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 Advisers

On November 14, the Securities and Exchange Commission announced its enforcement results for the 2023 fiscal year,[1] with case numbers up from fiscal year 2022 and monetary sanctions at the second highest level in the agency’s history, though down significantly from last year’s record highs.  In a press release announcing the results, Enforcement Director Gurbir Grewal noted that the past year’s cases demonstrate how the agency “work[s] with a sense of urgency, using all the tools in our toolkit.”  This post evaluates how the SEC used its enforcement tools in the past year and surveys the enforcement highlights in key substantive areas.Continue Reading SEC Announces FY 2023 Enforcement Results with Second-Highest Penalties on Record

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 Crypto

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 Funds

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

On July 26, 2023, the Securities and Exchange Commission (“SEC”) proposed new rules targeting the use of predictive data analytics and artificial intelligence (“AI”) by registered investment advisers (“RIAs”) and broker-dealers.[1]  The new proposed rules focus on the potential for conflicts of interest and the possibility that newer, more complex analytics models (including those using AI) might optimize decision making for RIAs and broker-dealers by placing those firms’ interests above the interests of their clients.[2]  The proposed rules would require RIAs and broker-dealers to: (i) evaluate whether their use of technologies “that optimize for, predict, forecast or direct investment-related behaviors or outcomes” create such a conflict of interest, and (ii) either stop using or address the effects of tools that place a firm’s interests before the interests of clients.  RIAs and broker-dealers will also will be required to adopt policies to ensure compliance with the new proposed rules.[3] Continue Reading SEC Proposes Rules Limiting the Use of Artificial Intelligence by Registered Investment Advisers and Broker-Dealers

On June 8th, the SEC Division of Examinations (the “Division”) published a risk alert expanding the areas of focus for its ongoing examination sweep of compliance with Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”).  The Division announced its initial focus areas in a September 2022 risk alert, covering (1) policies and procedures, (2) substantiation, (3) performance advertising and (4) books and records.  It has not yet released any observations from the sweep, nor has there been guidance on the Marketing Rule’s requirements from the Division of Investment Management.  This risk alert’s addition of the “general prohibitions” to the sweep’s focus areas could signal the staff’s intent to issue deficiencies for violations of the broad and undefined “fair and balanced” and “materially misleading” standards.  The risk alert also adds, as expected, endorsements and testimonials to the areas of focus, which is likely an unwelcome addition for advisers having difficult negotiations with placement agents over those requirements.Continue Reading SEC Expands the Scope of Its Marketing Rule Examination Sweep – But Still No Guidance

On May 3, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers (“RIAs”) to private funds.  The amendments are part of the SEC’s effort to bolster the Financial Stability Oversight Counsel’s (“FSOC’s”) ability to monitor systemic risk, but will also allow the SEC’s Divisions of Examinations and Enforcement to more quickly and specifically identify RIAs and issues for examination and investigation.  Coupled with the SEC’s increasing use of artificial intelligence and other data-mining techniques, the amendments will provide a trove of information in areas of focus for SEC staff.Continue Reading The First Shoe Drops—SEC Adopts the Initial Amendments to Form PF

On March 15, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued proposed amendments (the “Proposal”) to Regulation S-P, which governs the treatment of nonpublic personal information about consumers by broker-dealers, registered investment advisers, registered investment companies, and transfer agents.  The Proposal would broaden the existing “safeguards” and “disposal” rules under Regulation S-P, and would require the entities to adopt “incident response programs.”Continue Reading SEC Continues to Shine Light on Cyber and Data Security: Proposes Amendments to Regulation S-P

On March 27th, the SEC Division of Examinations (the “Division”) published a risk alert affirming its long-standing interest in conducting reasonably prompt examinations of newly registered advisers. The risk alert provides an examination ‘how to’ guide for new advisers, describing the materials those advisers should expect to provide to staff in an examination. Advisers should expect exam staff to focus on (i) proper identification and mitigation of conflicts of interest; (2) adequacy of client disclosures; and (3) effectiveness of compliance programs.Continue Reading SEC Risk Alert Identifies Key Compliance Issues for New (and Not New) Registered Advisers