Since 2013, the Securities and Exchange Commission’s Division of Examinations has published its annual examination priorities to inform investors and the industry about key areas where the Division intends to focus resources. You can assume those area areas that the Division believes present the highest risk areas to investors and the markets. Last year marked the first time the Division published the priorities with the start of the SEC’s fiscal year.
2025 marks two years in a row: Fiscal Year 2025 Examination Priorities.
Surprisingly, real estate explicitly popped up a few times. The first was around advice.
[T]he Division will continue to focus on:
Investment advice provided to clients regarding products, investment strategies, and account types, and whether that advice satisfies the fiduciary obligations owed to their clients. 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 second related to valuation.
The Division’s review of an adviser’s compliance program may focus on or go into greater depth depending on its practices or products. For example, if clients invest in illiquid or difficult to-value assets, such as commercial real estate, examinations may have a heightened focus on valuation.
I’m sure real estate fund managers have valuation as one of their top compliance concerns and properly deal with the issues. Perhaps, non-real estate managers dabbling with real estate may not have a robust method for valuation.
Real estate also pops up in the interest rate volatility item.
Whether disclosures are consistent with actual practices and if an adviser met its fiduciary obligations in times of market volatility and whether a private fund is exposed to interest rate fluctuations. Examples of investment strategies that may be sensitive to market volatility and/or interest rate changes include commercial real estate, illiquid assets, and private credit. The Division may particularly focus on examinations of advisers to private funds that are experiencing poor performance and significant withdrawals and/or hold more leverage or difficult-to-value assets.
Clearly, interest rates have affected commercial real estate. I suspect examiners may be diving deeper into debt practices.
Other items that caught my attention:
- A focus on post-commitment period management fee calculations
- Disclosure around fund credit facilities
- Alternative sources of revenue from selling non-security services to clients
