Privacy and the safeguarding of customer information continues to be an important compliance topic from the SEC’s perspective, including its examination staff.  The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently released a Risk Alert highlighting common examination deficiencies from registered advisers and broker-dealers related to Regulation S-P, a rule requiring that such registrants provide privacy notices to clients and implement customer information safeguarding policies.   A closer look at this Risk Alert along with some key takeaways for advisers and broker-dealers to consider can be found in the following Mayer Brown Legal Update.

Legal Update on OCIE Risk Alert for Investment Adviser and Broker-Dealer Compliance Issues Related to Regulation S-P (authored by Peter McCamman, Matthew Bisanz, Jeffrey Taft and Adam Kanter):

If you have any questions about the issues raised in this Legal Update or would like assistance with SEC regulatory matters related to privacy, safeguarding or otherwise, please contact any of the aforementioned Legal Update authors or any member of our Investment Management or Financial Services Regulatory & Enforcement practice groups.

Hello dear readers.  If you are reading this today, on April 1, and you have a December 31 fiscal year end, then you have survived your annual Form ADV amendment.  Congratulations!  And while many of you are doubtless gearing up for an annual Form PF filing due at the end of this month, you might also pause and take a few moments to dwell on everyone’s favorite rule under the Investment Advisers Act of 1940; I refer, of course, to Rule 206(4)-2, the “Custody Rule.”

In the course of the past few months, we have seen two potentially significant developments concerning the rule.  First, on December 20, 2018, the SEC staff granted no action relief to Madison Capital Funding LLC concerning Custody Rule issues related to loan syndications where the adviser acted as agent for the syndicate, which included non-clients (check out Mayer Brown’s Legal Update for more information), and more recently, on March 12, 2019, SEC staff released a letter seeking comment on issues arising under the Custody Rule related to assets traded on a non-“Delivery versus Payment” basis (such as the loans at issue in the Madison Capital no-action letter) as well as digital assets (check out Mayer Brown’s Legal Update on this one too).  We know from SEC staff statements in the March 12 letter, and from the SEC’s long-term unified agenda, that potential changes to the Custody Rule are in the works, and market participants are being given the rare opportunity to comment and potentially shape the future direction of the rule before any changes are even issued in proposed form.  For advisers that are active in the loan market (and other non-DVP asset classes) or invest in digital assets, we suggest that you consider taking ownership (custody, even!) of how the Custody Rule impacts your business, and weigh whether to provide input to the staff, either alone, or together with similarly situated advisers or associated trade groups.

On March 11, 2019, the SEC announced that it settled charges against 79 investment advisers who self-reported violations in connection with the SEC’s Share Class Selection Disclosure Initiative (the “Initiative”).  Please see the link below for a Legal Update on this enforcement action, which discusses the Initiative in greater detail as well as the eligibility requirements for advisers, reviews the regulatory activity in this area prior to the announcement of the Initiative and summarizes the settled enforcement actions against these self-reporting advisers.

Legal Update on SEC’s Share Class Selection Disclosure Initiative (authored by Stephanie Monaco, Matthew Rossi and Leslie Cruz):

If you have any questions about the topics raised in this Legal Update or would like assistance with SEC enforcement or regulatory matters related to share class selection or otherwise, please contact any of the aforementioned Legal Update authors above or any member of our Investment Management or Securities Litigation and Enforcement practice groups.

On February 28, 2019, the staff of the SEC’s Division of Investment Management granted no-action relief in connection with the 1940 Act’s in-person meeting requirements under Section 15 of the Investment Company Act of 1940 (the “1940 Act”).[1]  This relief would apply to the boards of directors of a registered investment companies (each a “fund”) and would permit them to, under certain delineated circumstances, approve certain investment advisory and principal underwriting contracts of a fund, the 12b-1 plan of a fund and the selection of a fund’s independent public accountant telephonically, either by video conference or by other means by which all participating directors may participate and communicate with each other simultaneously during a meeting. Continue Reading SEC Staff Grants Limited No-Action Relief Regarding the In-Person Board Meeting Requirement under the Investment Company Act

In late 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2019 examination priorities, which cover not only investment advisers and registered funds, but also broker-dealers and transfer agents.  To help you digest and better understand these 2019 exam priorities, our Washington, DC-based Investment Management practice has prepared a legal update (see link below) giving an overview of the exam priorities specific to investments advisers, a brief description of certain key SEC 2018 enforcement actions involving investment advisers as well as certain suggested practice points that advisers may want to consider in response to these priorities and enforcement actions.

