Category Archives: Regulatory

Regulatory, Standard of Care, Compliance

SEC proposes amendments to expand the reach of the fund “Names Rule,” with a specific focus on ESG

Leave a comment

On May 25, 2022, the US Securities and Exchange Commission (the SEC) proposed amendments (the Proposal) to Rule 35d-1 (the Rule) under the Investment Company Act of 1940, as amended (the 1940 Act). The Proposal comes over 20 years after the original adoption of the Rule and seeks to greatly expand the scope of the Rule in the name of investor protection and modernization.  The Proposal includes the following primary amendments to the Rule:

  • Expansion of the 80% policy requirement to include funds with names that suggest the fund focuses on investments that have, or whose issuers have, “particular characteristics.”
  • A requirement that any unlisted closed-end funds or BDCs that are required to have an 80% policy under the Rule, adopt such policy as a fundamental policy.
  • Identification of particular circumstances under which a fund may depart from its 80% policy and specific time frames for getting back into compliance.
  • Establishment of the “notional amount” as the appropriate value for a derivative instrument used by a fund when calculating compliance with a fund’s 80% policy.
  • Clarification of what the SEC deems a materially deceptive and misleading use of environmental, social and governance (ESG) terminology.
  • A requirement that any terms used in a fund’s name that suggest an investment focus or a tax-exempt fund, must be consistent with those terms’ plain English meaning or established industry use.
  • Modernization of shareholder notice requirements.
  • Establishment of certain recordkeeping requirements related to a fund’s 80% policy.

Read more here.

Regulatory, Standard of Care

Electronic Signature Policies and Procedures for IAs

Leave a comment

The SEC has begun examining investment advisers to evaluate their practices around the use and authentication of electronic signatures.  The focus is on ensuring that advisory firms have policies and procedures designed to ensure that electronic signatures are not being exploited to perpetrate fraud that could harm advisory clients.

 

Among other things, the staff has requested information pertaining to (a) the types of documents that firms allow to be electronically signed; (b) a firm’s procedures for authenticating changes to clients’ contact information (including email addresses); and (c) a firm’s controls  addressing how a client is authenticated for electronic signatures and how the firm prevents unauthorized changes to this information.

 

Advisers utilizing electronic signatures should ensure that their policies and procedures address such issues to minimize the likelihood of identity theft and fraud.

Read more here.

Regulatory, Compliance

Attracting and Retaining Talent

Leave a comment

In the increasingly challenging race to attract and retain top talent, investment advisers should consider all of the tools at their disposal. One of the most helpful and flexible options are profits interests.

Profits interests can be structured to provide an employee with the right to participate in a share of the ongoing net income earned by the firm and/or the proceeds from the sale of the firm down the road. Profits interests can also be structured to “vest” over time, meaning that an employee can only receive them after certain conditions have been satisfied (e.g., the employee remains with the firm for a period of time and remains in good standing), which provides employees with an incentive to remain loyal to the firm.

 

Read more here.

Regulatory, Standard of Care, Compliance, Enforcement

SEC Scrutinizing Advisers transitioning from BD model to IA model

Leave a comment

Advisers transitioning from wirehouses and independent broker-dealers must heed a warning from the SEC contained in its 2022 Examination Priorities that is pertinent to their transition.  The SEC noted that it will be scrutinizing whether advisors migrating from the broker-dealer model to the investment adviser model have evaluated their existing client accounts to determine whether it is in the client’s best interest to move from a brokerage account to an advisory account. As such, it will be important for transitioning advisors to evaluate the type and frequency  of services and investments currently offered and to be offered for each client and to document why, if applicable, it is advisable for the client to move from a brokerage account to an advisory account. Of course, client preferences should be solicited and documented in such analysis.  The failure to demonstrate that an adviser conducted such an evaluation could lead to allegations that the adviser breached its fiduciary duty of care to its clients.

Read more here.

Regulatory, Standard of Care, Compliance, Enforcement

SEC Examination Priorities for 2022 – Key Takeaways

Leave a comment

On March 30, 2022, the SEC’s Division of Inspections and Examinations (“staff”) published its examination priorities for 2022 (“Examination Priorities”). The central theme of the priorities for investment advisers seems to focus on the increasingly complex nature of the investment advisory industry, and the priorities focus principally on private funds, environmental, social and governance (ESG) investing, retail investor protections, information security and operational resiliency, emerging technologies, and crypto-assets.

For a summary of the priorities and guidance for mitigating regulatory risk in the coming year, read more here.