SEC's 'Back to Basics' Enforcement Pivot: What the 2026 Mid-Year Update Means for Investment Advisers and Broker-Dealers

The SEC filed fewer enforcement actions in FY 2025 than in any recent year. That isn’t a reason to relax compliance programs. It’s a signal to understand exactly where the current administration will focus the cases they do bring — and those cases are now specifically about fraud, fiduciary breaches, and direct investor harm.

TL;DR

• The SEC filed 456 enforcement actions in FY 2025, down from 583 in FY 2024, reflecting a deliberate shift toward fewer, higher-impact fraud cases over volume-driven enforcement
• SEC Rule 202.5(e) — the 52-year-old “no-deny” settlement requirement — was rescinded May 18, 2026; defendants settling SEC enforcement actions can now publicly dispute factual allegations
• Off-channel communications enforcement has effectively ended at the SEC after 95 actions and $2.3 billion in penalties since FY 2022; FINRA continues to pursue it independently
• Investment adviser enforcement priority areas: misappropriation, undisclosed conflicts of interest, private fund fee/expense arrangements, cherry-picking, fraudulent valuation
• Both the SEC and CFTC are offering meaningful credit for voluntary self-reporting, cooperation, and remediation — changing the cost-benefit of internal escalation decisions

The Enforcement Shift in Context

The change in SEC enforcement priorities tracks directly to a change in personnel and philosophy at the top of the Division of Enforcement. Both the SEC and CFTC appointed new directors of enforcement in 2025 who framed their mandates around a “back to basics” approach — meaning policing conduct that causes demonstrable harm to investors, not regulatory technical violations with no identifiable injured party.

SEC Chair Paul Atkins has been explicit: the Commission has “redirected resources toward the types of misconduct that inflict the greatest harm — particularly fraud, market manipulation, and abuses of trust — and away from approaches that prioritized volume and record-setting penalties over true investor protection.”

The FY 2025 numbers reflect that. The SEC filed 456 enforcement actions, down significantly from the 583 brought in FY 2024 — a year that the prior Commission had characterized as a record enforcement year. The drop isn’t resource-driven. It’s intentional.

For compliance programs, the relevant question isn’t whether enforcement risk has decreased overall. It’s whether the risks your firm actually carries are in the current enforcement lane — and for most investment advisers and broker-dealers, the answer is yes.

What’s No Longer a Priority at the SEC

Off-channel communications. The prior Commission made WhatsApp, Signal, and personal email some of the highest-risk compliance exposures in financial services. The current Commission has walked away from it. According to the Sher Tremonte mid-year enforcement update, the current SEC leadership explicitly characterized the prior enforcement program as bringing 95 actions, generating $2.3 billion in penalties, and producing “no direct investor harm and no investor benefit or protection.” New off-channel enforcement referrals from the Division of Examinations to the Division of Enforcement have effectively stopped.

Crypto registration violations. The prior Commission pursued crypto exchanges, token issuers, and platforms on the theory that their tokens were unregistered securities. The current SEC has adopted a “recalibrated approach” — one focused on fraud within crypto markets rather than registration status per se. The “dealer” definition cases that were a significant portion of recent enforcement activity have been dropped.

Volume-driven enforcement. The prior SEC under Gensler explicitly used case volume and penalty totals as metrics of success. The current SEC has said plainly that volume and penalty size are not the right metrics — outcomes for investors are. Cases go to the front of the queue when there is a real victim and a real fraud.

What Is Now a Priority

Investment Adviser Enforcement

The Division of Enforcement’s current investment adviser priority areas are:

Misappropriation of client funds and failure to safeguard assets. Cases where advisers take client money directly, or where assets are at risk due to control failures, remain the top priority. These are the cases where enforcement resources have the clearest payoff: recover money, stop harm, send a market signal.

Undisclosed conflicts of interest. This is the highest-frequency examination finding category and a current enforcement priority. The SEC has specifically named private fund fees and expenses as an active target — arrangements where the adviser benefits financially in ways that aren’t reflected in fund documents or investor disclosures. For registered investment advisers managing private funds, fee offset arrangements, transaction fees, broken deal expense allocations, and GP co-investment terms that advantage the manager at investor expense are live enforcement risks.

