I. Current SEC Posture on Enforcement II. The SEC’s 2026 Examination Priorities III. The Madison Capital Enforcement Action If chief compliance officers and other compliance specialists in the investment management field had a nickel for every time they heard statements to the effect that investment advisers don’t have to worry about compliance for the remainder of this administration, they could all retire early. Those in the investment adviser compliance field who are even slightly longer in the tooth than newcomers can confirm that the pendulum swings, and wildly so, as administrations and, generally, political parties and leaders change.  In this administration, it would be natural to assume that enforcement referrals and actions will be less prevalent than during the prior administration under the leadership of then-Chairman Gensler. An analysis of the SEC’s Division of Examinations’ first annual examination priorities and enforcement actions to date under the leadership of Chairman Atkins would indicate a lighter touch but read on to determine that for yourself. Veterans of SEC examination and enforcement trends observe that as Mark Twain apparently said, “history doesn’t repeat itself but often rhymes.” It may be that enforcement actions, including those referred by the Division of Examinations, might be reserved in the Atkins administration for fraud and manipulation. And for the industry, that would be a welcome relief from actions brought by the SEC under then-Chairman Gensler for hangnails, threads of hair out of place and other unintentional policy breaches. However, enforcement has not come to a complete halt, and investment advisory firms would be taking a great amount of risk to operate as if that was the case. Accordingly, the watchful eye should remain vigilant not just for bad acts and actors but for simple policy breaches and other victimless foot-faults to make sure financial fiduciaries and related institutions keep, or at least show a good faith effort to keep, their proverbial noses clean. The next administration might be much more enforcement-oriented, even more so than the prior Gensler term.  Certainly, the current SEC leadership has not taken its proverbial foot off the compliance and enforcement pedals. Statements from the first director of the Division of Enforcement under Chairman Atkins, the 2026 Examination Priorities (Examination Priorities) and a recent enforcement action all make clear that investment advisers need to remain focused on, and prioritize, compliance.  I. Statements from the First Enforcement Director under Chairman Atkins The first Director of the SEC’s Enforcement Division under Chairman Atkins, Judge Margaret Ryan, seemed to have articulated the foregoing view in a recent speech: …I want to spend some time talking about compliance with other provisions of our federal securities laws, such as… [an] investment adviser’s obligation to adhere to its fiduciary duties and financial responsibility rules. Whether a requirement is in a statute or promulgated using the Commission’s rulemaking authority, enforcement of such rules is necessary to maintain the fairness of our capital markets. Are violations of these provisions on par with fraud? No, not necessarily. In fact, I am confident that many violations of these provisions should not – and do not – result in enforcement cases by the Commission. But there is a middle ground: where fraud is absent, but compliance has failed in a way that poses risks to investors, risks to the integrity of the market, or yields a benefit to the participant.[1]  Her words should not be taken as confirmation that compliance is dead -- quite to the contrary. Although she resigned on March 16, 2026 (seven months into the job and resigning for no reason given), there remain many indicators of what could turn into enforcement referrals from the 2026 Examination Priorities and possible glimpses of what could be pursued as an enforcement referral from the recent action brought against Madison Capital Funding LLC, both described below.  II. 2026 Examination Priorities of Investment Advisers  A. Examination Priorities -- Investment Advisers  1. Adherence to Fiduciary Duty As its first priority in examining investment advisers, the Division of Examinations will continue to review advisers’ adherence to fiduciary duty. Notably, the Division will focus on how that duty of care and loyalty is being applied to retail investors. Exams will focus on: how conflicts of interest impact providing impartial advice, how advisers consider various factors such as cost, objectives and risk in providing, essentially, suitable advice, and how advisers seek best execution with the goal of maximizing value for clients. Observations: Examining conflicts of interest and how advisers mitigate, eliminate or disclose them, the appropriate kind of services provided to seniors, products sold in retirement strategies, and best execution have always been at the heart of fiduciary duty. This priority has been a constant in Examination Priorities over the years. Prioritizing these activities remains consistent with the same themes described in the 2019 Commission Interpretation Regarding Standard of Conduct for Investment Advisers (2019 Interpretation). Accordingly, the Division’s priorities in these respects are nothing new. The Division will be looking at products that are generally perceived to carry higher risks, such as alternative investments like private credit and private funds with extended lock-up periods, complex investments like ETF wrappers on less liquid underlying strategies, option-based ETFs, leveraged and inverse ETFs, and higher cost products. 