Although the change in presidential administration has unquestionably brought with it a shift in enforcement priorities, pursuing trade- and sanctions-related violations is one area of continuity. For example, in 2022, former Deputy Attorney General Lisa Monaco called sanctions enforcement the “new [Foreign Corrupt Practices Act],” while, this spring, Commerce Secretary Howard Lutnick signaled “a dramatic increase” in export controls enforcement.

Meanwhile, DOJ officials have explicitly prioritized investigation of “trade and customs” violations. Signaling greater scrutiny of non-bank financial institutions, the DOJ’s Criminal Division has promised to focus on “conduct that threatens the country’s national security, including threats to the U.S. financial system by gatekeepers.” And it has noted that “[f]inancial institutions, shadow bankers, and other intermediaries aid U.S. adversaries by processing transactions that evade sanctions.”

Two recent enforcement actions highlight those priorities, as well as the government’s increasing focus on non-bank financial institutions as financial “gatekeepers.” These actions illustrate that, more than ever, the government stands ready to impose penalties on investment fund managers and private equity (PE) firms that engage in criminal and regulatory violations, viewing them as responsible for the downstream effects of their investments and the conduct of their portfolio companies. But government agencies have simultaneously amplified the benefit of cooperation and voluntary self-reporting. This article discusses the two actions and the differing fates of the firms involved, highlighting the government’s dual-track approach.

For more insights from Nitz, see “Agency Power and Adjudication: The Government Seeks Supreme Court Review of Jarkesy v. SEC” (Jun. 8, 2023).

GVA Capital Highlights Risks of Non‑Cooperation and Underscores Focus on Non‑Bank Financial Entities

In the first action, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) announced a $216‑million penalty – the maximum available – against GVA Capital, Ltd, a venture capital firm operating out of San Francisco. In 2016, GVA Capital approached Suleiman Kerimov, a Russian oligarch, about an investment in a U.S. company. Kerimov agreed to invest, effectuating the investment through Prosperity Investments, L.P. (Prosperity), an entity in which Kerimov held an interest.

In 2018, OFAC designated Kerimov as a sanctioned individual for being an official of the Russian government. That designation froze Kerimov’s property in the U.S. and prohibited those property interests from being transferred, paid, exported, withdrawn or otherwise dealt with unless authorized by OFAC. After that designation, however, Kerimov continued to retain an interest in Prosperity.

Kerimov’s designation prompted GVA Capital to seek a legal opinion, which concluded – incorrectly – that GVA Capital’s transactions with Prosperity were not prohibited by Kerimov’s designation because a non-designated party nominally owned 50 percent or more of Prosperity. Nonetheless, the opinion warned GVA Capital that Kerimov could not be directly or indirectly involved in any transactions.

Notwithstanding that warning, between 2018 and 2021, on several occasions, GVA Capital attempted to sell or assign certain holdings in which Kerimov had an interest via transactions involving Prosperity and related entities. In doing so, GVA Capital coordinated with Kerimov’s nephew, who the firm knew was acting as a proxy for his uncle in connection with the transactions.

OFAC opened an investigation into GVA Capital, issuing a subpoena to the firm in June 2021. In response, GVA Capital initially produced 173 documents and indicated that its response to the subpoena was complete. However, after OFAC issued a pre-penalty notice in September 2023, the firm subsequently produced an additional 1,300 responsive records and recertified its response as complete – more than two years after the initial production and certification.

OFAC concluded GVA Capital had willfully violated the sanctions regime and imposed the maximum possible statutory penalty, finding several aggravating factors that, it argued, justified the stiff penalty:

• GVA Capital acted willfully, working through Kerimov’s known intermediaries, despite a legal opinion warning against his participation in transactions.
• The firm’s conduct “undermined broader U.S. policy objectives.”
• It “acted contrary to U.S. foreign policy interests” because of Kerimov’s status as a Russian national.
• It did not voluntarily self-disclose the violations.

In announcing the penalty, OFAC sent a clear message to financial “gatekeepers,” such as “investment professionals, accountants, attorneys, and providers of trust and corporate formation services.” Those professionals, OFAC said, “occupy crucial financial and legal positions that place them at particular risk of knowingly or unwittingly furnishing access by illicit actors to the licit financial system.”

OFAC also signaled to non-bank financial institutions such as venture capital firms and investment advisors that they must “have a clear understanding of their U.S. sanctions compliance obligations,” particularly when, as happened to GVA Capital, an existing client is sanctioned. Risks arising from that situation are heightened when parties “rely[] on formalistic ownership arrangements that obscure the true parties in interest behind an entity or investment,” OFAC observed.

For a look at sanctions basics, see this three-part series: “How Sanctions Regimes Work” (Jun. 16, 2022); “Their Impact on Private Fund Investors and Investments” (Jun. 23, 2022); and “How to Comply With Them” (Jul. 7, 2022).

Finally, OFAC emphasized the importance of compliance with its administrative subpoenas and the consequences of failing to cooperate with its investigations. GVA Capital’s prolonged failure to comply with the subpoena for 28 months resulted in 28 separate violations of OFAC’s reporting requirements, which led to millions of dollars in additional penalties.

White Deer Resolution Highlights Value of Voluntary Disclosure Programs

Just four days after the GVA Capital action was publicly disclosed, the DOJ announced a starkly contrasting resolution with the Texas-based PE firm White Deer Capital Management LLC (White Deer). The DOJ formally declined to prosecute sanctions and trade violations after White Deer voluntarily reported violations by one of its portfolio companies.

Specifically, the DOJ rewarded White Deer with the first declination under the M&A policy of the DOJ’s National Security Division (NSD) because it voluntarily disclosed a series of sanctions- and trade-related violations committed by its recently acquired portfolio company, Unicat Catalyst Technologies LLC (Unicat). Before being acquired by White Deer, Unicat committed sanctions, export controls and tariff violations by exporting chemical catalysts used in oil refining and steel production to customers in Iran, Venezuela, Syria and Cuba. It also imported mislabeled catalysts from China. White Deer did not discover the misconduct in its pre-acquisition due diligence, partly due to Unicat’s efforts to conceal the malfeasance through falsified invoices, export documents and financial records. But the violations ultimately came to light during post-acquisition integration efforts when Unicat’s newly installed management team, which had been selected and overseen by White Deer, learned about a pending transaction with an Iranian customer. At the direction of new management, Unicat cancelled that transaction and retained outside counsel to investigate, revealing the full scope of misconduct.

White Deer voluntarily disclosed Unicat’s violations to the NSD within a month of discovering them and even before completing its internal investigation. The DOJ concluded White Deer’s disclosure warranted a declination under the NSD’s M&A Policy, which states that an entity that acquires another can receive a declination when, through due diligence conducted shortly before or after the acquisition, the acquiring entity discovers potential export controls or sanctions violations. The acquiring company will receive a presumption of a declination and no criminal fine or forfeiture if it:

• timely and voluntarily reports the misconduct;
• fully cooperates; and
• undertakes timely and appropriate remediation.

In announcing the declination, the DOJ highlighted White Deer’s “exceptional and proactive cooperation,” stressing the agency’s intent to incentivize voluntary disclosure and remediation of misconduct. Although White Deer’s disclosure was not made until 10 months after the acquisition of Unicat, the DOJ nonetheless found it timely under the policy in light of:

• coronavirus-related delays in post-acquisition integration;
• the transaction structure that involved White Deer’s performing a second closing with a related entity only three months before voluntarily disclosing to the DOJ; and
• White Deer’s swift reporting and remedial action upon discovering the misconduct.

The DOJ also highlighted White Deer’s cooperation, such as its proactive identification, collection and disclosure of relevant evidence (including evidence located abroad), as well as its timely remedial action, which was completed within a year of discovering the misconduct.

White Deer also reached a joint resolution with the DOJ, OFAC and the Bureau of Industry and Security (BIS), under which Unicat entered a non-prosecution agreement (NPA) and agreed to pay a combined $3,882,797 to resolve the allegations. Unicat also agreed to pay $1,655,189.57 in a separate administrative resolution with U.S. Customs and Border Protection, and its former CEO pleaded guilty to conspiring to violate U.S. sanctions laws and engaging in anti-money laundering activities.

See this two-part series on the DOJ”s revisions to its corporate enforcement policy: “A More Amenable DOJ Looks to Negotiate” (Nov. 9, 2023); and “Parsing the Policy for the Path to a Declination” (Dec. 7, 2023).

