Compliance, Regulatory, Standard of Care

California and New Jersey setting the pace in nationwide race to write the rules for crypto

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Last week, California and New Jersey both upped the ante in the nationwide race to write the rules for the crypto industry:

  • The California Department of Financial Protection and Innovation published an Invitation for Comments related to issues impacting blockchain and crypto businesses.
  • The New Jersey State Assembly Financial Institutions and Insurance Committee approved bills that would require licenses for digital assets businesses and establish a crypto regulatory scheme.
  • Players in the blockchain and digital asset industry should take advantage of opportunities to help shape the evolving regulatory landscape, such as by responding to the Invitation for Comments.

Read more here. 

Compliance, Enforcement, Regulatory

DOJ brings first-ever NFT “insider trading” case

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The US Department of Justice and Federal Bureau of Investigation announced the first-of-its kind indictment of an “insider trading” scheme involving non-fungible tokens (or NFTs).

  • A former employee of an online marketplace for NFTs allegedly used confidential business information for personal financial gain.
  • The charged individual used new blockchain technologies to conceal the proceeds of the alleged illicit activity.
  • The DOJ brought charges without characterizing NFTs as securities.

Read more here. 

Compliance, Regulatory, Standard of Care

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

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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

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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.

Compliance, Regulatory

Attracting and Retaining Talent

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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.