In the past 2 years, the U.S. Securities and Exchange Commission ("SEC") (and other regulatory authorities) have been very busy with new rules, proposals, examination, and enforcement under the Investment Advisers Act of 1940 (the "Advisers Act"), and other applicable statutes. This client update summarizes where recent key rulemaking changes are in the process, highlights issues investment advisers, fund managers, and other financial institutions should be thinking about at this time, describes relevant regulatory guidance, recent litigation, enforcement activities, and provides checklists for investment advisers, commodity pool operators and commodity trading advisors.
The checklists appear after the legal developments summaries. For more information regarding any matter covered in this update, please contact one of the attorneys in our Investment Management Group.
FINAL RULEMAKING
SEC Enacts Wide-Sweeping Private Fund Adviser Rules which Fifth Circuit Vacates
Synopsis: On August 23, 2023, the SEC announced the enactment of a series of new and amended rules under the Advisers Act (the "Private Fund Adviser Rules"). According to the SEC, the new rules were designed to address conflicts of interest and adviser practices that may impose significant risks and harms on investors and private funds. As adopted, the rules would have a significant impact on the way advisers operate their businesses, and interface with investors. However, on June 5, 2024, the United States Court of Appeals for the Fifth Circuit vacated the Private Fund Adviser Rules.
Status: The SEC set forth a timeline as to when a Private Fund Manager must come into compliance with each applicable Private Fund Adviser Rule, which varies based on the specific Private Fund Adviser Rule and whether the manager of private funds ("Private Fund Manager") is a "Larger Private Fund Adviser" or a "Smaller Private Fund Adviser." This timeline called for a compliance date of March 14, 2025, in most cases (September 14, 2023, for Large Private Fund Advisers in respect of certain rules).
However, on June 5, 2024, the Private Fund Adviser Rules were vacated by the Fifth Circuit Court of Appeals as a result of litigation brought by a number of industry groups (National Association of Private Fund Managers, Alternative Investment Management Association, Limited, American Investment Council, Loan Syndications, Trading Association, Managed Funds Association, and National Venture Capital Association) challenging the SEC's authority. It remains to be seen whether the SEC will seek to appeal the Fifth Circuit's decision to the Supreme Court or propose alternate rules. Private Fund Managers should continue to monitor developments in the case.
The adopting release suggested continued scrutiny of Private Fund Managers in a number of areas in which there is no new rulemaking, including with respect to the fiduciary duty owed by Private Fund Managers. Even though the SEC chose not to proceed with rulemaking to address these concerns, and the Private Fund Adviser Rules were themselves vacated, we expect these areas to continue to invite scrutiny in SEC examinations and investigations.
The Private Fund Adviser Rules and associated amendments to the Compliance Rule and Section 204- (2) of the Advisers Act (the "Recordkeeping Rule"), if ultimately taking effect, will necessitate changes to the fund documents and compliance programs of all Private Fund Managers.
The Lowenstein Sandler Investment Management Group alert analyzing fiduciary duty aspects of the Private Fund Adviser Rules is available here.
The final rule is available here, and the SEC's press release discussing the adoption of the final rule is available here. The Lowenstein Sandler Investment Management Group alert analyzing the Private Fund Adviser Rules is available here. The Fifth Circuit's decision is available here.
Amendments to Form PF for Private Fund Advisers
Synopsis: Through three separate sets of amendments adopted in May 2023, July 2023 and February 2024, the SEC (jointly with the Commodity Futures Trading Commission ("CFTC") in respect of the February 2024 amendments) has adopted amendments to Form PF, the confidential form by which certain SEC-registered investment advisers report information pertaining to the private funds they advise.
The amendments (i) require certain advisers to hedge funds and private equity funds to provide current reporting of certain significant events and other information, (ii) align the reporting required of large liquidity fund advisers with reporting required in respect of money market funds and (iii) expand private fund reporting by requiring advisers to report new or additional identifying information about their private funds and their assets, the sources of financing for such funds, and fund performance.
The amendments demonstrate an evolution in the SEC's and CFTC's knowledge regarding private funds since the introduction of Form PF more than a decade ago. The updated Form PF will solicit much more granular detail regarding private fund strategies, investments, counterparty exposures, risk metrics, and performance data. The updated Form PF also reflects specific areas of continuing concern to the SEC and CFTC.
Status: The current and quarterly event reporting requirements became effective December 11, 2023. Amendments in respect of large private equity fund annual reporting and large liquidity fund reporting become effective June 11, 2024. The remaining February 2024 updates to Form PF will become effective March 12, 2025.
As we discussed in our client alert regarding the SEC's May 2023 Form PF amendments, regulators are demonstrating a commitment to enhancing their information-sharing relationship with respect to monitoring private funds. Regulators could use the new Form PF data to inform additional rulemaking, prepare interpretive guidance, inform the selection of examination targets and topics, and bring enforcement actions in a more aligned manner.