Key Takeaways

The White Deer and GVA Capital resolutions demonstrate the government’s focus on sanctions- and trade-related violations, particularly with respect to financial institutions and other gatekeepers, which OFAC believes are in a better position than others to identify whether sanctioned individuals retain an interest in property in violation of OFAC regulations.

Continued Sanctions– and Trade-Related Enforcement

The DOJ has promised to make “trade and customs fraud,” including “tariff evasion,” a criminal enforcement priority, including scrutinizing “gatekeepers,” such as “financial institutions and their insiders that commit sanctions violations.” The government’s resolutions with GVA Capital and White Deer are concrete manifestations of those priorities. Moreover, the involvement of OFAC and BIS shows the government intends to coordinate across agencies and may bring both civil and criminal enforcement mechanisms to bear.

More enforcement in this area is likely to come. Indeed, the DOJ recently added “corporate sanctions offenses” and “trade, tariff, and customs fraud by corporations” to the list of subjects covered under the DOJ’s corporate whistleblower awards program, which will incentivize additional tips in those areas. Investment firms should take the DOJ at its word and expect heightened scrutiny. Adjusting compliance programs appropriately to address sanctions and export-control risks will be critical, both for firms operating multinationally and for entities that make significant investments in those companies.

See “Measures Against Russia Pose Serious Compliance Challenges” (Jun. 6, 2024); “Compliance Measures to Mitigate Sanctions Risk for U.S. Hedge Funds Investing on the HKEX” (Aug. 3, 2023); “U.K. FCA: Retail Funds May Use Side Pockets to Hold Assets Affected By Russia‑Related Sanctions” (Sep. 29, 2022); “Scope of Global Sanctions From the Ukraine/Russia War and How Designated Person Standards Affect Fund Managers (Part One of Two)” (Jul. 21, 2022); as well as this two-part series on navigating sanctions regimes: “U.S. and U.K.” (Feb. 11, 2021); and “The E.U. and Hot Sanctions Arenas” (Feb. 18, 2021).

Voluntary Disclosure Programs Enhanced

The contrasting White Deer and GVA Capital resolutions also highlight the continued importance of voluntary disclosure. The DOJ has repeatedly emphasized the value of self-disclosure, cooperation and remediation, and it has formalized incentives for firms to self-report. In May 2025, it sweetened those incentives by formally amending the DOJ’s Corporate Enforcement and Voluntary Self-Disclosure Policy to provide for the presumption of a declination, rather than merely a non-prosecution agreement, when the disclosure, cooperation and remediation prerequisites are met. As the White Deer resolution and other recent declinations show, the NSD is similarly incentivizing companies with complete declinations for sanctions and export controls violations that are proactively reported and remediated.

Of course, voluntary disclosure still carries risks. It can embroil a firm in a costly investigation, or the DOJ might conclude that the requirements for a declination are not met. But firms confronted with allegations of wrongdoing should consider both the carrot and the stick when deciding whether to voluntarily disclose.

See this two-part series “Why, When and How Fund Managers Should Self-Report Violations to the SEC”: Part One (Jan. 10, 2019); and Part Two (Jan. 17, 2019).

Rewards of Genuine Cooperation

The government’s recent enforcement actions highlight the value of cooperating with regulatory inquiries – and the potential consequences for failing to do so. Cooperation efforts by White Deer and Unicat were specifically recognized by enforcement authorities as a factor in reaching a declination and NPA with those entities. Conversely, the GVA Capital penalty sheds light on how eschewing cooperation and failing to adequately respond to investigative efforts risk increased penalties – or potentially more drastic outcomes – when misconduct is not reported but still comes to light.

See “Investment Adviser Avoids Civil Penalty Due to Self-Reporting, Remediation and Cooperation: True, False or Other?” (Jan. 16, 2025).

Value of Thorough Investigation and Decisive Action

Finally, firms must act when confronted with potential wrongdoing. Robust sanctions- and trade-related compliance programs are only an early warning system. To be effective, management must investigate quickly and respond appropriately when alerted to potential violations or other risks by those systems. The thoroughness of the investigation can be critical. For example, tightly confined analyses based on highly controlled parameters may miss critical context and lead to open-ended or highly caveated opinions of little value. Meanwhile, properly scoped investigations designed to account for all the relevant context and evaluate the firm’s full set of risks will likely be much more effective.

GVA Capital’s limited legal opinion and its failure to act in light of the warnings therein contrast with White Deer’s quick decision to engage in a full investigation driven by outside counsel and to undertake remediation. When concerns arise, conducting an independent investigation like White Deer’s will enable firms to assess the root cause of a problem quickly and design appropriate remedial steps. As was the case with White Deer, doing so will also position the firm to potentially take advantage of voluntary disclosure programs and lend credibility to any negotiations with regulators.

Thus, in light of the continuing focus on enforcement in this area, firms should adjust their compliance programs appropriately. And, when risks arise, they should make sure to:

• investigate quickly and thoroughly;
• act decisively; and
• fully consider the value of self-reporting and cooperating with government regulators, given the strong incentives for such voluntary disclosure in current sanctions- and trade-related enforcement policies.

 

Eric R. Nitz is a partner at MoloLamken LLP, where he represents clients in white-collar and cross-border criminal investigations and regulatory enforcement; complex civil litigation; and appellate litigation.

Anden Chow is a partner at MoloLamken LLP and a former federal prosecutor who assists companies and individuals in complex domestic and cross-border criminal, regulatory and asset forfeiture investigations.

Walter H. Hawes IV is an associate at MoloLamken LLP, where he represents clients in white-collar criminal matters, complex commercial disputes and appeals.

The Trump administration has implemented broad staffing reductions across the entire government – including the SEC – and promised a lighter regulatory touch. The rapid changes prompted by Trump’s executive orders and the so-called Department of Government Efficiency have led to considerable uncertainty as to how the SEC will approach and implement those mandates. At PLI’s SEC Speaks 2025 event, officials from the Disclosure Review, Rulemaking, Analytics and Chief Counsel’s Offices of the SEC Division of Investment Management (Division) discussed the current operations of the Division, highlighting the function and importance of their respective offices, as well as recent regulatory activities. The speakers provided their remarks in their official capacities, but the views expressed were not necessarily those of the SEC, its commissioners or other SEC staff members. This article synthesizes the speakers’ insights, focusing on the issues most relevant to private fund managers.

See our two-part series on the anniversary of the SEC Division of Examinations: “Creation and Evolution Over the Last 30 Years” (Apr. 10, 2025); and “Present State and Possible Future” (Apr. 24, 2025).

Division Operations

Reduced Staff

There have been significant staffing changes in the Division, including a number of retirements and other departures, noted Asen Parachkevov, Branch Chief in the Disclosure Review Office. Staffing reductions have affected how the Division allocates responsibilities among its offices. The Division is working on maintaining continuity of its ongoing programs.

Disclosure Review

The most immediate and visible change will be in firms’ points of contact with the Division, said Parachkevov. Firms may interact with a different reviewer, accountant, attorney or branch. In the short term, the Division is working to ensure firms face as little disruption as possible in their day-to-day interactions with the SEC.

In the longer term, the Division is working on long-term enhancements to the disclosure review program, continued Parachkevov. The Division will give greater attention to “the high level, high impact material issues and the complicated filings that come across our desks,” rather than to more routine matters. Such matters are still important, but the Division believes the disclosure expectations on such issues are “well established.” Thus, the Division will allocate its limited resources to the more complicated and unique issues where it can add more value.

Firms must be proactive on timing issues, advised Parachkevov. They should contact the Division “early and often,” especially if they have a complicated filing. For example, a firm should let the Division know if it will need an acceleration order for a particular matter.

Chief Counsel’s Office

According to Christopher D. Carlson, senior counsel in the Chief Counsel’s Office, that office:

• provides or recommends formal guidance, interpretive letters, commission orders and other guidance under the federal securities laws, including the Investment Advisers Act of 1940 and the Investment Company Act of 1940 (Investment Company Act);
• responds to requests for no action and exemptive relief;
• provides informal guidance in response to public inquiries; and
• liaises with other areas of the Division and the SEC on matters involving advisers and investment companies.

See “SEC Chief Counsel Advises on Exemptive Applications and Requests for No‑Action Relief” (May 16, 2019).

Rulemaking

Form PF Amendments

In February 2024, the SEC and CFTC jointly adopted amendments to Form PF to enhance investor protection and the Financial Stability Oversight Council’s ability to monitor systemic risk, according to Brad Gude, acting Assistant Director in the Rulemaking Office. In March 2025, the SEC issued a release to correct certain errors in the original release. In response to industry concerns, the agencies extended the effective date of these amendments to June 12, 2025. However, on June 11, 2025, the SEC again extended the compliance deadline to October 1, 2025. “I would emphasize if folks are seeing issues or having concerns with stuff that’s coming up, please reach out to us and we’re always happy to work with folks,” he said.

