Happy New Year! Looking forward to bringing CCOs together for The Philadelphia Compliance Roundtables – now, in our 29th year and enjoying nationwide participation. We co-sponsor this roundtable with Morgan, Lewis & Bockius, and our current Member-in-Charge, SEI.
We are also excited for the 19th annual Investment Management Compliance Testing Survey that we co-sponsor with the Investment Adviser Association and ACA Group. The Investment Management Compliance Testing Survey is frequently referenced as a key resource for reviewing peer testing trends. Wishing you a wonderful 2024!
SEC FY 2024 Examination Priorities
The SEC’s Division of Examinations published its annual Examination Priorities for fiscal year 2024. The release of this year’s priorities was early and in alignment with the beginning of the SEC’s new fiscal year on October 1, 2023. This year’s priorities cover:
• examinations • fiduciary duty • conflicts • disclosures, • complex products (derivatives, leveraged ETFs) • high-cost and illiquid products (variable annuities and non-traded REITs) • unconventional strategies (addressing rising interest rates) • investment advice provided to older investors and for retirement savings • providing services in clients’ best interest (suitability, best execution, costs, risks, conflicts of interest (mitigating/eliminating, allocation of investments across accounts)) • compensation incentives (revenue sharing, markups) • dually registered brokers • use of affiliated firms • mutual fund share classes • proprietary products • affiliated service providers • disclosures to investors • compliance program (address risks, cover various aspects of the business, written annual compliance review mandated (conflict review) • portfolio management processes • disclosures • proprietary trading • personal trading • safeguarding assets • books and records security • privacy protection • trading practices • marketing • valuation • fees • business continuity plans • fiduciary requirements • marketing rule compliance (policies and procedures, Form ADV, books and records, untrue statements, misleading statements, deceptive advertising, performance requirements, requirements for third-party ratings, testimonials and endorsements) • compensation arrangements (fiduciary obligations, revenue sharing, fee breakpoint calculations) • valuation (difficult to value, illiquid) • safeguarding of information • disclosures • policies for selecting third-party and affiliated services providers • overseeing branch offices • obtaining informed consent from clients for material contract changes • never been examined • recently registered • have not been recently examined
• portfolio management risks (recent volatility, higher interest rates, poor performance, significant withdrawals and valuation issues and private funds with more leverage and illiquid assets) • adherence to contractual requirements (advisory committees, contract notification, consent process) • fees and expenses (calculation, valuation of illiquid, post-commitment management fees, adequacy of disclosures, offsetting of fees and expenses) • due diligence practices (private equity portfolio assessment, consistency with policies and disclosures) • conflicts • controls and disclosures (side-by-side with registered investment company, affiliated service providers) • Adviser Act requirements (custody, Form ADV, audits) • policies and procedures (Form PF reporting events)
• mutual funds • ETFs • compliance programs • fund governance practices • disclosures • SEC reporting • fee approvals (weaker performance relative to peers) • valuation • derivative risk assessment • liquidity risk management programs • fees and expenses (policies and procedures, fee waivers, share classes, differing fee structures for same strategy, high advisory fees relative to peers, board approvals) • derivatives risk management (policies and procedures, board oversight, disclosures, valuation) • liquidations • never been examined • recently registered • have not been recently examined
• Reg BI • dual registrants, • branch office supervision, • Form CRS • financial responsibility rules • trading practices
• National Securities Exchanges • FINRA • MSRB
• clearing agencies • municipal advisors • security-based swap dealers • transfer agents
• information security and operational resiliency (policies and procedures, controls, third-party vendors, governance practices, cyber-related incidents, identity theft programs, third-party providers, branch offices) • shortened settlement cycle • cybersecurity • crypto assets • emerging financial technology • Reg SCI • anti-money laundering programs for brokers and registered investment companies • OFAC reviews
SEC Updates Form ADV, IARD, and Form CRS FAQs:
The SEC’s Division of Investment Management updated its FAQs on Form ADV and IARD to provide additional guidance from the staff regarding specific questions concerning Form ADV, as well as the IARD system, through which filers submit Form ADV and amendments.
The updated FAQs address, among other topics: registration with the SEC, filings regarding adviser succession, filings made by exempt reporting advisers, switching reporting status, IARD guidance, and filing an annual updating amendment.
Updates to Form CRS FAQs were also recently released with respect to private placements, dually licensed financial professionals, and principal underwriters.
Mark Uyeda Sworn in as 2nd Term SEC Commissioner:
SEC Commissioner, Mark Uyeda, was sworn in for his second term as an SEC Commissioner. Uyeda began his first term as an SEC Commissioner on June 30, 2022, and previously served on the SEC staff as Senior Advisor to Chair Clayton and Acting Chair Piwowar, Counsel to Commissioner Atkins, and in various positions in the Division of Investment Management. Uyeda also served on an SEC detail to the Senate Committee on Banking, Housing and Urban Affairs, as Chief Advisor to the California Corporations Commission, and as an attorney in private practice.
The SEC announced its enforcement results for FY 2023:
- Filed 784 enforcement actions (3% increase over FY 2022)
- Obtained orders for nearly $5 billion in financial remedies (2nd highest in SEC history)
- Distributed nearly $1 billion to harmed investors (2nd consecutive year with more than $900M)
- Record-breaking year for the SEC’s Whistleblower Program
- $600M (Highest in SEC history)
- Industry-shaping initiatives: marketing rule, disclosure failures by insiders, off-channel communications, whistleblower rights, rewarding meaningful cooperation, actions against individuals, preying on retail investors, gatekeepers, market abuse, crypto, cybersecurity, ESG, investment professionals, and FCPA
The SEC charged a large investment adviser with failing to accurately describe investments in the entertainment industry that comprised a significant portion of a publicly traded fund it advised. To settle the charges, the adviser agreed to pay a $2.5 million penalty.
