The SEC’s announcement of its examination priorities for 2026 provides an opportunity to re-focus operational due diligence on investment managers. The SEC notes that they have used four pillars to assess risk and outline their priorities:
- Promote compliance
- Prevent fraud
- Inform policy
- Monitor risk
The SEC used a risk-based approach to determining its priorities for 2026 and we can use that to inform our assessment of operational risks.
Promoting Compliance and Monitoring Risk in Operational Due Diligence
The first of the four pillars – promoting compliance – is a key goal of operational due diligence. Investment firms know that their investors care about both investment level compliance and firmwide compliance when they are regularly asked detailed questions about the relevant controls.
The fourth goal, monitoring risk, is also a key element and purpose of financial due diligence. Investors have quantitative measures to see how investment risk has changed over time. Changes in qualitative, or operational, risks are less obvious. A robust diligence process provides insights regarding movement in the risks.
SEC Examination Priorities for Investment Advisors
The SEC has provided its broad Examination Priorities for the Division of Examinations for 2026. The following are included as areas of focus in the discussion of examinations of investment advisors:
- Impact of actual and/or perceived conflicts of interest on providing impartial advice.
- Understanding investment process: On the surface, this seems generic, but the SEC has been drilling down on whether the process considers performance in a variety of market and economic conditions. They have been mapping the process to disclosures in investor agreements and reporting and have linked some of the processes back to concerns about perceived conflicts of interest.
- Best execution: The SEC looks to ensure it focuses on maximizing value for investors based on circumstances at the time of investment. Best execution is a term that is most clearly defined for transactions in publicly traded instruments. Are they traded in a manner that minimizes costs, maximizes certainty of closing, and addresses quantitative metrics? The equivalent for transactions in private equity, private credit, and physical assets is necessarily more quantitative.
- Consistency of investment recommendations with related disclosures.
Investment Types and Structures Presenting Elevated Risk
In addition to outlining areas of focus for examinations, the SEC identified some types of investments, services, or funds that may create additional risks, including:
- Advisors to private funds: Here the SEC focuses on those who advise private managed accounts and/or newly registered funds. It notes a focus on favoritism in allocation and interfund transfers.
- Advisors to newly launched private funds and those who have not previously advised private funds.
- Investments with advisors that have been purchased or merged with another firm.
These focus areas are a continuation of emphasis noted in examinations over the last several years. The SEC has asked very detailed questions about services provided to funds and other investment vehicles by the investment firm and any affiliated persons or entities. These lines of questioning included getting a complete understanding of the pricing of the services and whether the terms of that pricing were the same as provided to/from third parties. The focus on the services themselves included consideration of whether the investment management and partnership agreements would lead an investor to expect the services to be included in the related management fee, rather than billed separately.
Applying SEC Priorities to Operational Due Diligence in Practice
At Kreischer Miller, we use the SEC’s risk-based priorities assessment as a check against our operational due diligence experience. The following expands on three areas that have been receiving increased attention in our discussions in practice and from the SEC.
Services provided by the investment advisor and related parties
Operational due diligence should include a similar understanding of what services are provided by an investment firm and its related parties, along with how they are billed if not included in the management fee. Any inherent conflicts of interest in pricing can be important, but the impact is generally limited to the cost of fees paid.
It is also important to understand the relationship with outside service providers to identify how the firm manages the risk of undue influence on the outside service providers in key controls, such as valuation of the investments. Use of a third party to value investments is generally a key control, particularly when investment management fees could be calculated based on the fair value of investments. Investment firms should ensure that the third party is independent of the firm.
Allocation of investment opportunities
Perhaps more important are potential conflicts of interest around access to the best investment ideas. As investors have made more investments in funds of one and co-investments, the allocation of investment opportunities becomes more critical in due diligence.
Investors should ensure that they understand where they stand in the priority order for having investments with the highest potential allocated to them. As an example, the allocation methodology at an investment firm could go as follows:
- Flagship co-mingled fund in the strategy at the firm
- Other co-mingled funds in the strategy at the firm
- Separately managed accounts in the strategy at the firm
- Excess capacity to investors in 1, then 2, then 3 in the strategy
- Excess capacity to investors that the firm is trying to woo in numbers 1, 2, or 3
An investor should have a clear understanding of where they are likely to fall. The consideration of investment risk will include an analysis of the size of the opportunity, but the operational diligence adds detail that helps an investor weigh the considerations of whether the best opportunities will run out before their placement in the allocation.
Changes in firms and evolving operational risk
Even the most established firms can have incremental operational risks in times of significant change. Firms that are expanding into new strategies or investment structures (i.e., private funds, separately managed accounts) and those that merge or are acquired should assess risks with a fresh view.
Operational due diligence should aim to capture both a snapshot of those risks at a point in time and an understanding of how the firm will continue to update the risk assessment over time. For example, the risks associated with underwriting private credit investments rely on the teams and resources available. A firm that expands into a new strategy may need to bring in people with different expertise (asset class, geography, industry, etc.). A firm that is acquired by another may lose key staff due to uncertainty or may gain access to great research and team members. That firm may have challenges addressing regulations related to sharing knowledge across teams while keeping key information confidential. The assessment of related operational risk will likely change in the short term after the merger while temporary provisions are put in place to comply with the regulations. This will shift in the medium- to long-term as the teams are reorganized. Effective operational diligence will identify these inflection points and update the risk assessment accordingly.
Aligning Resources with Operational Risk
In conclusion, institutional investors must weigh the operational risk associated with their investments and make tough decisions on how to allocate limited resources to understanding and mitigating those risks.
The SEC’s examination priorities provide a high-level view into how one organization prioritizes the use of resources. Its priorities are different from those of an investor, though. Investors must drill down to a more granular level to allocate their resources.
If you invest with managers subject to the change points highlighted by the SEC, this is a good time to reassess the investments to which you allocate the majority of time and resources for assessing and mitigating operational risk.
Next Steps for Strengthening Your Operational Due Diligence Framework
The SEC’s 2026 examination priorities highlight how operational risks can shift as firms introduce new strategies, evolve their structures, or adjust key processes. Our Operational Due Diligence & Internal Control Services provide perspective on these types of changes by examining how investment organizations design and maintain their operational and control environments. Our work draws on experience with a wide range of managers and operating models to help investors and managers better understand the practical implications of operational risk.
The Kreischer Miller Investment Industry team can serve as a resource as you consider how best to align your diligence efforts with these evolving risks. Please contact us if you’d like to talk through potential approaches.
Contact the Authors:
- Jennifer Kreischer, Director, Audit & Accounting, Investment Industry Group can be reached at jlkreischer@kmco.com.
- Patrick Cunningham, Consultant, Operational Due Diligence, Investment Industry Group can be reached at pcunningham@kmco.com.