It was another great gathering for The Philadelphia Compliance Roundtable – over 500 compliance professionals met on April 26th virtually and in person. We engaged with our keynote speaker, Karen Barr, CEO and President of the Investment Adviser Association, on the SEC’s very active rulemaking agenda. Following keynote remarks, panelists from Morgan Lewis, SEI, and Yuter Compliance Consulting, discussed the state of the regulatory environment and practical guidance on new rules, as well as SEC examination and enforcement trends and priorities. The next meeting will be held in the fall.
The 19th Annual Investment Management Testing Survey, cosponsored by YCC, ACA, and the IAA closed on May 21st. A complimentary webcast was held to share results on June 26th. Stay tuned for the release of the survey results. Please contact YCC for further information.
• Marketing Rule Risk Alert: Marketing Rule Risk Alert: The SEC’s Division of Examinations issued its 3rd Risk Alert on the amended marketing rule, Initial Observations Regarding Advisers Act Marketing Rule Compliance, following its 1st Risk Alert in November 2022 outlining examination focus areas, and its 2nd Risk Alert in June 2023 detailing its second examination phase under the amended rule. This Risk Alert includes preliminary observations from the examinations sharing findings with respect to Form ADV accuracy, books and records retention requirements, and adherence to the general prohibitions set form in the rule.
• Supreme Court Rules Against SEC: The U.S. Supreme Court rejected the SEC’s arguments and held that the 7th Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud. The Court concluded that civil penalties the SEC sought implicated the 7th Amendment guarantee of a jury trial as they sought to punish and deter. The holding limits the SEC’s authority to pursue civil penalties for fraud-based claims and also may create uncertainty for other federal agencies.
• Cybersecurity: The SEC settled with the Intercontinental Exchange and certain affiliates, including the New York Stock Exchange, for $10 million for failing to inform the Commission of a cyber incident, as required by Regulation Systems Compliance and Integrity (Regulation SCI).
Lesson Learned: The SEC was aware of similar incidents and reached out to the respondents who failed to report. A failure to report may be easily detectable by the SEC’s monitoring efforts.
• Conflicts of Interest: The SEC settled with an investment adviser and its founder for close to $1 million for breaching for fiduciary breaches by failing to disclose conflicts of interest and making misleading statements to clients. The firm advised a private fund and individual clients to invest in certain films while the founder received undisclosed compensation from the film producer. The adviser was also found to have preferred one investor’s redemption request over other client requests, in violation of their fiduciary duty.
Lesson Learned: “Fully and fairly disclosing conflicts of interest are at the heart of an investment adviser’s fiduciary duty,” said Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit. “Investors must have confidence that their investment advisers are treating them fairly and acting in their best interest when investing their funds.”
• Investment Company Contract Approval: The SEC settled with an investment adviser to an exchange traded fund (“ETF”) for $1.75 million in fines for failing to disclose to the ETF board’s independent trustees, a social media influencer’s role in connection with the ETF launch, in violation of Section 15(c) of the Investment Company Act and Sections 206(2) and 206(4) of the Investment Advisers Act. The ETF’s index provider planned to partner with the influencer to market the index in tandem with the ETF launch and offered the influencer an ownership stake and a sliding scale fee based on the ETF’s asset raise.
Lesson Learned: Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit, emphasized the importance of accurate disclosures, stating, “Fund boards rely on advisers to provide accurate disclosures, especially when involving issues that can impact the advisory contract, known as the 15(c) process.”
• Marketing Rule: The SEC settled with five investment advisers for advertising hypothetical performance on their websites without adopting reasonable policies and procedures to ensure that the performance was relevant to the audience. One investment adviser was also found to have advertised misleading model performance, failed to substantiate advertised performance, and violated other recordkeeping and compliance.
Lesson Learned: “The Marketing Rule’s provisions are crucial to protecting investors from misleading advertising claims,” said Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit. “Today’s actions show that we will continue to employ targeted initiatives to ensure that investment advisers fully comply with their obligations under the rule. They also serve as a reminder of the benefits to firms that take corrective steps before being contacted by Commission staff.”
• Auditor Fraud: The SEC settled with an auditor and its owner for $14 million in penalties and permanent bars for failing to comply with PCAOB standards and falsely representing PCAOB compliance.
Lesson Learned: Perform reasonable due diligence to ensure that your auditors are following PCAOB standards.