See “Challenges of the Amended Form PF June 12, 2025, Compliance Deadline” (Apr. 24, 2025); as well as our two-part series on the final Form PF amendments: “Enhanced Reporting for Large Hedge Fund Advisers” (Jun. 22, 2023); and “Compliance Challenges and Implications” (Jul. 6, 2023).

The Division has been engaged in outreach on the Form PF amendments, added Gude. In response to that engagement, it has issued new and amended FAQs. The Division remains ready to collaborate with the industry to work out any remaining kinks associated with the amendments. Common concerns expressed in the comments include:

• the compliance date;
• submitting amendments and corrections after the compliance date;
• how current reporting is supposed to work; and
• the specific requirements of the form.

For more on the Form PF current reporting requirements, see our two-part series: “Monitoring for Trigger Events” (Feb. 29, 2024); and “Reporting Trigger Events” (Mar. 14, 2024).

Regulation S‑P

Regulation S‑P requires registered funds, investment advisers and broker-dealers to adopt policies and procedures for safeguarding client information. Gude explained that, in May 2024, the SEC amended the rule to:

• require firms “to develop incident response programs reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information,” including procedures to provide timely notification to affected individuals; and
• broaden the scope of information covered by the rule.

The compliance date for fund groups with more than $1 billion in assets under management (AUM) and advisers with more than $1.5 billion in AUM is December 3, 2025, according to Gude. The deadline for smaller entities is June 3, 2026.

For more on the amendments, see “Compliance Corner Q3‑2024: Regulatory Filings and Other Considerations Hedge Fund Managers Should Note in the Coming Quarter” (Jun. 20, 2024).

Forms N‑PORT and N‑CEN

In August 2024, the SEC adopted amendments to Form N‑PORT requiring more frequent reporting of portfolio holdings and related information to the SEC and the public, said Gude. The SEC also amended Form N‑CEN to require open-end funds subject to risk management programs under the liquidity rule to report certain information about their service providers. Additionally, the SEC issued guidance on the open-end fund liquidity risk management program requirements.

The original compliance date for the Form N‑PORT amendment would have been November 17, 2025, with a six-month delay for small funds, noted Gude. In April 2025, following President Trump’s executive order directing agencies to review pending rulemaking, the SEC extended the compliance date for most requirements to November 17, 2027, for large filers and May 18, 2028, for small filers.

Names Rule Amendment

In September 2023, the SEC broadened the scope of the Names Rule for registered investment companies, requiring more funds to adopt a policy to invest at least 80% of fund assets in accordance with the investment focus suggested by its name, explained Gude. Significant changes include expanding the rule to encompass terms such as “growth” and “value” and requiring the terms used to be “consistent with plain English or established industry use.” The amended rule gives funds some flexibility to provide reasonable definitions for the terms used in a name, as well as criteria for selecting the investments for the stated strategy. The compliance date for fund groups with more than $1 billion in net assets has been extended to June 2026 and for smaller fund groups to December 2026.

Recent Exemptive Orders and Other Developments

Digital Assets

There have been a number of recent filings with a digital asset component, noted Parachkevov. The Division seeks to understand the subject digital asset, its unique features and its relationship to the associated blockchain. Disclosure must provide sufficient context about the exposure the fund will provide and how it will provide that exposure. Depending on the nature of the exposure, the Division may further engage with the firm on liquidity, valuation, custody, arbitrage mechanism and other issues.

See “SEC 2025 Exam Priorities Stress Core Fiduciary Duties and Effective Compliance Programs” (Dec. 5, 2024).

Non-Transparent ETFs

The Chief Counsel’s Office worked on an amended order for Fidelity’s non-transparent exchange traded funds (ETFs), expanding the class of permissible investments subject to additional disclosure requirements and conditions. “The non-transparent ETF relief that is out there continues to be modified as market practices evolve and the Commission gets more comfortable with these products,” Carlson said.

See “Regulatory, Business and Tax Considerations for Converting a Mutual Fund to an ETF” (Apr. 22, 2021).

Face Amount Certificate Companies

Another notable order involved Figure Certificate Company, which is a registered face amount certificate company that issues unsecured debt, said Carlson. The company invests in traditional assets, but its certificates, which will be registered under the Securities Act of 1933, will be issued and transferred using blockchain technology. The relief, which specifies the requisite custodial arrangements, borrows a framework that already exists for registered funds. Custody of digital assets “is obviously something the Commission and the staff are actively looking at and thinking about,” added Gude.

See our two-part series on an SEC crypto roundtable on custody of digital assets: “Custody Challenges” (Jun. 5, 2025); and “Custody Models” (Jun. 19, 2025).

Co‑Investment Relief

In February 2025, FS Credit Opportunities Corp. requested an exemptive order permitting certain joint transactions that would otherwise be prohibited under Sections 17(d) and 57(a)(4) of the Investment Company Act and Rule 17d‑1 thereunder, explained Carlson. The order permits registered closed-end investment companies and business development companies to invest in the same issuer at the same time. It has more streamlined terms and conditions than previous co-investment orders. After the SEC issued this order, the Division received several additional applications based on the same model, he added.

See “ACA Panel Reviews Affiliated Transaction Rules (Part One of Two)” (Sep. 6, 2018).

Novel Product Launches

There are many complicated ETF filings deploying complex derivatives strategies, single-stock funds and crypto funds, said Parachkevov. Novel strategies and structures, including tokenized funds, take additional time to review. Although not required, the Division would like to hear about new products and how they will work before filing, which will help it manage the review pipeline. Recently, there has been significant growth in single-stock funds, according to Parachkevov. In addition to routine disclosures, the Division pays close attention to risk disclosures, including:

• explanations of how the funds work and provide exposure;
• volatility impact;
• correlation risk;
• compounding; and
• counterparty risk, especially in levered funds.

On a filing for a new series of a single-stock fund, the Division focuses on the range and type of information available regarding the issuer and whether the ETF will be able to satisfy the relevant disclosure requirements, Parachkevov added.

Analytics Office

The Division’s Analytics Office provides the Division and the SEC with practical reviews and analyses of the asset management industry, explained Trevor Tatum, senior financial analyst in the Analytics Office. Additionally, its reports provide the public with relevant information about the funds industry. The Analytics Office:

• monitors and analyzes information collected by the SEC;
• conducts ongoing analysis of the asset management industry; and
• gathers and analyzes operational information directly from registrants.

In the last year, it published three new public reports and updated two existing reports, continued Tatum. The reports combine data from EDGAR and SEC structured filings and bridge gaps among the SEC’s various sources of information. Each report includes a downloadable data file with the full history of the aggregate statistics in a structured format that users can use for their own analysis.

The reports “provide accessible, usable, aggregated data and help illustrate the phenomenal growth and change in the asset management industry, which we believe helps inform public policy in the space,” said Tatum. In many cases, the reports represent years of analytical work and outreach. They “seek to clarify the story behind our regulatory filings and the data which our registrants put significant time and effort into filing,” he observed. “I also wanted to plug the fact that, for each of our reports, we have these cool new interactive visualizations available on our website, which provide highlights from our reports that will allow users to more easily visualize changes in the time series.”

Private Fund Statistics

The private fund statistics report was first published in 2015 and updated in 2017, 2020 and 2024, said Tatum. It includes information reported on Form PF, a form that is not available to the public. Advisers with at least $150 million in private fund assets must file Form PF annually to report on the types of funds they manage, as well as their size, leverage and beneficial owners. Larger advisers file more frequently and must provide additional information on exposures, liquidity, borrowing and risk factors.

The Division’s report aggregates and anonymizes the private fund data. The 2024 update provides new information on fund concentration; long and short hedge fund exposures; investments by larger private equity advisers; and leverage. The updated report provides the public with more transparency into the private funds industry and informs policy discussions, added Tatum.

See “SEC Private Fund Statistics Report: Continued Growth in Private Funds and Private Fund Assets” (Mar. 19, 2020).

Investment Adviser Statistics

The investment adviser statistics report, first published in May 2024, has been updated to include new data from Form ADV, said Tatum. It has more than 50 tables of data going back to 2000. The latest report reflects that, as of December 2024, there were more than 15,000 registered advisers with more than $145 trillion in AUM – an increase of more than 100% over the past decade.