The SEC's May 2023 final rule is available here. The Lowenstein Sandler Investment Management Group alert analyzing the May 2023 final rule is available here. The SEC's July 2023 final rule is available here. The SEC's February 2024 final rule is available here. The Lowenstein Sandler Investment Management Group alert analyzing the February 2024 final rule is available here.
SEC Expands Definitions of 'Dealer' and 'Government Securities Dealer' to Adapt to Modern Market Practices
Synopsis: On February 6, 2024, the SEC announced two new rules that expanded the definition of "dealer" and "government securities dealer" under the Exchange Act. These updates mark a significant broadening of the definitions, aiming to adapt to evolving market practices, and enhance oversight in the securities industry. Under the new rules, any person who engages in activities as described will, absent an applicable exemption, be required to: (i) register with the SEC under Section 15(a) or Section 15(c) of the Exchange Act, as applicable; (ii) become a member of a self-regulatory organization ("SRO") such as the Financial Industry Regulatory Authority ("FINRA"); and (iii) comply with federal securities laws and regulatory obligations as well as applicable SRO and U.S. Treasury rules and requirements.
By broadening the definitions of "dealer" and "government securities dealer," the SEC aims to enhance regulatory coverage and oversight over securities market participants. This move is likely to lead to increased scrutiny and enforcement actions, as the SEC seeks to ensure compliance with these new regulatory requirements.
The new rules are intended to provide greater clarity and transparency regarding the regulatory obligations of entities engaged in securities trading and dealing activities. Market participants can now better understand their regulatory responsibilities and take appropriate steps to ensure compliance with the updated definitions.
Status: Many different types of market participants are potentially implicated by these expanded definitions, including (but not limited to) family offices and investment fund managers that have more than $50 million in assets under management. These market participants should carefully review the new rules and assess the potential impact on their operations and whether they now need to register as a dealer or a government securities dealer. Becoming a registered dealer or government securities dealer can result in heightened regulatory scrutiny and additional compliance costs.
The final rules became effective April 29, 2024, and have a compliance date of April 29, 2025. However, the new rules remain subject to litigation, including a suit brought March 18, 2024, in the U.S. District Court for the Northern District of Texas by a number of industry groups (National Association of Private Fund Managers, Alternative Investment Management Association, Limited, and Managed Funds Association) challenging the new rules.
The Lowenstein Sandler Investment Management Group alert analyzing these new SEC rules is available here.
SEC Adopts Amendments to Rules Governing Beneficial Ownership Reporting on Schedules 13D and 13G
Synopsis: On October 10, 2023, the SEC adopted amendments to certain rules that govern beneficial ownership reporting. The amendments generally shorten the filing deadlines for initial and amended beneficial ownership reports filed on Schedules 13D and 13G. The amendments also clarify the disclosure requirements of Schedule 13D with respect to derivative securities. Schedules 13D and 13G may now be filed until 10 p.m. ET each business day, and Schedule 13D and 13G filings will need to be made using a structured machine-readable data language.
All Schedule 13D filers now have to file an initial Schedule 13D within five (5) business days after either acquiring beneficial ownership of more than 5% of a class of voting equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended ("covered securities"), or losing eligibility to file on Schedule 13G. An amended Schedule 13D to disclose material changes is now due within two (2) business days of the applicable change. "Qualified Institutional Investors" and "Exempt Investors" will have to file an initial Schedule 13G no later than forty-five (45) calendar days after the calendar quarter in which they beneficially own more than 5% of a class of covered securities (or within five (5) business days after month-end for Qualified Institutional Investors exceeding 10% beneficial ownership). "Passive Investors" will have to file an initial Schedule 13G no later than five (5) business days after exceeding 5% beneficial ownership. All Schedule 13G filers will be required to file a Schedule 13G amendment to disclose material changes no later than forty-five (45) calendar days after each calendar quarter. A "material change" includes, but is not limited to, any material increase or decrease in the percentage of the class of covered securities beneficially owned. A change in beneficial ownership by 1% or more of the class of covered securities is considered to be "material" for these purposes; provided, that an amendment is not required for 13G filers if the change in beneficial ownership results solely due to a change in the outstanding shares of the issuer. A change in beneficial ownership of less than 1% may be material, depending on the facts and circumstances. In addition, (a) Qualified Institutional Investors will be required to file a Schedule 13G amendment within five (5) business days after month-end if exceeding 10% beneficial ownership or in the event of a 5% increase or decrease in beneficial ownership and (b) Passive Investors will be required to file a Schedule 13G amendment within two (2) business days if exceeding 10% beneficial ownership or in the event of a 5% increase or decrease in beneficial ownership.
Status: The new rule became effective February 5, 2024. However, compliance with the amended Schedule 13G filing deadlines is not required until September 30, 2024, and compliance with the structured data requirement is not mandatory until December 18, 2024.
The Lowenstein Sandler Investment Management Group alert analyzing the proposed rule is available here. The text of the final rule can be found here.
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