SEC Guidance

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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 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 July 26, 2023, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) adopted rules to enhance and standardize disclosure requirements related to cybersecurity incident reporting and cybersecurity risk management, strategy, and governance.Continue Reading New SEC Disclosure Rules for Cybersecurity Incidents and Governance and Key Takeaways

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

On March 1, 2023, the U.S. Department of Justice and the Securities and Exchange Commission announced insider trading charges against Terren Peizer, the CEO and Chairman of a California-based healthcare services company called Ontrak, Inc. (the “Company”) for allegedly selling Company securities while in possession of material, non-public information (“MNPI”) that one of the Company’s major customers was likely to cancel its contract. Continue Reading DOJ and SEC Charge Healthcare Executive With Insider Trading Through a Rule 10b5-1 Trading Plan, Marking DOJ’s First Such Indictment

On December 29, 2022, in a closely-watched insider trading case, the Second Circuit decided United States v. Blaszczak (“Blaszczak II”).[1]  The Supreme Court in January 2021 had vacated and remanded the Second Circuit’s prior decision in light of Kelly v. United States (also known as the “Bridgegate” decision).  On remand, a divided panel of the Second Circuit found that trading on the basis of certain confidential government information related to pending regulation does not give rise to violations of the criminal wire fraud and securities fraud statutes.Continue Reading Second Circuit Decision Limits the Ability to Prosecute Instances of Trading on Confidential Government Information