Jun. 9, 2022

SEC Chair Gensler Discusses Swaps Risks and Regulation and Proposed Rules for Security‑Based Swap Execution Facilities

The SEC recently proposed new Regulation SE, which would institute a registration and regulation regime for security-based swap execution facilities pursuant to the Dodd-Frank Act. The regime would largely mirror the regime the CFTC adopted for CFTC-regulated swap execution facilities. Fittingly, in a recent speech at the annual meeting of the International Swaps and Derivatives Association, SEC Chair Gary Gensler discussed the risks posed by the swaps markets; the SEC’s implementation of Dodd-Frank swaps reforms; and issues involving the intersection of derivatives and both crypto assets and complex financial products. This article outlines the key takeaways from Gensler’s remarks and the contours of proposed Regulation SE. See our two-part coverage of a fireside chat with Gensler: “Three Key Disclosure Areas” (Nov. 18, 2021); and “Reporting; Voting and Proxies; Individual Accountability; and Market Structure Issues” (Dec. 2, 2021).

Fifth Circuit Decision Could Hamstring SEC Enforcement Abilities

In a sweeping decision, a divided three-judge panel of the U.S. Court of Appeals for the Fifth Circuit (Court) held that the SEC’s administrative law tribunals are unconstitutional because they violate the Seventh Amendment right to a civil jury trial and because Congress improperly delegated to the SEC the ability to choose in which forum it brings enforcement actions. For the time being, the ruling could eliminate the SEC’s ability to use one of its important enforcement tools in cases within the Fifth Circuit’s jurisdiction. The SEC is sure to challenge the ruling, either by requesting en banc review by the Fifth Circuit or appealing directly to the Supreme Court. This article discusses the events and proceedings leading up to the Court’s decision, the majority’s reasoning and the views of the dissenting judge, with additional insights from former SEC attorneys David Kornblau, partner at Dentons; Scott Mascianica, partner at Holland & Knight; Philip Moustakis, counsel at Seward & Kissel; and David Slovick, partner at Barnes & Thornburg. See “BakerHostetler Panel Analyzes SEC Use of Administrative Proceedings and Whistleblower Incentives, and Provides Guidance for Fund Managers Facing an Examination (Part Two of Two)” (Jan. 19, 2017); and “D.C. Circuit Delivers Significant Victory for the SEC in Upholding the Use of Administrative Law Judges in Enforcement Proceedings” (Sep. 8, 2016).

Private Funds Top the SEC’s 2022 Exam Priorities

The SEC Division of Examinations (Division) recently released its 10th annual examination priorities report (Priorities). The Priorities cover perennial focus areas, such as conflicts of interest; fees and expenses; and valuations, as well as emerging areas, such as information security, digital assets, resiliency and responsible investing. They also take direct aim at how private fund advisers address those areas and comply with their fiduciary duties. This article analyzes the Priorities, with commentary from Ken C. Joseph, Kroll managing director and former Senior Officer in the Division. See our coverage of the Division’s 2021 Priorities; 2020 Priorities; 2019 Priorities; 2018 Priorities; 2017 Priorities; and 2016 Priorities. For further insights from Joseph, see our two-part series “Thirteen Questions an Adviser’s Principals Should Ask Compliance”: Part One (Jan. 13, 2022); and Part Two (Jan. 20, 2022).

Present and Former SEC Officials Discuss Enforcement (Part Two of Two)

A panel of present and former SEC officials at the Investment Company Institute’s recent Investment Management Conference was moderated by Matt Chambers, GC and CCO at Horizon Investments, LLC. The panel featured 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 (Enforcement); and Anthony S. Kelly, partner at Dechert and former Co‑Chief of the Asset Management Unit. This second article in a two-part series outlines 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 Enforcement’s environmental, social and governance task force. The first article covered the key takeaways from the discussion on the present operations of the Division of Examinations and mutual fund oversight. For more from Kelly, see “ESG Considerations for Fund Managers: The U.S. Landscape (Part One of Two)” (Jun. 25, 2020).

Crypto Attorneys to SEC: Talk to Us

Frustration with the SEC when it comes to cryptocurrency is high, according to industry attorneys at the recent New York City Bar White Collar Crime Institute. The panelists, who also included the new head of the DOJ’s National Cryptocurrency Enforcement Team and the former CFTC Enforcement Director, weighed the effects of President Biden’s digital assets Executive Order and addressed challenges organizations face when cooperating with the government. Despite growing legitimacy and acceptance of cryptocurrencies, several attorneys on the panel outlined a fragmented regulatory framework in the U.S., which, they argued, may hinder the country’s competitiveness in the global digital assets marketplace. See “Regulatory and Market Developments Affecting Digital Asset Funds and Digital Securities” (Jul. 22, 2021).