Investment Company Statistics

The most recent report from the Analytics Office is the annual investment company update, which includes data from more than 13,000 registered funds, continued Tatum. It contains data from Form N‑CEN, which is filed by all registered funds, ETFs, insurance companies, separate accounts and unit investment trusts. It contains information on their service providers, the assets they manage and certain activities, including securities lending.

Registered Fund Statistics

First published in April 2024, the registered fund statistics report is based on data reported on Form N‑PORT, which registered funds and ETFs use to report monthly information on holdings; assets and liabilities; risk metrics; returns; flows; and other data, explained Tatum. This report fills gaps in publicly available data by drawing from both public and nonpublic SEC data. The Analytics Office updates the report quarterly. When used in a report, the office anonymizes, aggregates, rounds and masks nonpublic N‑PORT data.

Money Market Fund Statistics

The Division recently added new statistical analysis and enhancements to its money market fund statistics report, which is based on information collected monthly on Form N‑MFP, said Tatum. For example, the report now shows that money market fund investments in treasury securities and treasury repos now account for more than 60% of the value of money market fund investments, versus about 30% 10 years ago.

Future Reporting Requirements

The speakers were asked whether the current SEC would seek to reduce reporting requirements. The Division continually evaluates the data it uses, taking into account President Trump’s executive orders, noted Tatum. Of course, formal rulemaking would be required to change the requirements of reporting forms. The Division always assesses whether it needs the data it collects and the value of that data, added Gude. If it determines that it is collecting data it does not need, it can make a recommendation to the commissioners. The SEC’s next Reg Flex agenda should provide more insight and help inform how its divisions proceed.

For additional discussion of the SEC under the Trump administration, see “Acting SEC and CFTC Chairs Emphasize Getting ‘Back to the Basics’” (May 8, 2025); “SEC, CFTC and FINRA Division Heads Discuss Enforcement Outlook” (Apr. 24, 2025); and “What Hedge Fund Managers May Expect From the SEC in 2025” (Jan. 16, 2025).

If a firm thinks it is insulated from use of artificial intelligence (AI) by its vendors, “[it’s] probably not,” cautioned ACA Aponix partner Michael Pappacena during an ACA program on managing the risks posed by vendors’ use of AI. Vendors are not only offering AI tools and solutions but also incorporating it behind the scenes to streamline their operations. To help firms navigate the operational and data security risks posed by third-party use of AI, Pappacena and ACA Aponix director John de Freitas discussed the ever-expanding use of AI by third-party service providers, the evolving AI risk landscape, appropriate implementation of AI, AI governance best practices and incident response. This article distills their insights.

See “Managing Risks Associated With Outsourcing” (Jul. 20, 2023).

Vendor Use of AI

AI enablement is no longer a niche, said de Freitas. Even if a firm has not embraced AI, it is likely that its vendors have. Some vendors provide AI-enabled tools, products and services. Others are implementing AI internally to improve their operations and make better use of the data they already have in their systems. A lack of transparency about how vendors are using AI can create new risks for firms. For example, many firms use a customer relationship management (CRM) tool. A CRM vendor may embed AI into its CRM tool to make better use of the data within the tool and, depending on the AI system, may move the firm’s data onto a different infrastructure or into a different jurisdiction.

AI is also turbocharging “fourth-party” risk, continued de Freitas. Vendors are increasingly using fourth-party AI providers, resulting in even less transparency on operational issues. Common risks and challenges associated with AI implementation include:

• the potential impact of an AI system failure, including losing access to data and disruption of operations;
• potential “data sprawl” as AI models ingest data, which may raise concerns about the data’s location and security;
• rapid changes in AI tools, including learning of changes, having an audit trail and exercising appropriate oversight; and
• compliance and data privacy risks associated with “black box” systems in which the user may not know how the model generated its output.

Appropriate AI Implementation

Learn How Vendors Use AI

When retaining a new vendor, a firm should ask whether the vendor has implemented or plans to implement AI, advised de Freitas. If so, the firm should ask the vendor:

• how the model is used;
• what data the model uses;
• where that data is located; and
• what firm data the tool(s) will be able to see.

Additionally, the firm should seek to understand the content created by the tool(s), who owns that content and who has access to it. Seeking transparency from vendors and AI platform providers is critical. AI tools are not all created equal. They have different levels of risk, noted de Freitas. A common oversight is failing to understand a model’s behavior, added Pappacena.

Implement Appropriate Guardrails

By their very nature, AI tools ingest as much data as possible, according to de Freitas. Consequently, a firm must ensure its vendor adheres to the firm’s relevant access controls. If not, a tool may ingest too much information or inappropriate information.

Assess Functionality and Monitor Use

A firm should assess the functionality of the relevant AI tool and whether it works within the firm’s compliance and security framework, continued de Freitas. It also should determine whether the way employees actually use the tool is consistent with the firm’s intended use. For example, a tool may work so well that employees start using it for new or unanticipated purposes. Such scope creep can change the tool’s risk profile. As a tool’s use changes, the firm must also adapt its monitoring and audit practices.

See “A Checklist for Fund Managers to Ensure Adequate Vendor Management” (Sep. 9, 2021).

AI Governance Best Practices

Adapt Existing Risk Management Program

Many firms already have third-party risk management and due diligence programs, noted Pappacena. They can build on those existing programs to address AI. They should do this both for vendors that offer AI-specific tools and those that use AI in their own operations. Firms need cross-functional collaboration to address AI risk, advised de Freitas.

See our four-part AI compliance playbook: “Traditional Risk Controls for Cutting‑Edge Algorithms” (Sep. 29, 2022); “Seven Questions to Ask Before Regulators or Reporters Do” (Oct. 6, 2022); “Understanding Algorithm Audits” (Oct. 13, 2022); and “Adapting the Three Lines Framework for AI Innovations” (Oct. 20, 2022).

Establish a Governance Committee

Firms may ask, “Do I really need to have another committee?” The answer is “Yes,” said Pappacena. Instead of establishing a new committee, however, a firm could extend an existing vendor oversight or technology risk committee. The committee should assist with AI use and oversight – both for vendor-provided AI tools and vendors’ internal use of AI. The committee should include key stakeholders from the business to ensure the firm understands how the business plans to use AI and/or how vendors may be planning to deploy it. It may also be advisable to include IT, security, legal, compliance and procurement personnel. The committee should be responsible for:

• ensuring appropriate disclosure and vendor transparency;
• including AI-specific clauses in vendor contracts;
• understanding oversight of AI models and associated monitoring and auditing; and
• considering the regulatory implications of using a particular vendor, including whether the vendor agreement should include transparency requirements.

Address AI Issues With New and Existing Vendors

Addressing AI issues tends to be easier with a new vendor, but a firm must also find out how existing vendors are approaching AI, according to Pappacena. For existing vendors, a good time to make desired changes and updates to existing arrangements may be during the contract renewal process. A firm should find out, whether prior to onboarding or during the course of an existing relationship:

• what model or models the vendor uses;
• whether the vendor is training the model(s);
• whether the model is specific to the firm’s application or shared with others; and
• whether the model uses any intellectual property and, if so, who owns the model.

If a vendor uses a firm’s data for model training, the firm should find out what data will be used and whether other entities will be using that model, continued Pappacena. Firms should consider whether to restrict how their data may be used for model training.

Additionally, the vendor agreement should:

• require the vendor to keep the firm informed of model updates and changes;
• include incident reporting and notifications from the vendor; and
• address the return, destruction or other disposition of the firm’s data on termination of the vendor relationship.

See our two-part series on drafting data privacy and security provisions in vendor agreements: “Assessing the Risks” (Apr. 1, 2021); and “Negotiating Critical Provisions and Responding to Incidents” (Apr. 8, 2021); as well as “AI for Fund Managers: Government Guidance, Service-Provider Negotiations and Risks of Bias (Part Two of Three)” (Sep. 12, 2019).

Due Diligence

Once a firm understands how a vendor uses AI, it should conduct due diligence to assess the risks associated with that use, advised Pappacena. Due diligence for a vendor that uses AI internally will be different from that for a vendor that provides AI tools. Although external audit documents, such as “SOC 2” certifications, provide some level of assurance, best practice is to use an AI-specific questionnaire that covers model usage, implementation, data location, data privacy, data retention and other relevant concerns.

Firms should be particularly wary of vendors that connect to sensitive corporate data, email, CRM systems or other sources of sensitive information, added Pappacena. Many systems need high-level access privileges to function as intended. Firms must understand what data a system will access and the associated risk. Additionally, because this is a rapidly evolving area, firms should consider how long the vendor has been in business and what will happen if the vendor fails.