2. Matching Products to Client Objectives Rhyming with suitability, the Division will look for consistency of product disclosures and client investment objectives, risk tolerances, and financial acuity. Specifically, the Division will evaluate: the appropriate matching of products to older investors and retirement savers, fairness in allocating investment opportunities among private funds (including newly registered funds) and managed accounts, looking specifically for favoritism in allocations and interfund transfers, advisers to newly launched private funds, products with particular market volatility sensitivity, and advisers new to managing private funds to assess regulatory awareness, liquidity, valuation, fees, disclosures, and differential treatment of investors, including use of side letters. Observations: The first two bullets above are consistent with past exam priorities, although Chairman Atkins’ support for opening private fund investments to retirement accounts may be inconsistent with the Examination staff’s view of “appropriate.” What appears to be somewhat new relates to a focus on advisers to newly launched private funds and testing such advisers to see if they understand the differences in managing private funds from managing separate accounts. Activities that an adviser new to managing private funds may not be aware of can involve issues when delegating duties to affiliates, the importance of transparency of fees and expenses, and determinations of asset values, as examples. It appears that the examination teams have found that advisers new to managing a pooled private fund may fail to appreciate that there are significant differences from managing separate accounts. For example, in determining the value of various assets in separate accounts, advisers typically use the custodian’s determination of asset value for reporting, fee calculation and performance purposes. By contrast, in a private fund context, particularly private equity funds, values can be determined by the adviser (see Madison Capital Funding LLC enforcement action described and analyzed below in this Alert), by third parties other than custodians, by affiliates of the general partner, or through appraisals (depending on how illiquid the assets may be). Advisers migrating from a managed account practice to private funds should expect that the examination staff will look closely at the differences in adviser practices when managing separate accounts versus private funds. Similarly, while a single contract will dictate the terms for managing a separate account, it appears that advisers new to the world of private fund management may enter into side letters with various investors but fail to appreciate that some provisions can fundamentally change one investor’s experience from another, both in the same fund.  A non-skeptical reader might think that the focus on differential treatment of investors, including by use of side letters, is aimed solely at advisers new to private fund management. A more skeptical reader, on the other hand, might question this focus as, perhaps, a back door way of enforcing the Preferential Treatment Rule that was vacated by the US Court of Appeals for the Fifth Circuit on June 5, 2024.[2] That rule, Rule 211(h)(2)-3, would have prohibited giving preferential withdrawal and information rights to certain investors in private funds. While a full explanation of that vacated Rule is beyond the scope of this Client Alert, some level of skepticism might be deserved regarding this priority in the Examination Priorities. More broadly, if this mention is an attempt by the examination staff to issue deficiencies when an adviser to a private fund has given preferential treatment to certain investors by way of side letters under the broad anti-fraud provisions of Advisers Act Section 206(4), the staff may need reminding (respectfully, of course) that the Fifth Circuit Court of Appeals found that the SEC lacked authority under that Section to adopt Rule 211. Therefore, it could be argued that any examination finding of a breach of fiduciary duty in respect of specific side letter provisions is similarly without legal authority.  Lastly, the focus on “products with particular market volatility sensitivity” is curious, particularly in this day and age, when it seems like many financial products are prone to market volatility.  