Asset management year in review: Key insights for 2025

Corporate Transparency Act Update: 

A recent nationwide preliminary injunction against the enforcement of the Corporate Transparency Act by the US District Court for the Eastern District of Texas. The status of the appeal and the Jan. 1, 2025, deadline is pending. Most recently it sounds like they are considering extending the deadline by one year to Jan. 1, 2026, however a final announcement is pending (and should be made in the next few days). 

New AML Program requirements announced in August for Registered Investment Advisors (RIAs)/Exempt Reporting Advisor (ERAs): 

A new regulation passed in August 2024 expanding the definition of financial institutions to include registered investment advisors and exempt reporting advisors. Starting January 1, 2026, these entities must comply with the Bank Secrecy Act and Anti-Money Laundering (AML) regulations, including transaction monitoring, customer due diligence, ongoing training and independent testing. 

Next steps:    

• Covered investment advisors should first perform a gap assessment to determine what regulatory requirements they currently have covered and where they need to focus additional efforts. Many investment advisors are choosing to outsource AML compliance much like other back-office functions such as fund admin and compliance activities. In this case, you should partner with a firm that can stand up a fully compliant program with subject matter experts that understand your industry as well as AML.    
• If you choose to build an in-house function, start with doing an AML risk assessment to determine what areas of risk you have with regards to customers, products/services, and geographic footprint. From there, build a risk-based program and determine where you need to make investment in technology and human resources to execute compliance activities day to day. Make sure you take a technology-led approach to minimize risk and streamline processes, along with dedicated personnel with experience in AML. 

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As systems and data usage become increasingly complex, the frequency of cyber threats is rising. More organizations are falling victim to malicious actors. Here are the key cyber risks to watch for in 2025: 

Key cyber risks: 

1. Ransomware: This remains the leading cyber threat, where attackers encrypt an organization's data and demand a ransom for its release. The number of organizations falling victim to ransomware attacks continues to rise each year. 

2. Third-party supply chain vulnerabilities: Given the asset management industry's heavy reliance on vendors, it's crucial to assess and manage the security postures of third-party vendors to mitigate risks. 

3. Cloud services: While cloud usage is widespread, organizations must implement robust security measures and understand the shared responsibility model with cloud providers to ensure data protection. 

4. Insider threats: This risk involves the potential for data exfiltration or malware introduction by insiders. Over the past year, we have seen an increase in security incidents and data loss from malicious insides. 

5. Phishing and social engineering: With 90% of cyber-attacks initiated through this vector, enhancing employee training and awareness is essential to mitigate these risks effectively. 

Recommendations: 

• Proactive measures: Conduct regular cyber health checks to stay ahead of evolving threats.
• Vendor risk management: Perform thorough assessments and continuous management of third-party vendors' security postures.
• Employee training and awareness: Enhance training programs to mitigate risks from phishing and social engineering attacks.
• Incident response planning: Develop, test and refine incident response plans to ensure preparation for cyber incidents.

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2024 was a relatively quiet year for accounting and auditing standard changes, which comes as a relief compared to previous years of major changes in revenue recognition and lease accounting. 

Key trends and challenges: 

• SEC Custody Rules: The SEC prefers fund audits over custody exams for pooled investment vehicles. Advisors should prepare for potential future requirements in 2025.  
• Self-clearing brokerages: Challenges for organizations implementing self-clearing brokerages include internal controls examination, documentation, reperformance (especially relying on third-party software), as well as an educational gap with the rigorous examination of internal controls. Review our article to understand more about the self-clearing trend. 
• Venture capital space: There are increasing complexities for RIA's entering the venture capital space, specifically around valuation policies and interim reporting requirements. To mitigate issues, start discussions with service providers to align on compliance and make certain that your organization is well-documented with defined valuation policies to ensure compliance with SEC rules. 

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The Private Fund Adviser Rule was initially adopted by the SEC in Aug. 2023 and included stringent regulations on private fund advisors.  However, before the ruling could become effective, it was vacated by the Fifth Circuit U.S. Court of Appeals in June 2024.  The court determined the rules went beyond the SEC’s authority under Section 206(4) of the Advisers Act.

Key provisions of the rule:  

• Preferential treatment: The provision curbed preferential treatment to certain investors, including prohibiting preferred redemptions and favorable economic terms without prior notification.  
• Audited financials: This update requires all funds under SEC registered advisors to be audited. 
• Quarterly statements: The provision mandated quarterly financials with detailed disclosures on fees, expenses and fund performance.  
• Secondary transactions: This update required fairness opinions for secondary transactions.  
• Annual compliance review: Updates propose documentation of annual compliance reviews.
• Restricted activities: This prohibited charging funds for regulatory costs, borrowing from funds without LP consent and non-pro rata allocation of fees.  

Future outlook: 

• Uncertainty remains about the SEC's next steps, with possibilities including seeking a rehearing, petitioning the supreme court or pursuing enforcement under other provisions.  
• Larger firms with institutional investors are trending towards adopting the Institutional Limited Partners Association (ILPA) reporting standards to align with potential future requirements. 

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Private equity continues to grow as an “industry” worldwide. In the U.S., middle market deals continue to be an area of focus for private equity accounting for two-thirds of deal volumes as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) multiples paid are well below entire M&A market.  

Key industries that had meaningful deal activity in 2024 include: 

• Business products and services 
• Consumer products and services 
• Information technology 
• Healthcare 

In 2025, private equity funds are expected to continue to:  

• Deploy capital into new portfolio companies 
• Improve performance of existing portfolio companies 
• Exit portfolio companies 

Overall, the outlook for private equity is positive with many macro trends that are expected to drive activity in 2025. 

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