduct Comprehensive Risk Assessments

Identify high-risk areas such as fee transparency, cybersecurity, and market volatility impacts. Develop a prioritized action plan to address these risks.

2. Enhance Documentation and Reporting

Maintain meticulous records of compliance efforts, from valuation processes to cybersecurity protocols. These documents are critical during an SEC examination.

3. Invest in Staff Training

Regular training sessions on regulatory updates and compliance best practices can significantly reduce risks. Tailor training to specific roles within your organization.

4. Leverage Technology for Compliance

Explore tools that streamline compliance tasks, such as automated reporting systems or AI-driven analytics for risk management.

5. Stay Proactive with Regulatory Updates

Engage with the SEC’s published risk alerts and attend industry seminars to stay informed about changes in examination priorities or regulatory requirements.

Preparing for SEC Examinations

Being proactive is the best way to navigate the complexities of SEC examinations. By understanding the focus areas and implementing targeted strategies, real estate fund managers and accountants can minimize risks while demonstrating a commitment to robust governance and compliance.

Checklist for Fund Managers:

• Are your fiduciary disclosures thorough and up-to-date?
• Do you have a documented valuation methodology for illiquid assets?
• Is your cybersecurity framework tested regularly?
• Have you reviewed the impact of emerging technologies on your operations?
• Are your compliance programs adapting to market and regulatory changes?

Conclusion

The SEC’s 2025 examination priorities underscore the importance of transparency, resilience, and adaptability. Real estate fund managers and accountants must align their practices with these standards to safeguard investor interests and maintain market confidence. By addressing these focus areas strategically, fund managers can not only ensure compliance but also position their organizations for sustained success in an evolving regulatory landscape.

For further guidance or support in implementing these strategies, don’t hesitate to reach out to our team. Together, we can navigate the path to compliance and excellence. To read the full report go here: https://www.sec.gov/files/2025-exam-priorities.pdf

Verivest doesn’t offer legal advice, including advice about a manager’s specific compliance obligations, fiduciary duties owed to investors, or similar advice.  We encourage all fund and syndication managers to consult with qualified legal counsel to more fully understand the implications of the issues raised in the SEC’s most recent guidance.