3. Particular Types of Advisers The Division will also be looking at advisers with particular characteristics, such as: dually registered investment advisers and broker-dealers with dually registered investment adviser representatives and registered representatives with conflicts of interest that must be addressed, advisers that use third parties to access client accounts to ensure controls are adequate to safeguard client information, and merged, consolidated or acquired advisers which can result in operational or compliance complexities or new conflicts of interest.   Observations: Dual registrant issues continue to be a perennial favorite simply because the two ways in which advisers and broker-dealers, and their registered personnel, deliver their services and are paid raise different sets of conflicts of interest. As such, dual registrant activities provide fertile ground for the examination staff to evaluate the suitability of the kinds of accounts dual registrants open for clients with different objectives and goals and the costs they bear.  The focus on safeguarding sensitive personal client information, particularly when third parties are used to safeguard that information, is not new either. Protecting sensitive client information has been on the radar for a long time. However, broadly speaking, this priority could be viewed as the Division of Examination’s attempt to enforce the Outsourcing Rule, Rule 206(4)-11, that was proposed by the previous administration but withdrawn in June of 2025. That rule proposed to establish an oversight framework for advisers in retaining third parties to perform a variety of services and functions. It prohibited advisers from outsourcing certain services or functions without meeting minimum requirements, including engaging in due diligence and monitoring third parties that would have been required to meet certain standards. Again, the skeptic wonders if this exam focus is an attempt to identify and find fault with advisers if their outsourced arrangements fail to meet the withdrawn rule’s requirements.   Lastly, the focus on merged, consolidated and acquired advisers is new but somewhat logical. Combining two separate investment advisers into one, regardless of whether the combination is the result of a merger, consolidation or acquisition, can certainly be clunky. Much care and attention must be carried out to shuffle two separate sets of compliance policies and procedures into one full set that applies across the newly combined entity. It is important when doing so to avoid discarding one policy that applied to one of the entities that has been combined when that policy might continue to apply to a part of the legacy advisory product line. In short, as two or more advisers become joined at the hip, it is very important to give appropriate consideration to existing policies that apply to one of the entities but may not be relevant to others, much less the combined entity. Similarly, many combinations are attractive for cross-selling purposes; e.g., a fixed-income manager combines with an equity manager, and now the combined entity can offer a balanced portfolio. It is very important to identify and evaluate across those asset lines what conflicts of interest might spring out of that combination.  4. Effectiveness of Compliance Programs The Division of Examinations will continue to focus on the effectiveness of advisers’ compliance programs. Priorities will cover: marketing, valuation, trading, portfolio management, disclosure and filings, custody, and annual reviews of the effectiveness of the compliance program. In reviewing the compliance program, examiners will be focused on policies and procedures that address adherence to fiduciary principles, consistent with the Advisers Act and rules. Examiners will be particularly interested in conflicts of interest and any activity that appears to place an adviser’s interest ahead of clients’ interests. In that respect, examination teams will look to see if policies and procedures are implemented and enforced and whether disclosures address fee-related conflicts that arise from account and product compensation structures. Observations: As a general matter, this is not new. The bulleted activities that will be reviewed are embedded in Advisers Act Rule 206(4)-7 and should be covered topics in any compliance manual. Regarding implementation and enforcement, it cannot be emphasized enough that training relevant personnel and punishing those who violate policy and procedure (at least, repeat violators who think policies and procedures apply to everyone else) is the best proof that the compliance program has been implemented and is being enforced.    The last examination priority for investment advisers relates to never-examined advisers and recently registered advisers. Those advisers will be visited. B. Priorities for all Financial Intermediaries  No Examination Priorities alert would be complete without mention of information security and operational resiliency (Cyber and Regulation S-ID and Regulation S-P), emerging financial technology (AI), and Anti-Money Laundering. 