Category Archives: Regulatory

Unfinished Business: IAs Are Potentially Back on the Hook for AML and Counterterrorism Reporting Requirements

In its latest attempt, the U.S. Department of Treasury, Financial Crimes Enforcement Network (“FinCEN”), will require certain investment advisers to implement compliance measures to detect and report suspected money laundering and the financing of terrorism. The newly proposed rule brings investment advisers under the purview of the Bank Secrecy Act (“BSA”), which requires financial institutions to implement risk-based anti-money-laundering and counterterrorism programs to protect the national security of the United States and aid law enforcement in the fight against money laundering. If the proposed rule is finalized, FinCEN could require investment advisers to collect records, such as those related to fund transfers, and file suspicious activity reports with FinCEN. The proposed rule would also allow information sharing between FinCEN and the SEC, who will be delegated with examination authority over investment advisers for compliance with the new rule.

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The Dealerization of America by the SEC

On Tuesday, February 6, 2024, the United States Securities and Exchange Commission promulgated final rules relating to changing the definition of dealer pursuant to the Securities Exchange Act of 1934. See SEC.gov | SEC Adopts Rules to Include Certain Significant Market Participants as “Dealers” or “Government Securities Dealers”. This definitional change is a watershed moment in securities regulation.

Although the SEC has for several years now sought to expand the definition of dealer in certain markets, most notably the convertible debt market, this is the first time the SEC has taken advantage of its rule- making ability to dramatically shift decades of precedent.

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SEC shortens filing deadlines for beneficial ownership reports required under sections 13(d) and 13(g) of the Exchange Act

On October 10, 2023, the SEC adopted amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Exchange Act, shortening the filing deadlines.

  • For Schedule 13D, the amendments shorten the initial filing deadline from 10 days to five business days and require that amendments be filed within two business days.
  • For Qualified Institutional Investors and Exempt Investors required to file Schedule 13G, the amendments shorten the initial filing deadline to 45 days after the end of the calendar quarter in which the investor beneficially owns more than 5% of the covered class of equity securities, Passive Investors filing Schedule 13G must complete the filing within five business days.

All Schedule 13G filers must file an amendment within 45 days after the calendar quarter in which a material change occurred.

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Cyber Siege and Artificial Intelligence: These Aren’t Your Parents’ Cyber Threats

From Brian Rubin, Michael Bahar and Soroosh Faegh in NSCP Currents:

Everyone has been talking about Artificial Intelligence or AI. Broker-Dealers (BDs) and Investment Advisers (IAs) need to be particularly vigilant in addressing AI cybersecurity threats. The SEC has recognized these threats through a slew of recent pronouncements and proposed rules.

AI presents enormous opportunities, but it is also rapidly evolving the cyber threat, so BDs/AIs would do well to strongly consider re-assessing their policies, procedures, and plans to reasonably ensure they are incorporating the latest AI threats into their incident response, information security, and business continuity plans, their cybersecurity disclosures and board agendas, as well as their approach to consistent and coordinated communications.  Indeed, AI’s threats may not be your parents’ cyber threats.

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SEC expands the Names Rule

On September 20, 2023, the US Securities and Exchange Commission (SEC) voted by a 4-1 margin to adopt amendments to the fund “Names Rule” (Rule 35d-1) under the Investment Company Act of 1940. The amendments greatly expand the scope of the rule, but relax some of the compliance requirements that were originally proposed.

  • Consistent with the proposal, the final amendments expand the scope of the rule to require funds with names that suggest a focus in investments that have, or issuers that have, “particular characteristics” to adopt an 80% investment policy.
  • The final amendments retain the rule’s original language requiring funds to comply with their 80% policies “under normal circumstances” and “at the time of investment,” but add a requirement that funds must review compliance with their 80% policies no less frequently than quarterly, in lieu of the continuous monitoring that was proposed.

In a departure from the proposal, the final amendments do not require unlisted closed-end funds and BDCs to adopt their 80% policies as fundamental policies, rather, the amended rule states that such funds may not change their policies without a majority shareholder vote, unless the fund conducts a tender offer prior to the change, provides notice of the change prior to the tender offer, shares are repurchased at net asset value, and the tender offer is not oversubscribed.

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