Explore our U.S. Financial Regulation Group’s latest update covering the most critical regulatory developments impacting global financial institutions, private equity, hedge and real estate fund managers, broker-dealers, banks, and more.
On August 23, 2023, the SEC adopted the Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews final rules. According to the adopting release, these rules are designed to address several risks in the relationship between advisers with private funds and their investors, including a lack of transparency, conflicts of interest and lack of effective governance mechanisms for client disclosure, consent, and oversight. Read more.
Recent ESG-Related Developments in the U.S.
On September 20th, the SEC finalized the Investment Company Names rule and, despite recent suggestions by Chair Gary Gensler that at the SEC they “try not to do things against a clock,” the SEC is expected to take action in the near future on two other ESG proposals that could have a significant impact on investment advisers and public companies. Meanwhile, both pro-ESG and anti-ESG state lawmakers have been taking an increasingly aggressive stand to assert their own authority in the ESG space, including in California, where lawmakers recently passed two climate disclosure laws that could “change the baseline” of the climate reporting landscape. Global investment managers are preparing now for these significant developments. Read more.
Preparing to Comply with the Corporate Transparency Act
The initial compliance date for FinCEN’s final rule on beneficial ownership information reporting requirements is quickly approaching, with certain provisions going into effect on January 1, 2024. Despite limited guidance from FinCEN and numerous unresolved interpretive questions, it is imperative for investment managers, especially those with complex and multi-tiered organizations, to begin scoping their structures and identifying what information they will need to provide to FinCEN, including for certain SPVs and other upper-tier entities. Read more.
Marketing Rule Update: Recent Risk Alert and SEC Orders
The Marketing Rule has been in effect since November 4, 2022, and it continues to raise difficult and nuanced interpretive issues for RIAs concerning their advertising materials and client solicitation arrangements. On June 8, 2023, the SEC EXAMS Staff issued its first Risk Alert following the Marketing Rule’s effective date. The Risk Alert supplements previous guidance and, along with several recent SEC orders charging RIAs with Marketing Rule violations, serves as a reminder that the SEC is squarely focused on Marketing Rule compliance. Read more.
Preparing for the Amended Form PF
In May 2023, the SEC adopted amendments to Form PF, which change certain existing questions and create new events-based reporting requirements. With the compliance date for new events-based reporting set for December 11, 2023, private fund advisers should be actively reviewing their policies and procedures to ensure they are ready to comply with the new requirements during periods of significant market volatility. Private fund advisers should also ensure that they are on target to respond to changes to existing sections of Form PF that have a later compliance date of June 11, 2024. Read more.
Divergent Approaches to Service Provider Oversight Highlight Regulatory Focus
The FRB, FDIC, and OCC recently issued principles-based guidance on managing third-party relationships, a markedly different approach from the SEC’s more prescriptive proposal, which codifies and expands its longstanding practice of reviewing diligence and oversight of service providers. While the approaches differ, widespread regulatory activity in this space highlights the need for global investment managers and other financial institutions to carefully review their practices, policies, and procedures concerning third-party providers. Read more.
What Investment Advisers Need to Know about AI
Artificial intelligence (“AI”) could significantly alter the landscape for investment advisers, bringing with it the potential to quickly develop personalized investment advice using large amounts of unstructured data, provide automated regulatory compliance processes, and simplify communication about investment performance with investors. The implementation of AI could also introduce high-risk issues for registered investment advisers, including with respect to their fiduciary duties to investors and confidentiality concerns. The SEC is paying close attention to the use of AI by RIAs, having proposed a new rule in July 2023 to address conflicts of interest raised by predictive analytics and having conducted a sweep of RIAs in August 2023 to learn more about current uses of AI by private fund advisers. As RIAs explore the use of AI to enhance their investment advisory services, they should be mindful of the potential legal, regulatory, and practical risks presented by these tools. Read more.
SEC Underscores Key Risks in Broker-Dealer AML Compliance
The SEC EXAMS Staff recently issued a Risk Alert highlighting specific concerns regarding the anti-money laundering practices of U.S. broker-dealers. In particular, EXAMS Staff is focusing on controls around AML compliance programs, including independent testing requirements and training of personnel, as well as required identification and verification of brokerage customers and beneficial owners. The Risk Alert follows prior EXAMS guidance regarding other key AML component obligations, including suspicious activity monitoring and reporting programs. In addition, this guidance comes in what the EXAMS Staff continues to view as an ongoing high-risk environment, as the combination of existing AML obligations and increasing sanctions activity by the Office of Foreign Assets Control (“OFAC”) have the potential to strain understaffed broker-dealer compliance departments. In light of the Risk Alert’s focus on the testing and verification of AML compliance programs themselves, and not just the execution of specific obligations, industry participants should ensure that required periodic reviews of their AML programs take into account the key deficiencies highlighted in the Risk Alert. Read more.
No “Endgame” in Sight — U.S. Bank Regulators Propose Massive Overhaul of Capital Standards
On July 27, 2023, the U.S. federal banking agencies released a nearly 1,100-page proposal that would overhaul the U.S. regulatory capital framework for all banks and bank holding companies with $100 billion or more in assets — addressing in one massive rulemaking the requirements of the “Basel III Endgame” package as well as a host of other measures intended to respond to the U.S. regional bank failures of early 2023. This controversial proposal, which has been met with intense industry opposition and threatened legal challenge, would impose capital standards and requirements substantially exceeding those agreed at the Basel Committee level and would extend them to a much larger group of institutions. We highlight below five key things for you to know about the U.S. Endgame proposal and what may come next. Read more.
About our U.S. Financial Regulation Group
Linklaters’ U.S. Financial Regulation Group advises on the full spectrum of regulatory and compliance matters in the U.S. impacting global financial institutions, private equity, hedge and real estate fund managers, broker-dealers and banks. Learn more.
For further information, please contact:
Don Waack, Partner, Linklaters
don.waack@linklaters.com