1. Information Security and Operational Resiliency The examination teams will continue to evaluate registrants’ efforts to prevent interruptions to mission-critical services and to protect investor information, records and assets. In this respect, the examiners will examine procedures and practices to assess whether registrants are reasonably managing information security and operational risks. Specifically, examiners will review: policies and procedures pertaining togovernance practices, data loss prevention, access controls, account management, and responses and recovery to cyberrelated incidents (e.g., ransomware attacks); training and security controls employed to identify and mitigate new risks associated with artificial intelligence and “polymorphic malware attacks,” including “how they are operationalizing information from threat intelligence sources;” compliance with Regulations S-ID (including implementation of a written Identity Theft Prevention Program designed to detect, prevent, and mitigate identity theft) and S-P, related policies and procedures, internal controls, oversight of third-party vendors, and governance practices to ensure they are reasonably designed to identify and detect red flags, customer account takeovers and fraudulent transfers; and preparedness for the compliance date of amended Regulation S-P (Dec. 3, 2025, for registered advisers with $1.5 billion or more of assets under management/registered funds with $1 billion or more of net assets; June 3, 2026, for all other advisers), including incident response programs, policies and procedures in accordance with the amended Regulation. 2. Emerging Financial Technology (AI) The Division will look at risks associated with registrants’ uses of products and services, such as automated investment tools, AI technologies, and trading algorithms or platforms. In particular, the examiners will look at whether: representations of such uses are fair and accurate (see several enforcement actions involving misrepresentations of uses, e.g., of algorithms), operations and controls in place are consistent with disclosures, algorithms lead to advice or recommendations that sync up to investor profiles or strategies, controls confirm that advice and recommendations are consistent with obligations to investors, including retail and older investors, and firms have implemented policies and procedures to monitor and supervise their use of AI technologies, including tasks related to fraud prevention and detection, back-office operations, anti-money laundering and trading functions. Advisers who actively use AI, such as algorithms, should study and learn from past enforcement actions.[3]  3. Anti-Money Laundering (AML) Broker-dealers and certain registered funds are obligated to establish AML programs that are designed to prevent being used to launder money or to finance terrorism. In examining these institutions, the Division will review these programs to ensure these institutions are: appropriately tailoring their programs to their business models and risks, adequately testing their programs, establishing adequate customer identification programs, including for beneficial owners of legal entity customers, meeting their Suspicious Activity Report filing obligations, and in the case of registered funds, overseeing their applicable financial intermediaries. Many of the 2026 exam priorities are not new relative to the exam priorities in prior years. It therefore would seem that risks of non-compliance in these areas might similarly be causes for enforcement referral and possible action. III. Madison Capital Funding Enforcement Action On February 25, 2026, in the most significant investment adviser enforcement action year to date, the SEC issued a cease-and-desist order against Madison Capital Funding LLC for breach of fiduciary duty and violations of the Investment Advisers Act anti-fraud provisions.[4] Madison Capital, an investment adviser registered under the Advisers Act at the time, managed private funds and originated senior loans using funds from its parent company. Once the loans were originated, Madison Capital would sell a portion of those loans, typically between 50-60%, to the private funds it managed in principal transactions. The parent company would keep the remaining amount of the senior loans originated. Disclosures in advisory agreements and offering documents stated that Madison Capital would sell the loans to the funds at “fair value” or “fair market value” after an independent review agent consented to the sales on behalf of the fund (the consent mechanism used for purposes of Section 206(3) principal transactions). Madison Capital’s determination of the fair value of the loans was typically par value less unamortized loan fees.  Of significance, and at the heart of the enforcement action, from March 2020 to May 2020, the beginning months of the Covid Pandemic, Madison Capital failed to consider the effect of the market disruption due to the onset of the Pandemic when determining fair value of the loans, although it did increase monitoring of its existing portfolio companies and implemented a day-ahead check to confirm loans being sold still maintained a “B” credit rating or better according to its proprietary rating system. Notwithstanding these steps, Madison Capital did not perform other analyses to determine whether the fair market value of those loans declined because of changing market conditions. 