• False Statements: The SEC settled for $600 million with a formerly registered investment adviser and its co-founder and CEO for making false and misleading statements to investors in the adviser’s flagship private fund about the private fund’s holdings and exposures and omitting disclosures with respect to certain conflicts of interest.
Lesson Learned: “Complete and accurate reporting at all turns, whether in investor communications or about conflicts of interest, is vital to investor protection,” said Osman Nawaz, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “We will continue to hold individuals accountable for falling short in making such disclosures.”
• Private Fund Adviser Rule: The U.S. Court of Appeals for the 5th Circuit vacated the entire final rule package of the private fund adviser rules. The amendment to the Compliance Rule requiring documentation of the annual review is also vacated. Investment advisers should consider documenting their annual compliance program reviews to support that the review was conducted regardless of this action. Private fund advisers should consider the guidance offered in the rulemaking process as to the SEC staff views on private fund adviser compliance practices. The court’s decision could have significant implications for pending SEC rules.
• Form N-PX: Investment advisers subject to Form 13F reporting requirements will need to file Form N-PX beginning August 31, 2024 to disclose their proxy votes on executive compensation matters (“Say-on-Pay Votes”), for which they exercise voting power, on an annual basis.
• Schedule 13D/G: New filing deadlines for Schedules 13D and 13G: Initial 13D filings went from 10 calendar days to 5 business days following acquisition of beneficial ownership of more than 5% or losing eligibility to file a Schedule 13G. Initial 13G filings went from 45 calendar days after calendar year-end in which ownership exceeds 5%, computed as of the last day of the calendar year to 45 calendar days after the calendar quarter-end in which beneficial ownership exceeds 5%, computed as of the last day of the calendar quarter. 13G also is required to be filed for Institutional and Exempt filers within 5 business days (previously 10 calendar days) after the end of the month in which beneficial ownership exceeds 10% computed as of the last day of the month and for other “Passive” filers 5 business days (previously 10 calendar days) after acquiring beneficial ownership of more than 5%. New filing requirements for amendments: 13D went from promptly following a material change to 2 business days. 13G is required to be amended within 45 calendar days after the end of any calendar quarter (previously calendar year) if a “material change” (generally increase/decrease of 1% or more) has occurred as of the end of a calendar quarter. For institutional filers for 13G, amendments are required 5 business days after month end (previously 10 calendar days) in which beneficial ownership exceeds 10% or increases/decreases by >5% as of month end. Other Passive filers are required to file amendments 2 business days (previously promptly) after beneficial ownership exceeds 10% or increases or decreases by more than 5%. The filing deadline was extended from 5:30 p.m. to 10:00 p.m. Eastern Time. Compliance with the revised Schedule 13D filings was required in February and 13G compliance is required September 30, 2024. See the rule for additional details.
• Privacy: The SEC adopted rule amendments to Regulation S-P to enhance the protection of customer information. The amendments update the rules’ requirements for registered investment advisers, investment companies, and other “Covered Institutions” to address the expanded use of technology and corresponding risks. The amendments require Covered Institutions to develop, implement, and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information. The amendments also require that the response program includes procedures for, with certain limited exceptions, Covered Institutions to provide prompt notice (as soon as practical but not later than 30 days, after becoming aware that an incident involving unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred) to individuals whose sensitive customer information was or is reasonably likely to have been accessed or used without authorization. The notice is required to include details about the incident, the breached data, and how affected individuals can respond to the breach to protect themselves. Larger entities ($1.5 billion or more in RAUM) will have 18 months after publication in the Federal Register to comply and small entities will have 24 months…On July 1, Texas’ Data Privacy and Security Act goes into effect as one of the strictest state consumer privacy laws in the country. Texas formed a special tax force within its Consumer Protection Division dedicated to the enforcement of Texas’ privacy laws.
• Fiduciary: The Department of Labor (“DOL”) released its final fiduciary rule to update the 1975 definition of what it means to be an investment advice fiduciary to IRAs and ERISA Plans. The rule referred to as the “Retirement Security Rule” amends various class prohibited transaction exemptions applicable to investment advice fiduciaries and is narrower in scope from the 2016 rule that the 5th Circuit had vacated. The rule limits fiduciary status to recommendations made by persons who effectively hold themselves out as occupying a position of trust and confidence with respect to a retirement investor in the retail investment space (i.e., recommend rollover transactions from an ERISA plan to an IRA or provide investment advice to IRAs – does not include client-initiated rollovers to an IRA). Although there are legal challenges to the new rule, industry participants need to consider whether the rule could cause current marketing practices to be considered potential fiduciary advice. Those impacted will be subject to the highest duties of loyalty and care under U.S. law and strict prohibitions against specified transactions that present potential conflicts of interest. The Final Rule and amended exemptions are set to take effect on September 23, 2024.