See “How to Apply Alt Data Best Practices to AI Systems” (Oct. 10, 2024).

Monitoring

Once a firm has onboarded a vendor, the firm should monitor the vendor’s use of AI, suggested Pappacena. Monitoring, which will require transparency from the vendor, should address whether:

• the models are working as expected;
• the vendor has made any model changes or deployed new models;
• the vendor is complying with applicable data protection laws; and
• the vendor’s practices are ethical.

Data Retention and Deletion

Once data is put into a model, it can be difficult to erase – especially if it is a shared model, cautioned Pappacena. Many models cannot “forget” data once it has been processed. Thus, a firm must determine what data will be retained if the firm leaves the vendor and assess the risks associated with the retained data. Firms should consider sanitizing data by removing any sensitive, client or nonpublic information prior to exposing it to AI-enabled tools. Some vendors may offer a firm the ability to opt out of using firm data for model training.

Public AI Systems

Virtually every browser now uses AI to some extent, observed Pappacena. Additionally, employees may have access to public AI tools such as ChatGPT. Firms should adopt acceptable use policies and guardrails for use of such public models. They should never be used to answer questions involving any sensitive data held by the firm. There are enterprise-level versions of certain public tools that include greater security controls, noted de Freitas.

See “Dos and Don’ts for Employee Use of Generative AI” (Oct. 24, 2024).

Lessons From DeepSeek Incidents

DeepSeek is a China-based AI platform touted for being faster and more economical than U.S. platforms, explained de Freitas. A financial firm used a third-party AI vendor to provide contract summaries and code reviews. Unbeknownst to the firm, its vendor integrated with DeepSeek, which allowed the firm’s data to be shared outside the firm’s jurisdiction. After finding inconsistencies in the vendor’s output, a firm employee noticed that the DeepSeek coder had been integrated into the vendor’s system. The vendor agreements did not permit control over where data would be stored nor did they include transparency about model training, data restrictions or sub-processing of data. This resulted in violation of the E.U. General Data Protection Regulation. In another incident, in early 2025, a million DeepSeek records were publicly exposed as a result of an improper system configuration, added de Freitas.

The DeepSeek incidents are a reminder of the importance of understanding what AI tools vendors may be integrating into their products, said de Freitas. Such incidents could result in violation of data privacy requirements and reputational damage. Firms should insist on answers from vendors. Additionally, they should seek the opportunity to review and approve any proposed changes that alter an AI tool’s risk exposure.

Incident Response

As firms incorporate AI, they are also vetting and onboarding vendors but may be neglecting to prepare for AI-related incidents, said Pappacena. A firm’s legal and IT personnel should ensure AI tools are operated within the firm’s guardrails, according to de Freitas. A firm should train staff on how to use AI tools and have escalation and response processes for managing incidents.

Most firms already have a cyber incident response plan, which can be adapted for AI incidents, continued Pappacena. Firms should consider the potential scenarios that may arise out of the particular AI use cases of the firm and its vendors. A firm should create a response “playbook” just as it would for ransomware or other cybersecurity issues. Of course, the incidents that trigger the AI response plan may differ from traditional triggers. For example, the AI response plan might be triggered by biased output, unauthorized data use, model changes or model malfunctions. The plan should include clear lines of escalation. It should include legal, IT and compliance personnel, as well as the vendor management team.

Service level agreements should require vendors to cooperate promptly in the event of an incident, continued Pappacena. For example, a firm may need a vendor to provide information about the data a model used, the outputs it generated and when the model was last updated. A firm may also need the vendor to roll back or stop use of the AI tool until the issue is resolved. “AI incidents and risks aren’t static,” he added. Plans should evolve to address changing circumstances.

In an incident, the first step is to assess the firm’s exposure, including what data was involved and whether the incident involved a vendor’s AI or a fourth party, which will help guide the response, said Pappacena. After the initial assessment, the firm should ensure timely notification of clients, regulators and other stakeholders in accordance with applicable regulatory requirements. Upon resolution of the incident, the firm should do a root cause analysis and determine whether to continue with the vendor associated with the incident.

See “Incident Response in the Financial Services Industry” (Nov. 4, 2021); and “How Fund Managers Can Establish Effective Incident Response Plans” (Jul. 18, 2019).

There is ongoing pushback – particularly in so-called red states - against efforts to address climate change and other environmental, social and governance (ESG) initiatives. In November 2024, the Attorney General (AG) of the State of Texas, as lead plaintiff, and the AGs of 10 other states commenced an action in the U.S. District Court for the Eastern District of Texas against BlackRock, Inc., State Street Corporation and The Vanguard Group, Inc., alleging that their climate-related engagement with the coal industry and participation in climate-related initiatives violated U.S. antitrust laws. The current plaintiffs in the action are the states of Alabama, Arkansas, Indiana, Iowa, Kansas, Louisiana, Missouri, Montana, Nebraska, Oklahoma, Texas, West Virginia and Wyoming. In March 2025, the defendants moved to dismiss the action for failing to state a claim. In connection with that motion, the DOJ and FTC (together, the Agencies) submitted a Statement of Interest supporting the plaintiffs’ legal theories.

This article discusses the genesis of the action, the key allegations, the motion to dismiss and the Statement of Interest, with commentary from David R. Pearl, partner at Axinn, Veltrop & Harkrider LLP, on the implications of the action for fund and asset managers.

See “SIFMA Secures Injunction Against Missouri’s ESG Disclosure Rules” (Mar. 27, 2025).

Relevant Antitrust Laws

Section 7 of the Clayton Act (15 U.S.C. § 18) makes it unlawful to acquire the stock or assets of a company, or exercise voting rights associated with acquired stock, when the effect of the acquisition or exercise of rights “may be substantially to lessen competition, or to tend to create a monopoly.” It does not, however, apply to “purchasing such stock solely for investment and not using the same by voting or otherwise to bring about, or in attempting to bring about, the substantial lessening of competition.” Section 1 of the Sherman Act (15 U.S.C. § 1) provides that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations” is illegal. Many states have similar antitrust laws.

Alleged Restraint of Trade

Each defendant acquired “substantial shareholdings in every significant publicly held coal producer in the United States,” according to the amended complaint (Complaint). BlackRock is the largest shareholder of six of the nine publicly traded U.S. coal companies. The Vanguard Group is the largest shareholder of one of them. Collectively, defendants owned from nearly one-quarter to one-third of the nine companies. Each defendant’s holdings allegedly gave it significant influence over the companies.

The Complaint claims that the defendants conspired to restrain competition in the markets for South Powder River Basin coal and so-called “thermal” coal, acting collectively to pressure companies in those markets to reduce coal production and forming an “output reduction syndicate” that lessened competition and yielded supra-competitive profits. They publicly committed to using their shareholdings to influence coal company management to reduce output to achieve the goal of reducing carbon emissions. To that end, all three joined the Net Zero Asset Managers Initiative (Net Zero). Additionally, BlackRock and State Street became signatories to Climate Action 100+ (CA100+). Both initiatives called for a reduction in coal emissions – and reducing output was the only practical way to achieve it. Defendants allegedly agreed to engage with management of coal companies to secure commitments to reduce carbon emissions substantially.

See our two-part series on Net Zero: “What It Is and What It Requires” (Feb. 3, 2022); and “How to Make the Commitment” (Feb. 10, 2022).

The defendants’ commitments to CA100+ and Net Zero show they did not acquire, and have not used, their coal company shares solely for passive investment purposes. “Defendants have leveraged their holdings and voting of shares to facilitate an output reduction scheme, which has artificially constrained the supply of coal, significantly diminished competition in the markets for coal, increased energy prices for American consumers, and produced cartel-level profits for Defendants,” alleges the Complaint. Access to management of the coal companies in the defendants’ portfolios increased the risk of coordination among the companies and created an incentive to operate as a cartel, which would increase industry profits and discourage competition for market share. Additionally, defendants’ significant holdings in natural gas and alternative energy sources would benefit from elimination of lower-cost coal.

The 21-count Complaint alleges that all three defendants:

• violated Section 7 of the Clayton Act;
• violated Section 1 of the Sherman Act;
• conspired to share competitors’ information in violation of Section 1 of the Sherman Act;
• violated 11 states’ antitrust laws; and
• violated Louisiana’s deceptive trade practice law.

The Complaint also takes aim at BlackRock’s ESG disclosures. BlackRock offers funds that take into consideration ESG criteria. BlackRock allegedly misrepresented that its non-ESG funds would be dedicated solely to enhancing shareholder value. In fact, its Net Zero and CA100+ commitments, engagement activities and proxy voting of the shares held by its non-ESG funds all advanced climate goals. Thus, BlackRock allegedly violated four states’ deceptive trade practice, consumer protection and/or consumer fraud laws, according to the Complaint.