143 loans were sold to the funds during that period. No market adjustments were made to the values of those loans in consideration of the market disruption associated with Covid. All but one of the loans continued to perform during that period.  Several interesting facts about this case and Madison Capital deserve calling out: Madison Capital was examined sometime in 2020-2021 and was issued a deficiency letter in May 2021; Apparently in response to the deficiency letter, Madison Capital reimbursed the private funds that Madison Capital managed over $5 million, plus interest, as compensation for the sale of the loans at purchase price less unamortized loan fees (the inference being that the funds were made whole by reversing the loan sales that occurred during that time period as if they did not happen); Madison Capital de-registered as an investment adviser in March of 2022; and To settle the SEC action, Madison Capital paid a fine of $900,000.   Here are some takeaways from this case: If an adviser discloses that it will do something, the adviser better do what it has disclosed it will do. Enhancing some practices (e.g., monitoring and implementing other procedures) but not taking all steps described in disclosures is insufficient; The fact that all but one of the loans continued to perform, and maintained their credit ratings during the period, does not mean that the funds were not harmed. At least in responding to the deficiencies during or after the exam, it is possible that arguments advanced that the funds were not harmed failed; De-registering under the Advisers Act will not spare an adviser that was registered during the time of the examination from enforcement – not even 4 years later; and Even a kinder and gentler SEC will pursue cases that, at least, involve failure to act in accordance with disclosed policies and procedures, even when investors have been made whole. Applying the statements made by the previous Director of Enforcement noted at the beginning of this Alert to this case, the misconduct, if not fraud, would have had to be at the risk of investors or to have benefited Madison. Although Madison Capital was not charged with violating Section 206(1) of the Advisers Act for intentional fraud, it was charged with violations of Sections 206(2) and 206(4) for transactions that operated as fraud without intent (or scienter). Perhaps Judge Ryan, then Director of Enforcement, supported this action because fraud is fraud with or without intent, although the funds were made whole many years ago? Chairman Atkins has made clear his intention to pursue Congress’ intent that the SEC enforce securities laws against fraud and manipulation.[5] He voted in favor of the case. Did he think Madison Capital committed fraud by not taking Covid-driven market instability into account when valuing the loans although the case does not indicate any intention to have done so? In the final analysis, the Chairman likely was just following the law by finding fraud in this case that may have involved negligent conduct without intention or scienter.[6] A lot of unintentional conduct, like sloppiness, can fall into that category. The industry can only hope that this SEC, under Chairman Atkins, does not support labeling every foot-fault investment advisers make as fraud like his predecessor seems to have done. In the final analysis, this case is consistent with the 2026 Examination Priorities in a variety of ways – evaluating conduct relative to disclosure, considering the effectiveness of policies in practice, and acting in a manner consistent with fiduciary duty. And there is no question that valuation is part of any adviser’s compliance program and fundamental to fiduciary duty. Accordingly, investment adviser compliance personnel should consider the 2026 Examination Priorities as providing important visibility into what the examination staff will look at and what kind of cases they will refer to Enforcement. At a minimum, the Examination Priorities are a road map for compliance to follow in preparing for a regulatory examination.  _________________________________ Conclusion Those of us who have been through both aggressive and tame SEC enforcement cycles see rhymes in many of the same, familiar places, as the 2026 examination priorities and the Madison Capital case suggest. Preparing for an exam, testing policies and procedures, and training personnel remain the best ways to survive an examination and avoid enforcement. It may be that business leaders think that compliance can take a holiday and compliance budgets can be slashed. Those who have operated and practiced in both tough and easy regulatory environments know better. It is up to compliance professionals to convince business leaders that compliance needs to remain a priority. Hopefully this Alert, including what happened to Madison Capital, can help in that respect.  