Cherry-picking. The practice of allocating profitable trades to favored accounts after the trades are executed — by executing a block trade and then deciding who gets the good fills — has a clean enforcement pattern. Trade data and allocation records exist, the pattern is statistically detectable, and it’s unambiguously a breach of fiduciary duty. Expect cases.

Fraudulent valuation. For private fund advisers marking illiquid positions: how you value positions that aren’t independently priced is under scrutiny. Valuations that appear to track performance fee calculation periods, that reverse when redemptions are requested, or that diverge materially from observable market data without documented methodology are enforcement targets.

Misleading investment strategy disclosures. Cases where what an adviser told clients about investment strategy diverges from what the adviser actually did with the money. This connects to fiduciary duty disclosure but the specific enforcement focus is on material gaps between disclosed strategy and actual portfolio construction.

Prohibited principal trades. Advisers executing principal trades with clients without the required disclosure and consent under the Investment Advisers Act remain in scope.

Broker-Dealer Enforcement

For broker-dealers, the current enforcement priority areas are more specifically fraud-focused:

Misappropriation of customer funds. Direct theft from customer accounts — the clearest investor harm case.

Cherry-picking. Same pattern as investment advisers — block trade allocation that systematically advantages certain accounts.

Churning. Excessive trading generating commissions without regard for the customer’s investment objectives. Churning cases require demonstrating that trading frequency exceeded any reasonable investment purpose; the enforcement pattern generally follows accounts where turnover rates are several multiples of what documented investment objectives would support.

Unauthorized trading. Trading customer accounts without authorization — whether through negligent order entry or deliberate discretionary execution without a discretionary agreement.

The FINRA Off-Channel Complication

Firms assuming off-channel risk has been eliminated need to read the FINRA file separately.

FINRA continues to pursue off-channel communications violations under Rule 3110 (supervision) and Rule 4511 (books and records), entirely independent of the SEC’s enforcement posture. FINRA’s off-channel program is active. Registered representatives who communicate with customers via WhatsApp, Signal, personal email, or other unapproved channels remain exposed to FINRA disciplinary action even though the SEC is no longer the primary driver.

The SEC’s 2026 examination priorities continue to include cybersecurity and supervisory controls — the infrastructure within which off-channel communications supervision sits. Even if the Division of Enforcement isn’t prioritizing off-channel referrals, the Division of Examinations can still flag supervisory deficiencies related to off-channel communications in a deficiency letter, which becomes an item requiring a written response and remediation.

The practical guidance: do not dismantle off-channel communications policies because the SEC backed off. FINRA-registered persons remain subject to FINRA supervision requirements, and FINRA is bringing those cases.

The No-Deny Rule Rescission

On May 18, 2026, the SEC rescinded Rule 202.5(e) — a policy in place since 1972 under which firms settling enforcement actions were required to agree not to publicly deny the allegations. The CFTC subsequently followed suit.

Under the prior framework, settling an enforcement action meant accepting an injunction or cease-and-desist order and agreeing to stay quiet about the facts. Under the new framework, a firm can settle and then publicly contest the factual record. This makes settlement somewhat more palatable for firms that believe the factual allegations are contestable but face substantial litigation risk in a contested proceeding.

For compliance programs, the rescission matters most in one scenario: when an internal investigation identifies a potential violation and the firm has to decide between self-reporting and hoping it’s never discovered. Under the prior framework, getting caught after not disclosing meant a consent order where you couldn’t defend yourself publicly. Under the new framework, that asymmetry has shifted slightly — though the cooperation credit for self-reporting still makes the calculus favor disclosure in most cases.

