Oct. 20, 2022

Marketing Rule Risk Alert Forecasts Coming Exams

The November 4, 2022, compliance date for the SEC’s new marketing rule (Rule) – Rule 206(4)‑1 under the Investment Advisers Act of 1940 – is rapidly approaching. In anticipation of the new advertising regime, the SEC’s Division of Examinations recently issued a risk alert (Risk Alert) that discusses its plans for examining advisers’ compliance with the new Rule. Examinations will focus on policies and procedures; substantiation of claims; books and records; and performance advertising. This article discusses the key takeaways from the Risk Alert – as well as a related investor bulletin on performance claims – with insights from Genna Garver, partner at Troutman Pepper, and Krista Zipfel, director at ACA Group. See “A Checklist for Advisers to Guide Compliance With the Marketing Rule” (Sep. 8, 2022); and “A Checklist to Ensure Fund Managers’ Advertising Materials Comply With the New Marketing Rule” (Aug. 4, 2022).

Liu Is Dead, Long Live Liu: Spartan and Disgorgement After the NDAA

In recent years, the U.S. Supreme Court (Court) has imposed limitations on disgorgement as a remedy for securities violations. Congress, however, has pushed back against those decisions, amending the Securities Exchange Act of 1940 to undo some of the Court’s decisions on disgorgement. A recent decision in the Middle District of Florida – SEC v. Spartan Securities Group (Spartan) – illuminates how the district courts have navigated those developments and underscores ways defendants in enforcement actions can continue to challenge or limit disgorgement. In a guest article, MoloLamken partner Eric Nitz recaps key Court decisions on disgorgement, explains Congress’ response to those decisions, discusses Spartan’s take on disgorgement and presents the current state of disgorgement as a remedy for securities violations. For additional commentary from Nitz, see “Recent Amendments to the Securities Exchange Act Pose New Risks for Private Fund Managers” (Feb. 25, 2021).

SEC Pay to Play Settlements Prompt Strong Dissent From Commissioner Peirce

Rule 206(4)‑5 under the Investment Advisers Act of 1940, known as the pay to play rule (Rule), establishes what amounts to a strict-liability regime. An adviser whose covered associate makes a political contribution to someone with the ability to influence a government entity’s choice of adviser is barred for two years from receiving advisory fees from that entity – regardless of intent and whether a quid pro quo was involved. The SEC recently settled enforcement actions against four advisers for alleged violations of the Rule. The settlements prompted a strong dissent from Commissioner Hester M. Peirce, who saw little benefit from the settlements and urged the SEC to revisit the Rule’s fundamentals. This article details the facts giving rise to the enforcement actions, the terms of the settlements and Peirce’s dissent. See “Fund Managers Must Continue to Guard Against Pay to Play Violations” (Oct. 29, 2020); “Pay to Play Violations Remain on the SEC’s Radar” (Mar. 14, 2019); and “With Midterm Elections Looming, Fund Managers Must Review the Pay to Play Rule” (Sep. 20, 2018).

AI Compliance Playbook: Adapting the Three Lines Framework for AI Innovations

Facing imminent artificial intelligence (AI) regulation, companies using AI are looking to the respected “Three Lines of Defense” risk management framework to help them reassure the public and regulators, but they are finding that the framework’s rigor clashes with ethics-by-design thinking. This final article in our four-part series guides readers through adapting the Three Lines approach to AI/machine learning (ML) and includes actions to take during AI development and deployment, described by experts at bnh.ai, the Future of Privacy Forum, Linklaters and Mayer Brown. It also provides insights from AI specialists at Microsoft and Morrison & Foerster delivered during recent IAPP and Privacy + Security Forum panels. The first article in the series covered compliance essentials for AI/ML tools; the second article supplied questions to guide AI oversight; and the third article examined two recently completed audits of widely used AI services and presented commentary from algorithm auditors and AI incident responders about the practical role of AI audits. See “Asset Managers Seeking Efficiency Through Outsourcing and Technology, According to Recent Survey” (Sep. 15, 2022).

Lessons From California’s First CCPA Enforcement Action

The California Attorney General (AG) recently brought its first-ever enforcement action over violations of the California Consumer Privacy Act of 2018 (CCPA). To settle the action, a company will pay a $1.2‑million penalty and implement remedial measures to clarify its online disclosure and consumer opt-out practices. The terms of the settlement sound a warning to fund managers and all other organizations that conduct business with California customers. This article analyzes the defendant’s alleged missteps and the settlement terms; discusses their broader implications; and offers lessons from the case for firms subject to CCPA compliance. See “CPRA Draft Regulations: Essential Takeaways and 10 Actions to Take Now” (Aug. 25, 2022).