See “Tennessee Sues BlackRock Over Allegedly ‘False and Deceptive’ ESG Claims” (Feb. 1, 2024).

Motion to Dismiss

Section 1 of Sherman Act: No Conspiracy or Concerted Action

The Complaint does not include any facts establishing the alleged conspiracy to cut coal production, argued the defendants in their joint motion to dismiss (Motion). For example, it does not allege any agreement, concerted action, communications or exchanges of sensitive information among the defendants. “There is not the slightest indication that any Defendant was prodding the coal companies to reduce output, much less that all of them were doing so in collaboration,” they asserted.

No Direct Evidence of Agreement

There is no direct evidence of any agreement to suppress coal production and no allegation that any defendant told a coal company to reduce output, according to the Motion. In fact, the Complaint does not allege defendants “have ever communicated with each other, even once, about coal or their investment strategies.” Moreover, the mere act of joining Net Zero and CA100+ did not constitute an agreement to suppress output. In fact, both initiatives provide that the signatories must act independently and in accordance with their fiduciary duties to clients.

Participation in initiatives like CA100+ is central to the plaintiffs’ legal theory. “A Sherman Act Section 1 claim requires an agreement between two or more parties – and the plaintiffs cast the defendants’ participation in these ESG initiatives as just such an agreement – in this case, an agreement to suppress coal output and raise prices,” explained Pearl. “Had the parties simply unilaterally decided to pressure the energy companies in which they held an interest to shift away from coal, there would be no basis for a Section 1 claim.”

No Circumstantial Evidence

The Complaint does not allege any circumstantial evidence of an agreement to restrain competition. Allegation of parallel conduct, without more, is insufficient. A plaintiff must also allege factors showing that the parallel conduct was not likely to occur in the absence of an agreement, according to the Motion.

Moreover, the defendants did not act in parallel, alleges the Motion. Only Vanguard had routine meetings with coal companies. State Street and BlackRock, but not Vanguard, withheld votes for, or voted against, certain directors – and, in some cases, their votes differed. In short, their actions were “fractured and inconsistent.”

The Complaint does not allege any factors supporting a conspiracy, asserted the defendants. First, a conspiracy is not economically plausible. The defendants are asset managers that do not participate in the relevant markets. The Complaint does not explain how they influenced coal company behavior or allege any facts regarding the coal companies’ processes for making output and production decisions. Additionally, during the relevant period, although some companies cut production, others increased production – and overall coal production rose. Moreover, defendants’ votes did not correspond to production decisions.

Additionally, defendants’ conduct was at least as consistent with independent action and permissible competition as it was with an unlawful conspiracy, the defendants argued. Even if an individual defendant wanted to reduce coal production, there is no plausible explanation why it would be against such defendant’s interest to seek the reduction in the absence of an agreement with the others. The same would be true for joining the climate initiatives.

No Anti-Competitive Harm

Coal production had been in decline for decades – and dropped significantly because of the coronavirus pandemic – which was before the period covered by the Complaint, noted the defendants. In fact, coal production rose from 2020 to 2022.

Section 1 of Sherman Act: No Anti-Competitive Information Sharing Scheme

“The Complaint contains none of the who, what, when or why of any single supposed exchange of information between the parties,” argued the defendants. “[T]here are simply broad conclusions that exchanges happened.”

Section 7 of the Clayton Act

Because the defendants’ acquisitions were solely for investment, they fell within the Section 7 safe harbor, asserts the Motion. Plaintiffs’ theory of liability threatens the viability of index-based investing. Acquisition of a small minority stake provides “no plausible mechanism for controlling coal company output decisions” and has never been held to reduce competition. Each defendant owned just 1% to 15% of the coal companies – far below the 25% level at which there is a presumption of control under securities laws.

“An investor does not leave the safe harbor merely because it votes in a corporate election or occasionally speaks with the corporation’s executives to inform voting – unexceptional activities incidental to normal investment,” according to the Motion. Further, “[i]nvestment advisors have a fiduciary duty to ‘make voting determinations that are in the best interest of [their] client[s]’ and to stay abreast of corporate affairs.”

Additionally, there was no evidence that defendants were “using” their shares to harm competition or that any particular acquisition had the effect of harming competition. In fact, their holdings fluctuated during the relevant period. Some went down. Output was increasing during the relevant period, and there was no evidence that any acquisition increased any company’s market power or lessened its ability to compete.

Other Claims

State antitrust laws are parallel to federal laws. Because the federal antitrust claims must be dismissed, the state antitrust claims must also be dismissed, argues the Motion. Separately, BlackRock moved to dismiss the state law misrepresentation claims against it, arguing that there were no plausible allegations that it made any false or deceptive statements and that the laws under which the claims were asserted did not even apply to securities marketing.

Statement of Interest

“There should be no confusion: the antitrust laws allow passive fund investing, they allow shareholder advocacy for better corporate governance, and they allow active investing that doesn’t harm competition,” notes the Statement of Interest. On the other hand, there is a significant distinction between ordinary index fund management and “voting, buying or selling (or implicitly threatening to vote, buy or sell) specific stocks unless companies behave less competitively.”

“[T]his case alleges much more – the coordinated use of the power of horizontal shareholdings to distort output and prices in energy markets,” stated the Agencies. The defendants’ investors allegedly benefited from reduced competition in the coal industry, which increased coal company profits. Although there is ample room for “ordinary investment and corporate governance activity” under the federal antitrust laws, the plaintiffs alleged “active, anticompetitive use of common shareholdings to reduce the production of American coal to the detriment of American consumers and businesses.”

The concept of “common ownership” posited in the Statement of Interest could have far-reaching implications for antitrust liability, observed Pearl. “This is the idea that an asset manager with a single-digit share in an individual company can nonetheless exert control over an industry when it owns small shares in many companies across that industry and bands together with several other asset managers with similar positions,” he explained. “Although this concept has been percolating in academia for a number of years, this is the first time I’m aware of the federal antitrust enforcers adopting it.”

“It’s always notable when the DOJ and FTC weigh in on a novel issue like this, but the fact that they took this position is not a surprise,” said Pearl. For example, during the first Trump administration, the DOJ investigated an ESG initiative among automakers. Current FTC leadership has also been skeptical of ESG initiatives. “That said, we are a long way off from a final decision on the merits in this case, so it is not clear at this stage whether the court will agree with the plaintiffs’ or the Agencies’ position,” he added.

See “Money or Ethics: The ESG Investing Debate” (Oct. 13, 2022).

Section 7 of the Clayton Act

“Solely for Investment” Exception May Be Lost

“Defendants attempt to mask allegations of illegal, anticompetitive behavior behind the veil of passive investing and good governance principles,” according to the Agencies. However, “advocating that companies have good governance structures and processes is different from pushing for specific operational or strategic decisions that reduce a company’s competitive intensity.” Plaintiffs claim defendants were not merely advocating for good governance but seeking to influence “matters of business strategy and management,” alleges the Statement of Interest.

A company can violate Section 7 in connection with an initial acquisition of stock and/or its subsequent use of the stock, according to the Statement of Interest. Thus, the Section 7 exemption creates “a provisional carve-out for purchases made ‘solely for investment’ that can be lost depending on how investors use those investments,” asserts the Statement of Interest. For example, the exemption may be lost if the investor subsequently uses the investments in a manner that harms competition.

“A business acquires a company’s shares ‘solely for investment’ when it seeks to earn a financial return from dividends or appreciation, rather than to control the company’s day-to-day affairs,” the defendants argued in the Motion. However, a company may be held liable under Section 7 when such a legitimate motive is accompanied by an improper one, posited the Agencies. One such improper motive is the intent “to use shares to exercise an anticompetitive influence over competing firms, which in turn causes downstream anticompetitive effects such as output reductions.”

Additionally, the Section 7 exemption contemplates that a purchaser will not use the acquired shares “by voting or otherwise.” “Use” is not limited to voting or a similar act; it extends to other activities. Moreover, “although competitors and market-adjacent participants are often the entities with the financial incentive and ability to exert anticompetitive influence, a single entity with holdings in multiple competitors can engage in similar anticompetitive behavior,” says the Statement of Interest. A plaintiff may properly claim that an investor that initially made a passive investment later ceased to operate passively and used its horizontal shareholdings to reduce competition.

