California’s statute on Fair Investment Practices by Venture Capital Companies (the “VC Diversity Law”) was originally scheduled to come into effect in 2026, with an initial registration date of March 1, 2026 to self-identify as a venture capital company subject to reporting and initial substantive reports due on April 1, 2026. However, on March 17, the California Department of Financial Protection and Innovation (the “DFPI”) announced that enforcement of the VC Diversity Law would be suspended, pending rulemaking and final regulations. As a result, covered entities are no longer required to submit registrations or file reports by April 1, 2026. The DFPI plans to spend several months seeking input from industry stakeholders before beginning a year-long formal rulemaking process.
Continue Reading California Diversity Reporting Law for Venture Capital Funds Pushed to 2027 (Or Later)Amber V. Phillips
SEC Staff Reverses Some “Gross/Net” Marketing Rule Guidance
On Wednesday evening, the SEC Staff published two new FAQs relating to the presentation of gross and net performance under the Investment Advisers Act Marketing Rule, the sweeping 2022 overhaul of the advertising and endorsement restrictions applicable to registered investment advisers (“RIAs”). Both FAQs provide significant relief from prior Staff interpretations of the Marketing Rule and will dramatically reduce compliance burdens for RIAs in the areas of performance of individual investments and certain performance “characteristics” of portfolios and investments. The limited open questions raised by new FAQs pale in comparison to the issues RIAs faced with the prior interpretations.
Continue Reading SEC Staff Reverses Some “Gross/Net” Marketing Rule GuidanceFifth Circuit Vacates Private Fund Adviser Rules in Entirety
Posted in SEC Developments, United States
On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit issued its opinion on National Association of Private Fund Managers et. al. vs. Securities and Exchange Commission, the lawsuit brought by a group of trade associations representing the private funds industry against the Securities and Exchange Commission (“SEC” or the “Commission”) challenging the validity and enforceability of the SEC’s Private Fund Adviser Rules (“PFAR”). …
Continue Reading Fifth Circuit Vacates Private Fund Adviser Rules in Entirety
SEC Adopts Amendments to Reg S-P
By Robin M. Bergen, James R. Burns, Brant Brown, Amber V. Phillips, Rachel Gerwin & Anna Bintinger on
Posted in Cybersecurity, SEC Developments
On May 16, 2024, the Securities and Exchange Commission (the “Commission” or “SEC”) adopted a final set of amendments (the “Final Amendments”) to Regulation S-P (“Reg S-P”) to require “covered institutions,” which include SEC-registered investment advisers (“RIAs”) and broker-dealers, to adopt an incident response program for incidents involving unauthorized use of or access to customer data. The Final Amendments also require customer notification where the covered institution determines the compromise of such data could create a reasonably likely risk of substantial harm or inconvenience to an individual identified with the information.
Continue Reading SEC Adopts Amendments to Reg S-PSEC Announces Reforms for Internet Investment Advisers
On March 27, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced amendments to the Internet Adviser Exemption, which permits investment advisers that provide advisory services through the internet (“Internet Investment Advisers”) to register with the SEC under the Investment Advisers Act of 1940 (“Advisers Act”) if they do not otherwise have enough assets under management to be eligible for registration.[1] The final rule seeks to address technological and industry advancements since the original Internet Adviser Exemption was adopted in 2002. The final rule also amends the interactive website requirement, eliminates the exception for advisers with de minimis non-internet clients, and imposes additional reporting requirements for Internet Investment Advisers on Form ADV.
Continue Reading SEC Announces Reforms for Internet Investment AdvisersSEC Announces “AI-Washing” Cases Against Investment Advisers
On March 18, 2024, the SEC announced two enforcement actions against investment advisers for so-called “AI-washing” and violations of the Marketing Rule. Using the playbook from the Enforcement Division’s “green-washing” cases in the ESG space, the SEC found that the two investment advisers marketed that they were using AI in certain ways, when in fact, the advisers were not.