The material in this Client Alert is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem. To the extent that this Client Alert contains opinions, those opinions are solely of the author and do not necessarily reflect views of other practitioners at Sullivan & Worcester. [1] Remarks to the Los Angeles County Bar Association, Margaret Ryan, Director, Division of Enforcement, February 11, 2026. [2] National Association of Private Fund Managers, et al. v. Securities and Exchange Commission, 105 F.4th 229 (5th Cir. 2024). [3] Examples include the case against AXA Rosenberg, Investment Advisers Act Rel. No. 3149, Feb. 3, 2011, and Aegon USA Investment Management, et al., Investment Advisers Act Rel. No. 4996, Aug. 27, 2018. [4] Investment Advisers Act Rel. No. 6948, Feb. 25, 2026. [5] Chairman Atkins’ statements at the March 16, 2026 resignation of Judge Ryan: “Our goal has been to [the] lead the Division of Enforcement back to Congress’ original intent: enforcing the federal securities laws, particularly as they relate to fraud and manipulation,” said SEC Chairman Paul S. Atkins. “I am pleased to report significant progress toward this objective.”  [6] Scienter is not required to establish a violation of Investment Advisers Act Section 206(2), but rather a violation may rest on a finding of negligence. SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992) (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194-95 (1963)).

On January 7, 2026, the Securities and Exchange Commission (“SEC”) proposed amendments to the rules that define which registered investment companies, investment advisers, and business development companies qualify as small entities for the purposes of the Regulatory Flexibility Act (RFA).[1] The Proposing Release notes that the amendments would increase the asset-based thresholds used in such definitions and would also provide for a mechanism for future periodic inflation adjustments of those asset-based thresholds.  While the RFA does not mandate any specific regulatory outcome, it is intended to ensure that agencies, such as the SEC, consider the economic consequences of their rules on small entities. Generally, when the SEC adopts a new rule, it has often provided small entities with additional time to come into compliance, which is important because small entities frequently do not have the resources to develop tools in-house to comply with certain rules, and instead must contract with third-party vendors. Even when a new SEC rule only requires additional procedures and an entity does not need to hire an third-party service provider, the additional time to come into compliance can still be helpful.  Overview Proposed Amendments to Rule 0-10 of the Investment Company Act of 1940, as amended (the “1940 Act”) Raising the Net Asset ThresholdThe proposed amendments would amend Rule 0-10 of the 1940 Act to increase the small entity net asset threshold for investment companies from $50 million to $10 billion. The Proposing Release notes that this change would improve the usefulness of RFA analyses by more closely reflecting the population of funds that does not have the same competitive advantages as larger fund groups and would also more closely reflect the population of funds that does not have the same negotiating power as larger fund groups when retaining service providers to perform compliance and operational functions. Group Definitions AmendmentsThe proposed amendments would amend Rule 0-10 of the 1940 Act to replace the term “group of related investment companies” with “family of investment companies” as the term is used in Item B.5 of Form N-CEN. “Family of Investment Companies” means, except for insurance company separate accounts, any two or more registered investment companies that: (1) share the same investment adviser or principal underwriter; and (2) hold themselves out to investors as related companies for purposes of investment and investor services. Proposed Amendments to Rule 0-7 of the Investment Advisers Act of 1940 (the “Advisers Act”) The Regulatory Assets Under Management (“RAUM”) ThresholdThe proposed amendments would amend Rule 0-7 of the Advisers Act to increase the small entity RAUM threshold from $25 million to $1 billion. The Control Relationship ThresholdThe proposed amendments would amend the Control Relationship Threshold in accordance with the changes to the RAUM Threshold in Rule 0-7 of the Advisers Act, from $25 million to $1 billion. Form ADV AmendmentsThe proposed amendments would amend certain Form ADV instructions to update the definition of a small adviser as noted above.  Periodic Future Adjustments The proposed amendments would also provide for future inflation adjustments to the asset thresholds every 10 years for both Rule 0-7 of the Advisers Act and Rule 0-10 of the 1940 Act.  The Proposing Release requests comments on various questions the SEC has laid out with respect to these proposals, as well as whether the SEC should also  amend the total assets threshold in Rule 0-7 of the Advisers Act, which is not part of the current proposed amendments.     [1] Release IC-35864, amendments to the “Small Business” and “Small Organization” Definitions for Investment Companies and Investment Advisers for Purposes of the Regulatory Flexibility Act (January 7, 2026) at https://www.sec.gov/files/rules/proposed/2026/ia-6935.pdf (“Proposing Release”).