SEC 2027 Examination Priorities for Investment Advisers

Introduction

The SEC recently announced the Division of Examination’s (the “Division”) 2027 Examination Priorities (the “Report”).While several types of registrants are discussed in the Report (such as broker dealers and investment companies), this summary, prepared by Orical LLC, focuses on priorities for investment advisers (“advisers”).

Fiduciary Duties

The Division continues to focus on SEC-registered advisers’ adherence to fiduciary duties[1], particularly with respect to retail and older investors, and those saving for retirement. Have advisers provided full and fair disclosures of all material facts relating to their advisory relationships, conducted reasonable due diligence into products or services recommended to clients, adopted and evaluated the effectiveness of compliance policies and procedures, and assessed the reasonableness of their valuation processes?

Economic Conflicts of Interest

The Division reviews advisers’ fiduciary obligations relating to economic conflicts of interest.[2] Do advisers’ financial conflicts affect the impartiality of their advice in certain areas, such as fee rebates, fee and expense calculations, cash management, quid pro quo arrangements, deposits, and withdrawals?

Formulation of Investment Advice

Another focus is fiduciary obligations related to the formulation of investment advice. These assessments evaluate factors advisers consider in providing investment advice and whether the characteristics of the investment products or strategies are consistent with client profiles, investment objectives, risk tolerance, etc.Factors assessed include liquidity, risk profile and potential rewards, volatility, projected performance across diverse market and economic conditions, time horizons, and costs (including exit costs). Examinations review unique features that may impact the suitability or performance of investment recommendations.

Illiquid or Complex Assets

The Division prioritizes advisers that recommend products difficult to trade, have unusual features, or are illiquid: alternative investment products, such as private loans, investments in private companies through SPVs, and complex and higher-risk investments such as exchange-traded funds (“ETFs”) based on less liquid assets, option-based funds, inverse ETFs, single-stock ETFs, and zero-days-to-expiration options, for example.

Private Fund Advisers

Reviews of advisers to private funds, assess investment-related disclosures of risks for consistency with fiduciary standards, and whether compliance policies, procedures, and controls are designed to address both fund-level and investment-level risks. Examples include disclosures related to certain investments and allocations, use of debt and fund-level lines of credit, use of affiliated service providers, and the accuracy of fee and expense calculations at both the fund and investment levels.

Third Party Service Providers

The Division focuses on advisers’ use of certain third-party service providers. This includes advisers using third parties to access clients’ accounts, where existing controls may be insufficient to protect client assets and data. Also, the Division examines advisers that rely on proxy advisory firms, assessing how those advisers evaluate such recommendations, examine their bases, identify potential conflicts of interest, and determine whether that reliance satisfies applicable legal obligations.

Compliance Programs

Evaluation of compliance program effectiveness is a critical element of the examination process. The Division reviews key components of an adviser’s compliance program such as marketing, valuation, trading, portfolio management, disclosure and filings, and custody. Examinations also typically analyze an adviser’s annual compliance review.

Policies and Procedures

The Division reviews whether policies and procedures are reasonably designed (A) to address a firm’s conflicts of interest, and (B) to prevent an adviser from placing its interests ahead of clients’ interests. Examinations focus on whether policies and procedures are implemented, and whether disclosures address fee-related conflicts of interest, particularly those arising from compensation structures.

Evolving Advisers: Something New

The Division focuses on compliance practices when advisers have undergone certain changes. This includes when advisers have changed their business models or have started advising different types of clients, providing advice regarding new asset classes, or providing new services. The Division also prioritize advisers that have grown such as through mergers or acquisitions, or are operating from multiple geographically dispersed branch offices. Has the adviser adapted its compliance program in response to these changes and has it identified and made any necessary changes to address new conflicts of interest?

Activist Managers

The Division also reviews whether advisers with activist engagement practices are making timely and accurate filings on Schedules 13D and 13G and Forms 13F, 13H, 3, 4, 5, and N-PX, as applicable.

Never-Examined and Recently Registered Advisers

The Division examines advisers that have never been examined, particularly recently registered advisers. These examinations evaluate, among other things, the adviser’s compliance with regulatory requirements and its processes for identifying, addressing, and disclosing risks and conflicts of interest. Is the adviser adhering to its fiduciary duty to its clients?

Cybersecurity

Examinations focus on information security and operational resiliency, with particular emphasis on cybersecurity. Cybersecurity practices remain a key examination priority to help ensure the safeguarding of customer information. Examinations review firms’ policies and procedures regarding governance practices, data loss prevention, access controls, account management, and the response and recovery protocols for cyber-related incidents, including ransomware attacks. In addition, the Division assesses risks associated with advisers’ increased use of third-party service providers and shared technologies, including the effectiveness of risk management.

Emerging Financial Technology

Advisers increasingly use super intelligence (“SI”) in core business operations and systems, including investment analysis, customer management, and code development. Threat actors are using SI to automate and accelerate cyberattacks, making those attacks more efficient and harder to detect. The Division focuses on compliance with relevant rules relating to adviser’s assessment and preparation for potential threats from SI-related cyberattacks that may affect their businesses or customers, such as SI-generated phishing messaging and synthetic or deepfake voice and video used for social engineering.

The Division prioritizes examinations of policies and procedures relating to monitoring SI, including its use in fraud prevention and detection, back-office operations, and trading functions.

The Division remains focused on advisers’ use of certain products and services, such as automated investment tools and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative data sources. The Division prioritizes firms that engage in activities such as automated investment advisory services, recommendations, and related tools and methods. When conducting these reviews, assessments generally include whether: (1) representations are fair and accurate; (2) operations and controls are consistent with disclosures made to investors; and (3) algorithms lead to advice or recommendations consistent with investors’ investment profiles or stated strategies.

Regulation S-ID and Regulation S-P

Examinations focus on whether firms have developed, implemented, and maintained reasonably designed policies and procedures that address administrative, technical, and physical safeguards to protect customer information, as required by Regulation S-P. In accordance with the amended rule, staff evaluates response program policies and procedures for unauthorized access to or use of customer information, including customer notification procedures and oversight of service providers. Examiners also review how firms address operational risk, including technology risks, as part of their efforts to safeguard customer information.

The Division also reviews policies and procedures under Regulation S-ID, with a focus on firms’ identification and detection of and response to red flags intended to prevent and mitigate against identity theft, particularly during customer account takeovers and fraudulent transfers. Examiners assess whether firms are updating their Identity Theft Prevention Program to address emerging risks, such as those related to SI and stolen credentials.

Conclusion

Orical is experiencing a high level of advisers engaged in SEC examinations both with regional SEC office exam teams and the Private Funds Unit.Core compliance with the Code of Ethics, MNPI management, accurate fee calculations, allocation of investment opportunities and expenses are vital.The importance of obtaining monthly brokerage statements, preclearing required trades, and maintaining a restricted list of securities as a means of managing MNPI cannot be stressed enough.Similarly important is the disclosure of all material facts, particularly conflicts of interest to investors.Some advisers are also surprised by the requirements of the books and records rule, including with respect to the adviser’s finances.The SEC Director of Enforcement recently remarked that advisers that treat the examination process as if it were an SEC enforcement action are significantly more likely to turn their examination into an SEC enforcement action.Preparation for the examination (before the adviser is examined) is paramount.Advisers have little time to organize the significant amount of information required to timely satisfy the initial document request.Many supervised persons also benefit from time preparing for the interview portion of the examination.

[1] See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Rel. No. IA-5248 (Nov. 21, 2023).

[2] See Risk Alert: Examination Observations of Investment Advisers Obligations Related to Economic Conflicts of Interest (Jun. 9, 2026).