See “DOJ Lawsuit May Limit Ability of Activist Hedge Funds to Rely on ‘Investment Only’ Exemption From Hart-Scott-Rodino Filing Requirements” (Apr. 14, 2016); and “In Third Point Settlement, FTC Takes Narrow View of ‘Investment Only’ Exemption to Hart-Scott-Rodino Premerger Notification Requirements” (Sep. 3, 2015).

Minority Stake May Be Used for Anticompetitive Purpose

The Clayton Act is not limited to acquisitions of controlling stakes. All that is required is a stake that enables the investor to “exert an anticompetitive influence,” according to the Statement of Interest. Whether an investor used its minority stake for an anticompetitive purpose is an issue of fact.

Additionally, it did not matter that the defendants did not participate in the relevant coal markets or control any of the relevant coal companies. It was sufficient that they used their substantial shareholdings to influence the decisions of competing companies.

Finally, there is no requirement under Section 7 to link a particular acquisition to an anticompetitive effect. It is sufficient for stock holdings from a stock acquisition to be “wielded in an unlawful manner,” claims the Statement of Interest. Here, the defendants acquired shares and later used their positions to push for decreases in coal production, noted the Agencies.

See “Establishing, Maintaining and Exiting a Minority Equity Position: U.S. Securities Law Considerations for Hedge Funds” (Jan. 15, 2009).

Fostering Good Governance Versus Discouraging Competition

The Clayton Act gives asset managers “broad latitude to force managerial and operational changes at individual companies, instill discipline and drive performance,” acknowledges the Statement of Interest. “The Agencies reaffirm . . . the importance of index investing and corporate governance.” However, institutional investors and asset managers are not permitted “to use their shares in fact to stifle competition among their commonly held companies.” The Statement of Interest distinguishes between behavior that affects “market output, prices, quality, or other indicia of competition” and efforts to improve governance, oversight and reporting practices, which generally benefit consumers. According to the Agencies, the defendants allegedly were “facilitating parallel output reductions among competing coal companies, driving up Americans’ energy prices.”

An asset manager that does not control a company may use its stock holdings in the company “to influence or change governance structures and processes – for example, by conferring with the officers and directors on board size, compensation polices and public reporting practices – and such ordinary course conduct typically does not approach the theory of liability presented here,” notes the Statement of Interest. However, passive investors lose the protection of the “solely for investment” exception if they “affirmatively use their stock to reduce rivalry among their commonly held assets.”

The Statement of Interest is limited to situations in which holders of competing companies “discourage competition among their investments in a manner that results in harm to consumers or businesses,” said the Agencies. Additionally, “[t]he Agencies do not assert a position as to when an investor’s acquisition of stock in competing firms alone – without evidence of subsequent anticompetitive use – would implicate Section 7.”

There are circumstances under which an asset manager may, without violating the antitrust laws, urge a company to reduce output or increase prices, according to the Statement of Interest. For example, pressuring a company to exit one market in favor of another market would not violate the laws “unless it resulted from a consummate [sic] reduction in competition – for example, if the investor also held shares in the company’s competitor and thus would benefit from a rival’s market exit.” In contrast, defendants allegedly used their stakes to “coerce” coal companies to reduce production, which “drove up prices for consumers and businesses.”

Section 1 of the Sherman Act

To state a claim under Section 1, a plaintiff must allege both concerted action and a resulting unreasonable restraint of trade, according to the Agencies. Plaintiffs’ allegations regarding the defendants’ joining Net Zero and CA100+ was consistent with the U.S. Supreme Court’s 1939 decision in Interstate Circuit v. United States, which stated, “acceptance by competitors, without previous agreement, of an invitation to participate in a plan . . . is sufficient to establish an unlawful conspiracy under the Sherman Act.”

By joining those initiatives, defendants allegedly agreed to engage with coal company management to secure commitments to reduce carbon emissions and disclose their compliance with those commitments. “Such a common corporate engagement plan creating restrictions on the portfolio companies’ separate and competing businesses could satisfy the concerted-action element [of Section 1],” asserted the Agencies. Defendants’ good motives did not validate their anticompetitive action. “Carbon reduction is no more a defense to the conduct alleged here than it would be to price fixing among airlines that reduced the number of carbon-emitting flights,” they added.

Finally, the fact that coal output increased during the period covered by the Complaint is not dispositive. “Even assuming, arguendo, that output did increase overall, an agreement that restricts output growth would be anticompetitive,” noted the Agencies. “Therefore, the relevant question is not whether coal production rose but whether production was lower than it would have been without Defendants’ alleged agreement.”

See “U.S. Supreme Court Declines to Review District Court Decision Holding That Collective Action by Hedge Funds in Pressing Issuer to Redeem Its Long-Term Notes at Par Did Not Violate Antitrust Laws” (Jun. 6, 2013); and “Federal Antitrust Suit Against Ten Prominent Private Equity Firms Based on Allegations of ‘Club Etiquette’ Not to Jump Announced Deals Survives Summary Judgment Motion” (Apr. 11, 2013).

Implications for Fund Managers

“Texas v. BlackRock is really about coordinated action by multiple asset managers – such as participation in industry climate initiatives – in furtherance of ESG goals,” said Pearl. “If such action could be viewed as leading to higher prices or decreasing production for more traditional energy sources, such as coal, asset managers are apt to come under greater scrutiny from certain state AGs and the DOJ and FTC.” The Statement of Interest promotes the idea that industry initiatives to address climate change could amount to an anticompetitive agreement.

The Statement of Interest draws a line between influencing company governance from a procedural standpoint and influencing the company’s commercial strategy or day-to-day operations. “I think that’s a blurry distinction at the margins,” commented Pearl. “[W]hat does seem clear in the short term is that attempts to influence companies to pursue ESG goals, as well as other typically left-leaning goals, such as diversity, equity and inclusion, are going to be viewed with skepticism by the DOJ and FTC, as well as the [Texas AG.]”

“[W]hat is a legitimate asset management activity from an antitrust standpoint is up for debate,” continued Pearl. In fact, “this lawsuit has already had a chilling effect on financial firms’ participation in industry-wide ESG initiatives.” Notably, BlackRock and Vanguard have left Net Zero, and a number of major banks have exited the equivalent initiative for banks. “That said, what creates the antitrust exposure under the theory in Texas v. Blackrock is the group nature of the activity. Each of these firms remains free to pursue the promotion of ESG goals unilaterally,” he explained.

In June 2023, the Bank of England (BoE) launched its first system-wide exploratory scenario (SWES) to improve its understanding of how banks and non-bank financial institutions (NBFIs) react to sudden market stresses and the impact of their reactions on the broader financial system. BoE explored the potential impact on U.K. financial markets of a sudden spike in the yields on U.K. government bonds (gilts) and sterling corporate bonds. Although the scenario revealed significant resilience across participants and the market, it also found that certain areas of concern, including NBFIs’ overestimating their access to liquidity, which could have amplified the effects of the hypothetical shocks had certain variables been different. This article discusses the design of the SWES and BoE’s findings and recommendations, which were released in late 2024.

See “FCA ‘Dear CEO’ Letter Highlights Focus on Private Markets and Resilience” (Apr. 10, 2025).

Design of SWES

Central banks often use models to analyze systemic risk. Although the models provide insight into system-wide dynamics, they are not well-suited to assessing complex behavior in times of market stress, according to BoE. Similarly, stress testing by individual firms does not address system-wide dynamics. Consequently, BoE devised the SWES as a collaborative exercise, which it conducted with approximately 50 banks, insurers, pension plans, hedge funds, asset managers and central counterparties (CCPs), to study how they would be affected by and react to a hypothetical market stress.

Relevant Stress Events

The SWES was informed in part by the so-called “dash for cash” in 2020 at the onset of the coronavirus pandemic and a September 2022 event that prompted BoE to intervene in the market for gilts during a spike in long-term rates. The latter event involved the potential failure of U.K. liability-driven investment (LDI) strategies, which U.K. pension funds use to ensure the value of their assets matches their anticipated liabilities to retirees. As gilt yields spiked, the value of gilts held by LDIs fell significantly, threatening their solvency. There was a risk that banks that provided leverage to the LDIs, holding gilts as collateral, would liquidate the collateral, selling into an already illiquid market – and causing further increases in yields.

Focus on System-Wide Resiliency and Bond Markets

The SWES was designed to assess system-wide resiliency, not the resiliency of the individual participants. Its specific goals were to:

• enhance understanding of the risks to and from NBFIs, and how and why banks and NBFIs act during market stresses; and
• investigate how their actions and market dynamics may amplify market shocks and potentially threaten U.K. financial stability.