Self-Reporting: The New Compliance Calculus

Both the SEC and CFTC have modified their cooperation policies to offer credit for firms that:

1. Voluntarily self-report potential violations before detection
2. Cooperate fully with the investigation
3. Remediate promptly and effectively
4. Make investors whole through restitution or disgorgement

Firms that check all four boxes can avoid enforcement action entirely or significantly reduce penalties. This is not a new concept — both agencies have long had cooperation frameworks. What’s new is the explicit articulation under current leadership of what cooperation looks like and what it’s worth under a “back to basics” enforcement philosophy focused on investor outcomes.

The compliance program implication is operational: when your issues tracking system, testing program, or a business line surfaces something that looks like a potential violation, the clock on self-reporting starts then — not after a month of internal review. Build a self-reporting decision framework before you need it:

• What threshold distinguishes a compliance issue from a potential violation requiring disclosure evaluation?
• Who evaluates and within what timeframe?
• What does remediation look like before disclosure?
• Who makes the final disclosure call?

The MRA remediation playbook covers how to manage regulatory findings end-to-end — the same structured approach applies when a potential finding is self-identified before an examiner surfaces it. The difference in outcome between an issue that’s investigated and disclosed on a defined timeline versus one that sits in internal review for six months is material under the current cooperation framework.

Practical Adjustments for Investment Advisers

Given the current enforcement priorities, the compliance program items most likely to surface an enforcement-referral-level deficiency:

Conflicts and disclosures:

• Pull your current Form ADV Part 2 and map every compensation arrangement that creates a potential conflict. Are all of them disclosed? Is the disclosure specific enough to be meaningful? “The firm may receive compensation from third parties” is not meaningful disclosure of a specific arrangement.
• For private fund managers: review fund documents and actual fee calculations for any arrangement where the manager benefits at investor expense. Focus on: fee offset provisions and whether offsets are being applied consistently, transaction fee treatment, broken deal expense allocation, and co-investment economics.

Cherry-picking:

• Confirm your trade allocation procedures require same-day allocation documentation and prohibit post-execution favorable allocation decisions.
• Pull a sample of block trade allocations from the past 12 months and verify that the allocation pattern doesn’t correlate with trade profitability across accounts receiving different treatment.

Valuation:

• For any illiquid position valued internally: document the methodology, the inputs used, who performed the valuation, and who provided independent review. The documentation needs to demonstrate that valuation decisions were made independently of performance fee calculations.

Safeguarding:

• Confirm custodial account statements are delivered directly to clients, not routed through or delayed by the adviser.
• Review wire authorization procedures and cash movement controls.

Practical Adjustments for Broker-Dealers

Supervision for fraud:

• Review supervisory procedures for misappropriation, churning, and unauthorized trading. Do the procedures name specific review thresholds, timeframes, and responsible supervisors?
• Confirm that annual supervisory reviews are actually reviewing for these patterns — not just confirming that procedures exist.

Turnover analysis:

• Run a turnover analysis on retail accounts. Any account with an annualized turnover rate above 6x in a given period, in a non-discretionary account, should be flagged for supervisory review and documented. This is the standard churning detection methodology regulators use.

Off-channel supervision:

• Maintain the existing off-channel supervision program for FINRA-registered persons regardless of SEC enforcement trends. The FINRA exposure is real.

So What?

The SEC enforcing fewer cases doesn’t mean compliance risk has decreased. It means the cases that get brought will be specifically targeted at fraud and investor harm, and the consequence of being the firm that’s found in that lane is significant — both financially and reputationally.

For investment advisers: conflict disclosure and private fund fee transparency are the live wires. For broker-dealers: supervisory controls for misappropriation, churning, and unauthorized trading are where exam deficiencies and enforcement referrals will originate.

The SEC Marketing Rule deficiency findings from 2026 examinations illustrate how the Division of Examinations translates stated priorities into actual written deficiencies. The enforcement shift doesn’t make exam risk disappear — it means the deficiencies that escalate to enforcement referrals are the ones involving investor harm, not technical policy gaps.

Build the issues tracking discipline before you need it. When something surfaces internally, the self-reporting decision needs a structured framework with a defined timeline — not an improvised call with outside counsel six months into an internal review that’s gotten longer every week.