The SEC this month posted its reply to its Office of the Inspector General’s (OIG’s) most recent Semiannual Report to Congress – a report in which the watchdog agency raised questions about the SEC’s measurement of analytics, its redesign of the EDGAR system, its adoption of cloud computing services, and more.
When an advisory firm employee uses material non-public information (MNPI) from a client to increase his own profits, that most likely constitutes insider trading. A former healthcare analyst at a New York City-based registered advisory firm found this out the hard way on January 10, when he settled insider trading charges with the SEC.
It was designed, in part, to provide the Commission with a real world perspective on developments and trends affecting asset managers. The SEC’s Asset Management Advisory Committee held its first meeting January 14, addressing a variety of topics that affect advisory firms, investment companies, broker-dealers and others.
The SEC’s Office of Compliance Inspections and Examinations released its 2020 Examinations Priorities, and while many of the topics were the same as in past years, the new list includes checking into firms’ compliance with its recently adopted Standards of Conduct, including Regulation Best Interest, Form CRS, and interpretation of an adviser’s fiduciary duty. Cybersecurity, digital assets, conflicts of interest and compliance programs also made the list.
One lesson from the concerns about possible Iranian actions in the wake of the U.S. killing of General Qasem Suleimani is a cyberattack on domestic infrastructure. Investment advisers and funds, even if not the primary targets of such an attack, could be caught up in one, with potentially significant consequences for themselves and their clients. Firms, even those with cyber defenses in place, would be wise to take steps to mitigate damage from any such attack.
The Investment Company Institute is calling on the SEC to “save millions of dollars for registered fund shareholders” by making significant reforms to the fund proxy voting process. Those reforms in its proposal advocate what it termed a “supermajority option,” under which funds could achieve majority votes for specified items through a combination of lowering the percentage needed for a quorum while raising the percentage required to approve certain items.
Every year brings new developments and challenges, but as far as investment advisers and funds go, 2020 may pack quite a wallop. Aside from adoption of a final Advertising Rule, Proxy Advisory Firm Rule and others, expect the SEC to move forward with proposing a revamped Custody Rule and possibly more self-reporting initiatives along the model of the concluded Share Class Disclosure Initiative. As if that isn’t enough, fund managers will need to ensure their funds comply with the requirements of the recently adopted ETF and Liquidity Risk Management Rules.
As the SEC increasingly hones its ability to gather data and finds new ways to analyze it, Commissioner Hester Peirce, in a recent speech, waved a yellow caution flag. She challenged not only the amount of data the agency collects, but what the SEC’s attorneys and economists do with it.
The Investment Adviser Association and a group of seven other associations and firms, in a recent letter to Congressional leaders, criticized a portion of the 2017 Tax Cuts and Jobs Act – better known as President Donald Trump’s tax cut – that limits their ability to take part in a 20 percent tax deduction.
If anything, 2019 will be remembered as the year when Jay Clayton’s SEC tackled rulemaking head on. The Commission adopted a Standards of Conduct package designed in part to delineate the difference between investment advisers and broker-dealers, and an Exchange-Traded Funds Rule that was widely welcomed by the industry. It proposed new rules for advertising and solicitation, proxy voting advisory firms, filing exemptive applications, and most recently, expanding the definition of “accredited investor.”
In a move likely to be at least partially welcomed by advocates of private funds and those that advise them, the SEC on September 18 proposed to widen the definition of who qualifies as an “accredited investor.” Under the proposed new definition, while wealth would continue as a factor, professional knowledge, experience or certifications would also count.
In a reversal of its previous position, the Financial Stability Oversight Council (FSOC) recently adopted new guidelines that call for an activities-based approach when identifying and addressing potential risks to financial stability at advisory firms and other non-bank financial institutions. The new guidelines mark a significant change from the organization’s previous guidelines, which based oversight on the institutions themselves.
Cyber breaches are never good news, but 2019 saw a huge jump in the number of companies that experienced them. The key takeaway? Take steps now to safeguard data, lest your firm becomes a cyber victim in 2020.
Whenever an SEC chairman or other high agency officials testify before Congress, there is usually more than one purpose in mind. Certainly they are there to provide an update on various initiatives the SEC has underway and to answer questions from interested legislators, as SEC Chairman Jay Clayton did in his recent testimony before a Senate committee, but there is also the need to do what they can to ensure that the agency’s funding for the coming year will meet its needs.
The SEC’s recently proposed changes to the exemptive application process under the Investment Company Act have been generally well-received by investment companies, the advisers that manage them, and the associations that represent them. While that support for the overall thrust of the changes continues, concerns have been raised about several of their provisions.
The SEC’s Division of Enforcement was pleased with the results of its Share Class Disclosure Initiative, under which 95 advisory firms agreed to return more than $135 million to mutual fund investors. With that success under its belt, the Division is now turning to new targets, including revenue sharing, cash sweep arrangements, unit investment trusts and teacher retirement plans.
The four parts of the SEC’s standards of care package, adopted this past June by the SEC and met with some concern and confusion by those affected by them in the asset management community, can be expected to result in the agency issuing guidance to help advisers and others comply. In that regard, the SEC’s Division of Investment Management’s new set of answers to FAQs, released December 3, might provide some help.