Jun. 2, 2022

SEC’s Proposed Dealer Rules Would Capture Certain Private Funds

SEC rulemaking under Chair Gary Gensler has proceeded at an incredible pace. One of the agency’s latest proposals is intended to close gaps in the dealer registration regime. As market structure and trading practices have evolved, certain unregistered firms have, in effect, been performing a traditional dealer’s role by serving as liquidity providers and making markets in securities, and to address that regulatory gap, the SEC has proposed rules with qualitative criteria for determining whether a firm is acting as a dealer and a quantitative test for classifying a firm as a government securities dealer. If adopted, the rules would primarily capture principal trading firms and proprietary trading firms – but they would also capture certain private funds and investment advisers. This article analyzes the key elements of the proposal. See our coverage of other recent SEC rulemaking on beneficial ownership, cyber risk management, Form PF, private funds, security-based swaps and short sales.

Present and Former SEC Officials Discuss Examinations (Part One of Two)

At the Investment Company Institute’s recent Investment Management Conference, Matt Chambers, GC and CCO at Horizon Investments, LLC, moderated a discussion with present and former SEC officials, including Vanessa L. Horton, Associate Regional Director over the Investment Adviser/Investment Company Examination Program and acting Associate Regional Director of the Broker Dealer and Exchange Examination Program at the SEC in Chicago; C. Dabney O’Riordan, Co‑Chief of the Asset Management Unit of the SEC Division of Enforcement; and Anthony S. Kelly, partner at Dechert and former Co‑Chief of the Asset Management Unit. This article, the first in a two-part series, covers the key takeaways from the discussion on the present operations of the Division of Examinations and mutual fund oversight. The second article will discuss the panel’s thoughts on the potential for more aggressive enforcement activity; the implications of recent enforcement actions involving electronic communications, share class selection and cybersecurity; and the Division of Enforcement’s ESG task force. See our two-part series on recent experiences with SEC examinations and enforcement: “Cybersecurity, BCPs, Branch Offices and Disclosures” (Dec. 9, 2021); and “Disclosures, Conflicts and Trading Issues” (Dec. 16, 2021).

SEC Releases First Report on Registrants’ D&I Policies and Practices

The SEC is committed to fostering diversity and inclusion (D&I) both internally and within the broader financial services sector. Its Office of Minority and Women Inclusion (OMWI) supports those efforts. In 2018, the agency developed a Diversity Assessment Report for Entities Regulated by the SEC (DAR), which it sends to a select group of registrants every two years. OMWI recently released the SEC’s first-ever Diversity Assessment Report, which discusses the responses provided by registrants in the DARs that the SEC solicited in 2020 (D&I Report). OMWI has also detailed the SEC’s efforts to improve the diversity of its own workforce and that of its suppliers in its 2021 Annual Report to Congress for the 2021 fiscal year (Annual Report). This article explores the key findings from the D&I Report and highlights the key takeaways from the Annual Report. See our two-part series on diversity and inclusion in asset management: “Key Challenges and Impacts of 2020 Events” (May 13, 2021); and “Structural Barriers and Investor Impact” (May 20, 2021).

Navigating the Intersection of Blockchain and Data Privacy Laws

Blockchain technology offers fund managers many benefits, including resiliency; permanence; and elimination of traditional intermediaries and data repositories. Certain of those qualities, however, may conflict with the requirements of data privacy laws, especially the E.U. General Data Protection Regulation (GDPR), which includes, for example, data minimization requirements and deletion rights. During a recent program at the 2022 IAPP Global Privacy Summit, attorneys from Baker McKenzie and Protocol Labs discussed the principal features and applications of blockchain technology, including smart contracts, cryptocurrency, non-fungible tokens, decentralized autonomous organizations and decentralized data storage, as well as the applicability of data privacy laws – particularly the GDPR and the California Consumer Privacy Act of 2018 – to blockchain applications. This article synthesizes their insights and provides ten takeaways. See “Opportunities and Challenges Posed by Three Asset Classes on the Frontier of Alternative Investing: Blockchain, Cannabis and Litigation Finance” (Dec. 14, 2017).

Latest on Using Reverse Solicitation, Placement Agents, NPPRs and Other Potential Non‑AIFMD Options to Distribute in Europe

Recent E.U. regulations and comments from the European Securities and Markets Authority have put reverse solicitation firmly in the spotlight, and it may be timely for fund managers to reassess the costs and benefits of using that approach to distribution in Europe. There are a host of alternative approaches that non‑E.U. alternative investment fund managers (AIFMs) can pursue to avoid full registration under the E.U.’s Alternative Investment Fund Managers Directive, but each has its own drawbacks and considerations. IFI Global (IFI) recently hosted a webinar discussing the various pressures on, and risks associated with, reverse solicitation and other techniques for non‑E.U. AIFMs to distribute in Europe, including through distribution intermediaries (e.g., placement agents and management companies) and under national private placement regimes. The panel was moderated by IFI’s CEO, Simon Osborn, and featured Conrad C. Axelrod, partner at King & Spalding; Emily Haithwaite, group partner at Ogier; Simon Firth, partner at Arnold & Porter; and Philip A. Pirecki, business development lead for Americas at Jersey Finance. This article summarizes relevant takeaways from the webinar. See “IFI Global Survey Identifies Trends in Offshore Domiciliation and Fund Structuring Among U.S. Managers” (Feb. 3, 2022).