How well investment advisors, hybrid representatives and their affiliated broker-dealers adhere to fiduciary standards is the top priority for Securities and Exchange Commission examiners in fiscal year 2025, the agency said a report today.
The regulator said in its 2025 exam priorities report that it will focus on Regulation Best Interest compliance, fee calculations and disclosures and recommendations regarding account type.
Each advisor “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 so that a client can provide informed consent to the conflict,” the SEC said in the report.
As SEC’s examiners dig into advisors’ Reg BI’s duty of care and duty of loyalty obligations, the exam staff expects to focus on advice provided to clients regarding products, investment strategies and account types, with an eye toward advisors’ fiduciary obligations.
“In particular, the Division will focus on recommendations related to: (1) high-cost products; (2) unconventional instruments; (3) illiquid and difficult-to-value assets; and (4) assets sensitive to higher interest rates or changing market conditions, including commercial real estate,” the SEC said.
Dual registrants and advisors with affiliated broker-dealers are the SEC’s second most pressing exam priority, according to the report. Examiners plan to spend 2025 reviewing client disclosures, the appropriateness of account selection practices and if reps’ practice of steering clients into brokerage versus advisory accounts are in clients’ best interests.
Rollovers from existing brokerage accounts to advisory accounts are likely to get added scrutiny, the agency said. The focus here will “be assessing whether and how advisers adequately mitigate and fairly disclose conflicts of interest,” the report said. The agency said it plans to take a close look at what it calls “non-standard fee arrangements.”
Firms should be mindful of how they’re calculating fees and disclosing any fee-related conflicts, the regulator said. Expect SEC examiners to look at any conflicted fee arrangements that allow “select clients to negotiate lower fees when similar services are provided to other clients at a higher fee rate,” the SEC noted.
Areas of exam focus will include the fiduciary obligations of advisors who outsource investment selection and management, as well as alternative sources of revenue advisors receive, the SEC said.
The agency said it will also look at difficult-to-value assets such a commercial real estate, the use of artificial intelligence in advisory operations including portfolio management, trading, marketing and compliance.
Like advisors, broker-dealers can expect SEC examiners to focus on recommended products that are complex, illiquid, or present higher risk to investors.
Examinations may also focus on recommendations using artificial intelligence and those related to opening different account types, such as option, margin and self-directed IRA accounts, the SEC said. Recommendations to older investors and those saving for retirement or college may elicit extra scrutiny, as may advice to open wrap fee accounts, the report said.
“Examinations may also assess broker-dealer supervision of sales practices at branch office locations,” the SEC said. “If an adviser utilizes a large number of independent contractors working from geographically dispersed locations, examinations may focus on supervision and oversight practices.”
As part of ensuring that investors are fully apprised of firms’ limitations and potentially costly conflicts, count on examiners digging into disclosures particularly Form CRS (customer relationship summaries) to ensure firms are telling investors the truth about services, fees and costs, conflicts of interests and firms’ disciplinary histories, the SEC advised.
“As with previous years, the Division will prioritize exams of advisers that have never been examined and those that have not been recently examined with a continued focus on newly registered advisers,” the regulator said.