• QPAM: The DOL issued final amendments, effective June 17, 2024, to its Qualified Professional Asset Manager (“QPAM”) exemption, a prohibited transaction class exemption used by investment advisers managing assets of ERISA plans and IRAs. The amendments significantly impact the exemption and may cause investment advisers to explore other applicable prohibited transaction exemptions. Investment advisers that rely on the QPAM exemption will need to: (1) register as a QPAM with the DOL promptly, (2) ensure that each transaction has been negotiated with sufficient authority for the entity acting as a QPAM, (3) confirm that the updated AUM and equity thresholds are, and continue to be satisfied, and (4) keep accurate records necessary to support compliance with the exemption.
• AML: FinCEN and the SEC proposed a joint rule with respect to a “Know Your Customer,” customer identification program (“CIP”) for investment advisers as a companion to the anti-money laundering/countering the financing of terrorism program rule proposed by FinCEN in February. The CIP would not require a look through of a private fund so that it would only apply to the private fund itself. An investment adviser could rely on other financial institutions that already have a relationship with the customer, are subject to CIP requirements, and provide annual certifications of compliance.
• Non-Compete Clauses: The Federal Trade Commission (“FTC”) voted to finalize rulemaking, effective September 4, 2024, that would generally prohibit any employer from using non-compete clauses and generally applies to existing non-compete agreements. The rule generally applies to all employees and independent contractors, whether paid or not, and applies to investment advisers. The rule does not prohibit non-disclosure and non-solicitation agreements. On July 3, 2024, the U.S. District Court for the Northern District of Texas granted a stay and preliminary injunction preventing the rule from taking effect and indicated that the rule is likely to be vacated because the FTC lacked authority to issue a non-compete ban.
• Uncleared Repo Transactions: The U.S. Treasury Department’s Office of Financial Research (“OFR”) adopted a rule that will require daily reporting of certain transaction level data in respect of non-centrally cleared bilateral repurchase (“NCCBR”) transactions by certain financial entities, including investment advisers with over $1 billion in AUM with NCCBR transactions over all business days during the prior calendar quarter to be at least $10 billion, whose funds/other clients separately or collectively meet the rule’s reporting threshold and will be required to include transactions by non-U.S. sub-advisers.
A LOOK AT THE NEXT QUARTER
- July 1: Texas’ Data Privacy and Security Act Effective Date
- July 10: 13G Monthly, 13H Quarterly
- July 14: Form PF for Large Liquidity Advisers
- July 30: Code of Ethics Quarterly
- May 30: Private Equity Fund Advisers New Section 6 of Revised Form PF Certain Quarterly Reporting
- August 10: 13G Monthly
- August 14: Form 13F Quarterly
- August 30: Treasury Form SHL Reporting Upon Request or Exceeding Threshold for U.S. Securities for Non-U.S. Investors
- August 31: Form N-PX Annual Filings Due on Say-on-Pay Votes
- September 4: FTC Non-Compete Clause Rule Effectiveness
- September 10: 13G Monthly
- September 23: DOL Update of Investment Advice Fiduciary Effectiveness
- September 30: Section 13(g) Beneficial Ownership Reporting Compliance Date
A LOOK AHEAD TO 2025-2026
Keep in mind the following upcoming new compliance dates:
- February 14: Form SHO Short Position Reporting
- April 1: OFR Repo Reporting Compliance Date for Investment Advisers
- April 30: Amended Form PF Due
- May 31: Amended Form PF Large Hedge Fund Advisers
- December 10: Fund Names Rule Compliance Date Large Fund Groups
- June 10, 2026: Fund Names Rule Compliance Date Small Fund Groups
Yuter Compliance Consulting is an internationally recognized boutique compliance consulting firm offering consultation and support services trusted by the industry’s chief compliance officers. Yuter Compliance Consulting partners with clients to provide personalized consultation and support to enhance compliance resources and improve compliance programs.
Amy Yuter, Managing Principal of Yuter Compliance Consulting, founded the Investment Management Compliance Testing Survey and The Philadelphia Compliance Roundtable, and served as a Director of the National Society of Compliance Professionals. Amy has over 30 years of industry, consultation, and SEC regulatory experience in overseeing investment advisers, investment companies, public companies, broker-dealers, and private funds.
