Apr. 13, 2023

SEC 2023 Exam Priorities: Private Funds Feature Prominently (Part One of Two)

The SEC Division of Examinations (Division) recently released its examination priorities for the SEC’s 2023 fiscal year (Priorities). At the head of this year’s list are four top-of-mind concerns for private fund advisers, including compliance with the new marketing rule, risks associated with private funds, fiduciary duties and use of environmental, social and governance criteria in investing. Protection of retail investors also remains a recurring theme. The Priorities include a joint message from Division leadership, which discusses the Division’s activities in the SEC’s 2022 fiscal year and the four-pillar “lodestar” of its mission: promoting compliance, preventing fraud, monitoring risk and informing policy. This article, the first in a two-part series, summarizes the elements of the Priorities of particular interest to private fund managers. The second article will discuss the creation and use of the Priorities and provide key takeaways for private fund managers from former Division officials. See “Key Compliance Issues for Advisers and Funds Arising From the SEC’s 2022 Exam Priorities (Part One of Two)” (Jan. 19, 2023).

ELTIF 2.0: Revised E.U. Regime Poised to Jump Start Retail Investment in Alternatives

The vote by the European Parliament on February 15, 2023, to confirm the reform of the E.U.’s European Long‑Term Investment Fund (ELTIF) Regulation was never in doubt – broad political agreement on the changes has been in place since late 2022. Nevertheless, the final passage of the legislation represents the culmination of a revision process that aims to jump-start an initiative intended to both open up alternative investment strategies to individual investors and boost funding for critical infrastructure projects, including elements of the sustainability transition, as well as for smaller businesses in Europe. The revised ELTIF Regulation was published in the E.U.’s Official Journal on March 20, 2023, following technical revision, and will apply from January 10, 2024. Accompanying regulatory technical standards implemented through European Commission delegated acts are expected to take effect soon afterwards. This guest article by Linklaters partner Silke Bernard reviews the first version of the ELTIF regime and the issues with it; explains the goal for the revision process; and discusses the key changes in the revised regime. For additional insights from Bernard, see “ALFI Seminar Examines E.U. Funds Landscape and Regulatory Developments Affecting Distribution (Part Two of Two)” (Dec. 9, 2021).

SEC Introduces Cooling-Off Period & New Disclosure Requirements Regarding 10b5‑1 Plans

Rule 10b5‑1(c)(1) under the Securities Exchange Act of 1934 includes an affirmative defense to insider trading liability for persons who sell securities pursuant to trading plans that meet the rule’s requirements. Concerned about potential abuses of trading plans, the SEC has adopted several amendments to the rule that limit the availability of that affirmative defense, including a minimum 90-day “cooling-off” period between the adoption of a plan and the first trade under the plan. It has also adopted new disclosure requirements pertaining to an issuer’s insider trading policies and trading plans adopted by its insiders. The final rule took effect on February 27, 2023. Most issuers will be required to comply with the amended requirements in the first filing that covers their first full fiscal period that begins on or after April 1, 2023. Smaller reporting companies will have until the first filing that covers their first full fiscal period that begins on or after October 1, 2023. This article discusses the final rule amendments and how they differ from the SEC’s original proposal, with commentary from Jonathan Hecht, partner at Goodwin Procter LLP and former assistant chief counsel and acting co-chief counsel in the SEC Division of Enforcement. See our two-part series “The Best-Laid Plans: Preventing Rule 10b5‑1 Plans from Going Awry”: Part One (Jun. 6, 2014); and Part Two (Jun. 13, 2014).

Landscape of On‑Chain Asset Tokenization & Blockchain Technology’s Path Toward Maturity

Although blockchain technology has long held a certain allure for fund managers as a way to optimize their compliance practices and modernize their operations, that potential has not been actualized on any grand scale. The technology has improved and advanced with time, however, increasing the likelihood that it will eventually prove to be viable for the private funds industry. Specifically, on-chain tokenization has the potential to connect private funds with untapped sources of capital once the technology and network of providers mature, as well as when there is more regulatory certainty. Those issues were addressed in a paper by Boston Consulting Group and ADDX, entitled “Relevance of on-chain asset tokenization in ‘crypto winter’” (Paper). The Paper examines current crypto market conditions and developments; the application of blockchain technology to illiquid assets; how on-chain tokenization compares with traditional fractionalization; key challenges to the growth of on-chain asset tokenization; and how key stakeholders – including regulators – can assist with progress and growth. This article summarizes the key insights and takeaways from the Paper that are relevant to private funds. See “Tokenization on the Blockchain: Applicability to Private Debt and the Technology’s Future Outlook” (Sep. 30, 2021); and “Tokenization on the Blockchain: Unique Challenges and Benefits and Its Use by Hedge Funds” (May 27, 2021).

SEC Imposes Substantial Sanctions for Cross Trades & Principal Transactions, Despite Self-Reporting, Cooperation & Remediation

Over a three-year period, an SEC-registered investment adviser executed more than 126,000 trades between various client accounts and/or the client accounts of affiliates. In a recently settled enforcement proceeding, the SEC claimed that more than 44,000 of those trades were principal transactions the adviser had not disclosed to the client in question and for which it had not obtained the client’s prior consent. It also allegedly effected more than 500 cross trades involving mutual funds in the absence of an exemptive order or available exemption. The adviser discovered and remediated the issue, voluntarily reported the violations to the SEC and cooperated with the SEC’s investigation – but it still received a substantial fine, censure and a cease-and-desist order. This article details the relevant laws and regulations; the alleged violations; the adviser’s remediation and cooperation; and the terms of the settlement. See “Pair of Risk Alerts Focuses on Issues Associated With Cross Trades, Principal Transactions and Wrap Fees” (Aug. 19, 2021); and “OCIE Risk Alert Details Concerns About Principal Transactions and Agency Cross Trades” (Oct. 24, 2019).