Continue Reading SEC Announces “AI-Washing” Cases Against Investment AdvisersFinCEN Tries Again . . . to Impose AML Requirements on Investment Advisers
On February 15, 2024, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) released a notice of proposed rulemaking (the “Proposed Rule”)[1] that would impose anti-money laundering/countering the financing of terrorism (“AML/CFT”) compliance obligations on SEC-registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”) pursuant to the Bank Secrecy Act (the “BSA”), taking steps to close a perceived gap in the AML/CFT defenses of the U.S. financial system. FinCEN estimates more than 15,000 RIAs and almost 6,000 ERAs may be covered by the Proposed Rule, including many advisers that are located outside the United States but have registered (or file reports) with the SEC because they have U.S. clients.
Continue Reading FinCEN Tries Again . . . to Impose AML Requirements on Investment AdvisersSEC Staff Play the Hits: 2024 Exam Priorities Focus on Private Funds, Marketing and Crypto
The U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”) released its 2024 examination priorities on October 16, 2023 (the “2024 Priorities”), launching a new release schedule to align with the fiscal year. As in the 2023 examination priorities (the “2023 Priorities”), private fund advisers received special focus, with broad topic areas spanning both the existing Staff sweeps on custody, marketing and artificial intelligence, as well as renewed scrutiny of valuations and investment processes. Despite its release causing much fanfare, there was surprisingly little overlap between the 2024 Priorities and the newly adopted Private Fund Adviser Rules; the focus on fees and expense allocation carried over from the Private Fund Adviser Rules, and the Division picks up a theme from its adopting release by taking a shot at limited partnership advisory committees (“LPACs”) and compliance with private fund governance procedures.
Continue Reading SEC Staff Play the Hits: 2024 Exam Priorities Focus on Private Funds, Marketing and CryptoCalifornia Adds To Private Fund Adviser Woes; Adopts New Diversity Reporting for Venture Capital Funds
On October 8, 2023, California’s Governor Gavin Newsom signed into law Senate Bill 54 (the “VC Diversity Law”) requiring “venture capital companies” with business ties to California to file annual reports detailing (1) specified demographic data for the founding teams of all portfolio companies invested in during the prior year and (2) the aggregate amounts of investments made by the venture capital company during the prior year and investments in specified categories of portfolio companies. Demographic data must be obtained through voluntary surveys sent to each founding team member of a portfolio company that receives funding from the venture capital company. The data, in anonymized form, will be publicly available – and searchable and downloadable – on the California Civil Rights Department’s website. The VC Diversity Law is stunning both in its scope and its plain objective to impose State-level requirements that go beyond Federal requirements. And this at a time when the Securities and Exchange Commission has exponentially increased those Federal requirements.
Continue Reading California Adds To Private Fund Adviser Woes; Adopts New Diversity Reporting for Venture Capital FundsSEC Risk Alert on Examinations: Who Gets Examined and Scope of Exams
By Robin M. Bergen, Amber V. Phillips & Lyric Gupta on
On September 6th, the SEC Division of Examinations (the “Division”) published a risk alert with more detail on how it selects investment advisers for examinations and its process for determining the specific risk areas and issues to address in examination. It noted that it leverages technology to conduct bulk data collection and analysis at both an industry and adviser level, as well as utilizing disclosure documents such as Form ADV and Form PF. The risk alert is the second this year to address examination practices; a March 2023 risk alert provided an examination road map for new advisers and detailed a number of observations from recent exams. Releases for the recently proposed and adopted amendments to Form ADV and Form PF, as well as the much anticipated final Private Fund Rules, have also noted the anticipated use of such disclosures and rules in examination and enforcement. While some industry watchers have observed that the staff’s focus on rulemaking has slowed examination and enforcement activity, the staff have achieved a spate of recent settlements in connection with their sweeps on Marketing Rule compliance and Custody Rule violations. This latest risk alert signals that advisers should expect continued scrutiny in these areas and additional sweep exams shortly after the compliance dates for new Private Fund Rules.[1] Advisers should take into account the recent enforcement cases and Division publications as they review their policies and procedures, disclosures, compliance controls and practices relating to the Marketing Rule and these other high priority areas for the SEC.
Continue Reading SEC Risk Alert on Examinations: Who Gets Examined and Scope of Exams