Lesson Learned: “Retail and institutional investors rely on accurate disclosures of the companies that make up a closed-end or mutual fund’s portfolio to evaluate a current or prospective investment in the fund,” said Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit. “Investment advisers have a responsibility to provide this vital information.”
Gurir S. Grewal, SEC Division of Enforcement Director, spoke at the NYC Bar Association’s Compliance Institute on creating a culture of proactive compliance with a focus on (1) education, engagement and execution, (2) the significance of self-reporting and cooperation, and (3) scenarios where a CCO could be held liable for securities law violations.
While Grewal noted that cases against CCOs are rare and that the SEC is not interested in pursuing actions against compliance personnel “who undertake their responsibilities in good faith and based on reasonable inquiry and analysis,” the SEC may bring enforcement actions against CCOs where they affirmatively participated in the misconduct, they misled regulators, or there were “wholesale failures” in the carrying out compliance responsibilities.
Lesson Learned: As noted in the Investment Adviser Association Today’s review of Grewal’s speech, CCOs must remain diligent and vigilant, firms need to build a “culture of proactive compliance,” and appropriate resources must be dedicated to the compliance function, including retaining a 3rd-party compliance consulting firm, as may be appropriate.
President Biden issued an Executive Order (EO) on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence. The EO establishes sweeping directives and priorities for federal agencies regarding the development and use of AI across a broad swath of areas touched by the US federal government. The EO reflects the Administration’s goal of advancing US leadership in this critical emerging technology, mitigating risks for individual consumers, patients, workers, businesses, and addressing US economic and national security considerations.
The SEC adopted a new disclosure rule that requires investors to report information about certain short sales to the SEC. New Rule 13f-2 under the Securities Exchange Act of 1934 will require “institutional investment managers” that engage in short sales of “equity securities” in excess of certain thresholds to confidentially file new Form SHO with the SEC monthly. The SEC will aggregate the reported information by security and publicly disclose only the aggregated information monthly. Investors will need to begin complying with Rule 13f-2 and filing Form SHO in late 2024 or early 2025, depending on when the final rule is published in the Federal Register.
The Department of Labor (DOL) issued a proposal to update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA). The updated definition of an investment advice fiduciary would expand the scope and would apply when a financial service provider gives investment advice for a fee to retirement plan participants, IRA owners, and others. The proposed changes could create unintended burdens for advisers with respect to rollovers as well as record-keeping, disclosure, and reporting requirements. The DOL is also proposing amendments to related existing prohibited transaction exemptions (PTEs) that are available to investment advice fiduciaries.
The U.S. Commodity Futures Trading Commission (CFTC) proposed an amendment to Rule 4.7 that would: (1) introduce new minimum disclosure requirements for commodity pool operators (CPOs) and commodity trading advisors who operate pools and trading programs pursuant to CFTC Rule 4.7, (2) increase the monetary thresholds to qualify as a Qualified Eligible Person; and (3) codify routinely issued exemptive relief allowing CPOs of funds-of-funds operated under Rule 4.7 to choose to distribute monthly account statements within 45 days of month-end.
The SEC adopted substantial changes to the reporting requirements for significant shareholders of public companies. The amendments:
- Accelerate the filing deadlines for Schedule 13D and Schedule 13G;
- Provide a specific deadline for when amendments to Schedule 13D and some Schedule 13Gs must be filed in lieu of the current “promptly” standard;
- Require more frequent amendments to Schedule 13G filings;
- Clarify that cash-settled derivatives should be disclosed in Schedule 13Ds;
- Extend the cut-off time for Schedule 13D and Schedule 13G filings from 5:30 p.m. Eastern time to 10:00 p.m. Eastern time, making it consistent with the cut-off time for Section 16 and Form 144 filings; and
- Mandate that the body of Schedule 13Ds and Schedule 13Gs (but not any exhibits) be prepared using a structured, machine-readable data language (XML).
The US Treasury stated that it plans to release an updated proposed rule in the first quarter of 2024 that would impose anti-money laundering obligations on certain investment advisers, directed to advisers of hedge funds and PE funds in particular.
The SEC issued a staff report on the accredited investor definition pursuant to its Dodd-Frank Act mandate and following reviews in 2015 and 2019. The report examines the current status of the rule and offers suggested revisions received from a variety of sources.
FINRA filed a proposed rule change to amend FINRA Rule 2210: Communications with the Public that would permit members, subject to certain conditions, to project performance of, or provide targeted returns for, a security, asset allocation, or other investment strategy in an institutional communication or a communication that promotes qualified private offerings to Qualified Purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act.
- January 10: 13G Monthly, 13H Quarterly
- January 26: Final payments for IARD State Registration/Notice Filings
- February 10: 13G Monthly
- February 14: 13F Quarterly, 13H Annual, 13G Annual
- March 10: 13G Monthly
- March 31: Form ADV Annual Update
Yuter Compliance Consulting provides advising and coaching services trusted by the industry’s chief compliance officers. 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.
Yuter Compliance Consulting partners with clients to provide personalized consultation and support to enhance compliance resources and improve compliance programs.
For more information, visit www.yutercompliance.com
© 2024 Yuter Compliance Consulting. All Rights Reserved.