Legal Update on OCIE’s 2019 Exam Priorities (authored by Stephanie Monaco, Leslie Cruz, Adam Kanter and Peter McCamman):

If you have any questions about the issues raised in this Legal Update or would like assistance with SEC regulatory or other related matters, please contact any member of our Investment Management practice.

There’s clearly no summer lull at the SEC Division of Enforcement’s Asset Management Unit—over the past two weeks, we’ve seen a deluge of more cases impacting investment advisers than we’ve seen afternoon thunderstorms (and here in DC, that’s saying something).  In this post I’m going to briefly summarize some of the take-aways for these cases impacting the pay-to-play rule, the “testimonial rule,” and the custody rule.

Continue Reading SEC Enforcement Round-Up

Fund managers that are affiliated with U.S. banks, or that have historically courted U.S. banks  (or their affiliates) as investors in their funds, are by now very familiar with the restrictions imposed by the “Volcker Rule” since its adoption in December 2013.  A massive regulatory undertaking, the rule was adopted by five of the U.S. financial regulators (namely, the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the SEC, and the CFTC) acting in concert, and resulted in sweeping changes to how U.S. banks and their affiliates make proprietary investments and how they interact with so-called “covered funds.”  From the perspective of a ’40 Act practitioner, it was clear at the time, and has remained so ever since, that the group of august regulators did not, collectively, grasp some of the implications of the way the final regulation approached some issues involving covered funds–including the very way that term was defined.

After several years of Congressional logjam and the regulators addressing some of the more vexing issues in the Volcker Rule through FAQs, we now suddenly find ourselves moving forward with changes to the Volcker Rule on multiple fronts.  Unfortunately–at least from this practitioner’s perspective as an investment management lawyer–most of the changes we’ve seen so far are targeted at the proprietary trading side of the rule, rather than the covered fund side.  That said, there are still a few things on the covered fund side worth mentioning, especially for industry participants interested in making their voice heard by the regulators.

Continue Reading Changes Afoot for the Volcker Rule

In April 2018, the SEC proposed an Interpretation Regarding Standard of Conduct for Investment Advisers.  In that proposal, the SEC has proposed to interpret the duty of loyalty (which, combined with the duty of care, constitutes fiduciary duty) as requiring advisers to put client interests ahead of their own and make full and fair disclosure of all material facts of the relationship.  More particularly, the SEC stated that advisers must seek to avoid conflicts of interest and make full and fair disclosure of material conflicts that could affect the relationship.  If you stopped reading the release at this point, you might think this is a clear articulation of what the duty means and how we practice in the area of conflicts. Continue Reading A New Standard for Investment Adviser Fiduciary Duty?

As most of you have heard, on March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit issued an opinion vacating, in its entirety, the Department of Labor’s amendment to regulations defining “investment advice” for the purpose of determining who is a fiduciary (the “DOL Fiduciary Rule”) on the basis that the Department violated the Administrative Procedures Act and exceeded its regulatory authority.  The Department had the right to request an en banc review of the decision by the full Fifth Circuit panel within 45 days of the date of the decision and to appeal the decision to the U.S. Supreme Court within 90 days after the date of the decision.  The Department of Labor did not file the request for review or an appeal to the Supreme Court within such deadlines.  On June 21, 2018, the Fifth Circuit issued the mandate implementing its decision to vacate the DOL Fiduciary Rule. Continue Reading The Department of Labor Fiduciary Rule: Lots of Work, Lots of Drama, Lots of Uncertainty