SEC Developments

Subscribe to SEC Developments via RSS

With its decision in Securities and Exchange Commission v. Keener (May 29, 2024), the U.S. Court of Appeals for the Eleventh Circuit has now twice in the span of four months affirmed a broad interpretation of who is considered a “dealer” for purposes of the securities laws. More specifically, the Eleventh Circuit upheld the Securities and Exchange Commission’s (“SEC”) position that a person engaged in the business of purchasing—for its own account—convertible debt notes from microcap issuers (also referred to as “penny-stock” companies), converting the notes into common stock, and selling that stock in the market meets the definition of a “dealer” under the Securities Exchange Act of 1934 (the “Exchange Act”), and must therefore be registered as a dealer with the SEC. The decision in Keener closely tracked the same Court’s decision in Securities and Exchange Commission v. Almagarby, Microcap Equity Group (February 14, 2024), in which the Eleventh Circuit agreed with the SEC that the plaintiff Almagarby had been acting as an unregistered “dealer” in violation of the Exchange Act by obtaining convertible debt of microcap companies for his own account, converting the debt into common stock, and then selling the stock. Continue Reading Keener, Almagarby, and the Scope of the “Dealer” Definition: Potential Implications for Fund Managers and other Investors

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  

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-P

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 Advisers

On March 6, 2024, the Securities and Exchange Commission (“SEC” or “Commission”) adopted amendments to the disclosure requirements of Rule 605 of Regulation NMS for order executions of stocks listed on a national securities exchange.[1]  The final rule amendments expand the scope of entities that must comply with, and order types and sizes that must be reported under, Rule 605, and requires time-based metrics to be reported at a more granular level.  This is the first substantive update of Rule 605 since it was adopted in 2000. Continue Reading SEC Approves Amendments to Enhance Disclosure of Order Execution Information

On October 13, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted (i) a new Rule 13f-2 under the Securities Exchange Act of 1934 (the “Exchange Act”) which will require a wide range of firms to file monthly reports with the SEC for large short positions in equity securities on a new Form SHO, as well as (ii) an amendment to the National Market System plan governing the Consolidated Audit Trail (the “CAT NMS Plan”) which adds an additional reporting requirement for CAT-reporting firms relying on the bona fide market maker exception to Reg SHO’s locate requirement.  The Final Rules, described in greater depth below, will require a significant compliance effort from firms and could potentially risk the exposure of certain valuable proprietary data. Continue Reading SEC Adopts New Short Position Reporting Requirements for Market Participants

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 August 23, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules under the Investment Advisers Act of 1940 (the “Advisers Act”) that will significantly impact private fund advisers (the “Final Rules”).  Although the Final Rules abandoned most of the headline prohibitions in the SEC’s original proposal (the “Proposed Rules”) from February 10, 2022 (discussed in our Alert Memo here) —  which created shock waves through the industry for its proscriptive requirements and tone — the Final Rules still contain onerous and market practice-changing requirements.  The Final Rules do not prohibit indemnification for negligence or ban the standard practice of accounting for taxes in clawback requirements, as the Proposed Rules threatened. But they do impose substantial new and detailed quarterly reporting requirements, two prohibitions and many new disclosure requirements for side letters and expense allocations, and restrict certain other activities, which the SEC explicitly warned that Exam and Enforcement Staff will be closely reviewing. With a few limited exceptions, all registered advisers (“RIAs”) will have their hands full implementing new and modified reporting, and RIAs, exempt reporting advisers (“ERAs”) and other advisers exempt from registration must develop processes —  and make difficult judgments —  about providing preferential treatment to selected investors and engaging in the targeted activities.Continue Reading Fund Rules Dampened, Not Defanged: SEC’s final private fund rules drop proposed bans on certain activities, but still have bite.

On September 9, 2022, the Securities and Exchange Commission (“SEC”) announced charges against several investment advisers for failure to comply with requirements of Section 206(4) of the Advisers Act and the rules promulgated thereunder (commonly known as the “Custody Rule”) and deficiencies related to Form ADV filings.  The advisers included BiscayneAmericas Advisers L.L.C., Garrison Investment Group, LP, Janus Henderson Investors US LLC, Lend Academy Investments, LLC, Polaris Equity Management, Inc., QVR, LLC, Ridgeview Asset Management Partners, LLC, Steward Capital Management, Inc., and Titan Fund Management, LLC.  The advisers all agreed to settle the charges and will pay combined penalties of over $1 million.
Continue Reading SEC Releases Slate of Enforcement Actions Against Advisers Related to Custody Rule Violations and Form ADV Deficiencies