2025 investment management regulatory outlook: Preparing for significant shifts

With the reelection of President Trump to a second, nonconsecutive term, financial regulatory policy is likely to reverse course for the second time in eight years. The outgoing administration leaves plenty of work for the industry to do, and the new administration needs time to embark on its agenda. The wheels of enforcement likely will continue to turn, at least until new appointees to lead agencies are in place to put on the brakes.

We expect the new regulatory climate to be more permissive with regard to scrutiny of mergers and acquisitions, particularly of cryptocurrency, private credit, and hedge funds; as well as toward new and novel products, such as exchange-traded fund (ETF) share class structures and retail alternatives.

The world after Chevron, Jarkesy: With 2024 rulings that address foundational elements of agency action and process, recent rulings by US courts have cast a shadow over agency interpretations and jurisdiction of certain enforcement actions. Less deference likely will be given to actions overseen by regulatory agencies and undertaken through administrative processes. This shift indicates a potential reduction in the authority and influence of regulatory agencies.

The Jarkesy ruling had a direct impact on the SEC as it often relies on administrative or in-house courts to levy penalties in certain cases. The ruling is expected to impact and potentially slow the pace of enforcement actions that depend on administrative courts in securities fraud cases.

The defeat of the Private Fund Adviser Rule: The US Fifth Circuit vacated the Private Fund Adviser Rule just one year after it was adopted—a significant setback for the SEC. The rule comprised five separate categories, including a requirement that private fund managers provide investors with more detail about quarterly fees and expenses and a prohibition on firms giving some clients certain preferential terms, including preferential treatment to any “material economic terms,” unless they satisfy certain specified exceptions. The SEC passed the deadline to appeal to the US Supreme Court.

On October 21, 2024, the SEC’s Division of Examinations released its 2025 examination priorities. The SEC has stated that this year’s examinations will prioritize existing and emerging risk areas, such as fiduciary duty, cybersecurity, and AI. Under new SEC leadership, we expect enforcement focus areas to have a more direct line to investor protection, such as fiduciary obligations or the marketing rule. In our view, managing firms’ response to these areas should be investment firms’ highest priority.

Significant proposals issued during Chair Gensler’s tenure remain unfinished for multiple reasons, including the volume of initiatives undertaken, vocal industry pushback to the most sweeping proposals, the departure of the division director last spring, and—most recently and most significantly—the departure of the chair himself. With the arrival of a new chair under another presidential administration, the fate of each proposal may be unknown; but certain initiatives are less likely to move forward than others, including proposed swing pricing for open-end funds and environmental, social, and governance disclosures for registered investment advisors and registered investment companies. Other outstanding proposals—such as cybersecurity and outsourcing—are likely to languish or be reproposed to incorporate industry feedback, prior to any adoption. Rule finalization, examinations, and enforcement may arrive for these eventually.

In our view, two rule proposals are of less interest to the new administration: swing pricing for open-end funds and the safeguarding rule. The SEC’s proposal to require swing pricing for open-end funds, which met fierce pushback from the industry, likely will be abandoned by incoming leadership and may face judicial challenge on the Form N-PORT and Form N-CEN amendments. The SEC’s rule on safeguarding remains under review, and the SEC has previously indicated this rule may be reproposed, allowing further industry feedback.