ARTICLE
17 October 2022

Investment Management Legal And Regulatory Update - October 2022

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On August 24, 2022, the Securities and Exchange Commission (SEC) released its draft strategic plan for public comment. As part of the strategic plan, the SEC outlined its mission...
United States Corporate/Commercial Law

LATEST DEVELOPMENTS

SEC Publishes Draft FY22-26 Strategic Plan for Public Comment

On August 24, 2022, the Securities and Exchange Commission (SEC) released its draft strategic plan for public comment. As part of the strategic plan, the SEC outlined its mission, vision, values and goals for the 2022- 2026 fiscal years. The SEC's stated mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, which is supported by its vision and values. The goals span over a four-year time period and are summarized below.

Goal 1: Protect working families against fraud, manipulation, and misconduct

The SEC intends to achieve this goal through rulemaking, enforcement and examinations. The staff will continually evaluate products and other financial arrangements to determine whether they comply with securities laws. Through enforcement, the SEC hopes to deter both individuals and the industry as a whole from violations. The SEC will continue to monitor for misconduct and work in conjunction with other agencies in enforcement actions. The SEC Division of Examinations (Division) will continue to focus on key risks and violations that could harm investors, such as cybersecurity and private fund adviser conflicts of interest. The SEC intends to invest in its technology and data analytics abilities to keep pace with the industry. Lastly, the SEC plans to continue to focus on disclosure to investors, notably regarding climate risks and cybersecurity, and will continue to evolve its disclosure framework.

Goal 2: Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies

The SEC noted that as the markets continue to evolve technology plays a key role and therefore cybersecurity risks continue to increase. In addition, with the global interconnectedness of the markets, SEC oversight becomes more challenging. The staff intends to require more transparency into the private markets via disclosure requirements and noted greater need for data protection across global regulators. The SEC stated a need for expanded authority from Congress to address digital currencies. The plan also underscored the importance of continuing to educate diverse and underserved communities and also educate investors on new and relevant industry issues, using feedback from investor and community outreach. The staff also recognizes the need to further understand crypto assets, fixed income investments and derivatives.

Goal 3: Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives.

The SEC is committed to diversity, equity and inclusion across its workforce. The staff intends to provide opportunities for collaboration and cross-training of its employees and plans to encourage job rotations. The staff deems its biggest internal risks as data and information security protection, including information from third parties. Lastly, the plan noted the importance of internal modern technology and to continue to invest in up-to-date technological systems, such as migrating to the cloud.

The request for comment closed on September 29, 2022.

Sources: SEC Publishes Draft FY22-26 Strategic Plan for Public Comment, SEC Press Release (Aug. 24, 2022), available here; U.S. Securities and Exchange Commission Strategic Plan, Fiscal Years 2022-2026 (Aug. 24, 2022), available here.

LATEST DEVELOPMENTS: ADVISERS

SEC Risk Alert Regarding Upcoming Examinations for Compliance with New Marketing Rule

On September 19, 2022, the Division published a risk alert announcing its intent to conduct examinations focused on compliance with Rule 206(4)-1 under the Advisers Act (Marketing Rule). Any advertisements disseminated by advisers, including advisers to private funds, on or after November 4, 2022 must comply with the Marketing Rule.

The Division staff noted Marketing Rule exams would focus on the following areas:

Marketing Rule Policies and Procedures

The staff will confirm whether advisers have instituted written policies and procedures to comply with the Marketing Rule. Examiners will look for objective and testable means reasonably designed to prevent violations of the Marketing Rule, such as conducting internal pre-reviews of and approving advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.

Substantiation Requirement

The staff will review whether advisers have a reasonable basis to believe they will be able to substantiate material statements of fact in advertisements. There are a number of ways to do this, including making a record contemporaneous with the advertisement or adding citations and sources to advertisements. If an adviser is unable to produce information to substantiate statements of fact when the staff demands it, the staff will presume that the adviser did not have a reasonable basis for its belief.

Performance Advertising Requirements

The staff will review compliance with the performance advertising requirements in the Marketing Rule, including the prohibitions on including the following in an advertisement:

  • Gross performance, unless the advertisement also presents net performance;
  • Any performance results, unless they are provided for specific time periods (not applicable to the performance of private funds);
  • Any statement that the SEC has approved or reviewed any calculation or presentation of performance results;
  • Performance of portfolios other than the portfolio being advertised, performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement, with limited exceptions;
  • Performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
  • Hypothetical performance, unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain additional information; and
  • Predecessor performance, unless the personnel primarily responsible for achieving the prior performance manage accounts at the advertising adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.

Books and Records

The staff will also review for compliance with the amended books and records rule (Rule 204-2 under the Advisers Act). Advisers will be required to answer the new questions in Item 5L of Form ADV, Part 1A regarding their marketing practices in their next annual update after November 4, 2022.

Source: Division of Examinations Risk Alert: Examinations Focused on the New Investment Adviser Marketing Rule (Sept. 19, 2022), available here.

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