The U.S. Securities and Exchange Commission (SEC) has released its 2025 Examination Priorities, emphasizing key compliance areas for private fund managers. Accurate and independent valuations, fee transparency, and conflict disclosures remain central to protecting investors and ensuring fiduciary compliance. This document integrates unique insights from previous guidelines and emerging regulatory expectations.
Valuation of Illiquid and Complex Assets
The SEC underscores the critical role of accurate valuations for illiquid and hard-to-value assets such as private credit, commercial real estate, and derivatives. These assets pose unique challenges due to limited market data and evolving regulatory expectations. Advisers are encouraged to:
- Adopt Robust Valuation Methodologies: Ensure policies are comprehensive, consistent, and transparent.
- Engage Independent Valuation Experts: Regularly utilize third-party professionals to provide unbiased assessments, reducing biases and errors.
- Enhance Transparency: Clearly disclose valuation methodologies and associated risks to investors, fostering trust and mitigating conflicts of interest.
Examiners will review whether valuation processes are aligned with fiduciary duties, particularly in times of market volatility.
Fee Calculations and Expense Allocation
The SEC remains focused on ensuring that fee practices are accurate, transparent, and equitable. Private fund managers should:
- Reassess fee calculations, especially those tied to valuation.
- Address conflicts in post-commitment management fees, offsets, and expense allocation.
- Disclose fee-related conflicts of interest clearly and comprehensively.
Risk Management and Market Volatility
Funds holding leveraged, interest-rate-sensitive, or illiquid assets must demonstrate robust risk management practices. During periods of instability, valuation adjustments should be defensible and transparent. The SEC will scrutinize policies that address:
- Adjustments for market volatility.
- Concentrated positions and their impact on investors.
Cryptoassets and Digital Securities
Since 2021, cryptoassets have been a focal point for SEC examinations due to their valuation and custody complexities. The 2025 priorities emphasize:
- Accurate valuation and regular third-party assessments for digital assets.
- Compliance with the Bank Secrecy Act (BSA) and robust custody practices.
- Clear and consistent methodologies to manage volatility and custody risks.
Conflict of Interest Disclosures
Advisers must ensure transparent disclosures of conflicts tied to:
- Adviser-led secondary transactions.
- Fund-level leverage.
- Affiliated service providers.
Comprehensive disclosures allow investors to understand risks and align with fiduciary obligations.
Preparedness for Regulatory Updates
Amendments to Form PF and updates to marketing rules require managers to:
- Revise compliance frameworks.
- Address reporting and valuation practices with updated policies and procedures.
Recommendations for Examination Compliance
To align with the SEC’s priorities, private fund managers should:
- Engage Independent Valuation Experts: Ensure fair and defensible valuations of illiquid and complex financial products.
- Review and Update Compliance Policies: Regularly update policies to address valuation practices and adhere to regulatory standards.
- Enhance Transparency: Communicate valuation risks and methodologies effectively in disclosures and marketing materials.
- Conduct Regular Training: Equip staff with knowledge on evolving regulatory requirements to prevent errors and breaches.
How Houlihan Capital Can Help
Houlihan Capital provides independent and defensible valuations tailored to the unique challenges of private funds, including digital assets. Their expertise includes reviewing valuation policies and determining the fair value of investments. As a SOC-compliant firm and member of FINRA and SIPC, Houlihan Capital upholds the highest professional standards, ensuring compliance with accounting and regulatory requirements.
Conclusion
The SEC’s 2025 Examination Priorities highlight the necessity of accurate and independent valuations, transparency, and robust compliance frameworks. Private fund managers must act proactively to meet these expectations, safeguarding investors and fostering trust while mitigating regulatory risks.