The SWES participants accounted for more than 60 percent of total turnover in the gilt market in 2023; nearly three-quarters of all bank gilt repurchase agreement (repo) activity and most of the levered LDI market. BoE focused on the impact of the stress scenario on:

• the gilts market;
• the market for gilt repos and reverse repos;
• the sterling corporate bond market; and
• associated derivatives markets.

See our two-part series “Navigating Prime Brokerage Agreements, Swaps and Repos During the Coronavirus Crisis”: Part One (Jun. 18, 2020); and Part Two (Jun. 25, 2020).

Details of Stress Scenario

The stress scenario contemplated by the SWES was “a sudden crystallisation of geopolitical tensions” resulting in multiple liquidity shocks to global financial markets over a 10‑day period. In particular, risk-free yields and credit spreads spiked by near-historic levels simultaneously, including:

• a 115 basis points (bps) increase in yields on gilts, which was nearly as high as in the 2022 LDI event; and
• a 130 bps increase in credit spreads on sterling corporate bonds, which was approximately the same as the spike in 2020.

The SWES included a day-to-day scenario narrative and price paths for approximately 40 key rates, spreads and other market variables. Other elements of the scenario included:

• a widening of the price difference between government bonds and the associated bond futures contracts, which affects relative value hedge fund strategies;
• a moderate deterioration in the derivatives market for hedging gilts;
• the default of a mid-size relative value hedge fund, which increased concerns about counterparty risk;
• one-notch credit downgrades of the U.K., other governments and certain corporations;
• announcements by sovereign wealth funds of reductions in holdings of government debt; and
• anticipated longer-term shocks to economic fundamentals.

In the first round of the SWES, participants modeled the daily impact of the shocks on their businesses and how they would react to each development. For example, they estimated relevant margin requirements. In the second round, BoE asked participants how they would have reacted to more severe shocks to credit spreads, deteriorating sterling repo credit conditions and reduced availability of derivatives for hedging core U.K. market activity.

“As with any simulation, the SWES is a hypothetical exercise and not a forecast,” cautioned BoE. It used certain simplifying assumptions. For example, because participants were primarily larger firms, the implications for smaller firms are less clear. Additionally, the outcome depended on the participants’ positions at the outset of the scenario, which are likely to change over time. Consequently, the SWES is “most effective as a means to gain insights into participants’ behaviours in response to a stress, understand interactions between firms, and draw wider insights into how the financial system as a whole responds to stress,” said BoE.

Importance of Timing

The relative positions of the participants at the start of the SWES are an important consideration. For example, at the outset of the exercise, the participating hedge funds were net cash lenders in the gilt repo market, with net short gilt exposure. A year later, however, they were net borrowers. Had the scenario taken place when the hedge funds were net borrowers – with long exposure – they would have suffered losses and had to sell gilts, which would have used up banks’ remaining market-making capacity. Similarly, if banks had greater exposure to gilts at the start of the scenario, they would have been less inclined to buy gilts, putting additional pressure on the market.

Impact on Participants

Liquidity Pressure on NBFIs

In the SWES scenario, the spike in rates and spreads caused asset values to fall. NBFIs incurred significant losses and margin calls from banks and CCPs. Consequently, they needed liquidity to meet redemption requests and margin calls. Hedge funds needed £2 billion ($2.7 billion) to meet margin calls, while pensions, LDI funds and insurers needed an aggregate £92 billion ($124.2 billion). NBFIs met about four-fifths of those calls by pledging eligible securities. The remaining calls were met with cash on hand or cash raised through repos or redemptions from money market funds (MMFs) or open-end funds (OEFs).

The ability to meet calls with securities reduced NBFIs’ need for cash, reduced selling pressure and thereby increased the system’s liquidity resilience, noted BoE. On the other hand, holding securities as collateral increased operational complexity and created financial and valuation risk.

Many LDI funds, insurers and MMFs in the SWES started the exercise with better liquidity buffers than at the outset of previous market shocks. Some of this was due to regulatory requirements imposed after such shocks. Some, however, “are not underpinned by regulation, and therefore resilience could fall over time as memories of recent market events begin to fade,” cautioned BoE. The NBFIs sought to restore their liquidity buffers quickly. Some sold assets, which could have affected other parts of the financial system. Others redeemed MMFs and OEFs, which caused those funds to sell assets.

See “FCA Chief Executive Offers Perspectives on the Importance of Asset Management” (May 17, 2018).

Impact on Hedge Funds

The SWES was designed to examine the impact of hypothetical shocks on fixed income relative value, macro and momentum strategies. All participating funds used both financial and synthetic leverage. Most funds did not face significant funding constraints. The hedge funds tended to use short-term repos, which made them more vulnerable to withdrawal of funding and/or increasing haircuts. BoE found that bigger haircuts on U.S. Treasury repos had a much more significant impact on hedge funds’ liquidity than bigger haircuts on gilt repos. Hedge funds that incurred losses as a result of the shocks and increased volatility in the scenario reduced their leverage and risk-taking activity.

On average, the hedge funds in the SWES lost approximately 0.6 percent of their net asset value, but outcomes varied widely across firms. The increase in the price difference between gilts and gilt futures caused mark-to-market losses for the relative value funds. Those firms were also required to post additional margin with their lenders. In contrast, macro funds, which at the start of the scenario had leveraged short positions in gilts, realized gains from closing out short positions and return of margin from lenders. Momentum strategies benefited from the stress-driven moves in asset prices.

Many hedge fund participants took pro-cyclical actions. For example, some hedge funds affected by the rise in volatility voluntarily reduced their exposures, including by deleveraging. Others did so because they were at or near portfolio risk limits. On the other hand, purchases of gilts by macro funds to close out short positions had a counter-cyclical effect. Generally, the hedge funds did not anticipate increasing risk positions or taking advantage of distressed corporate bond prices.

The hedge fund participants were among the largest and oldest in the sector, noted BoE. Smaller funds, and those with different investment approaches, could have been affected differently. For example, deleveraging by some large funds could have made deleveraging by other funds more likely.

See “FCA Seeks Input on Updating Asset Management Regulation” (Apr. 27, 2023); and “FCA Identifies Regulatory Priorities for Alternative Investment Managers” (Oct. 13, 2022).

Limited Impact on CCPs

CCPs determined that the credit risk of their counterparties had not changed significantly as a result of the hypothetical shocks. Consequently, they did not increase haircuts on collateral nor did they change initial margin requirements or how they used initial margin.

Banks Move to Reduce Risk

Banks determined that the shocks did not significantly lower their financial resilience or result in the immediate breach of applicable regulatory limits. They did, however, draw a total £20 billion ($27 billion) from BoE’s short-term and long-term repo facilities, which was consistent with their design and anticipated use. They also sold assets and took other measures to reduce risk.

The banks, as market makers, were willing to temporarily increase their inventories of gilts, which enabled NBFIs to derisk and/or meet liquidity needs. However, the banks were near the limit of their willingness to purchase gilts without further increases in bid-ask spreads. Moreover, had the scenario contemplated a greater deterioration in the derivatives market for hedging, banks’ appetite for gilts would have contracted significantly.

See our three-part series on mitigating prime broker risk: “Preliminary Considerations When Selecting Firms and Brokerage Arrangements” (Dec. 1, 2016); “Structural Considerations of Multi-Prime or Split Custodian-Broker Arrangements” (Dec. 8, 2016); and “Legal Considerations When Negotiating Prime Brokerage Agreements” (Dec. 15, 2016).

Notable Mismatches in Expectations

Although, in many parts of the SWES, the participants correctly anticipated the behavior of other participants, there were three notable disconnects. First, many NBFIs underestimated the extent to which their access to repo financing could be limited. Notably, banks had extremely limited appetite to increase repo financing, although they mostly continued to roll over existing repos. Thus, although more than half of the fund managers in the SWES thought they could use additional repos for urgent cash needs, the banks indicated that “over a third of these would not have been granted additional repo by any SWES bank,” according to BoE. Managers’ asset sales or other efforts to secure alternate financing could have exacerbated stress dynamics. For example, hedge funds might not have been able to take advantage of the falling market for gilts – which would have had a countercyclical effect.

Second, NBFIs overestimated the amounts of additional initial margin CCPs would require. An underestimation could have exacerbated fallout from the scenario. Finally, MMFs had difficulty predicting demand for subscriptions and redemptions. If repo financing was limited as a result of the scenario, NBFIs may have increased their redemptions of OEFs and MMFs.

Market Impacts

Gilts and Gilt Repos

The spike in yields resulted in sales of about £4.7 billion ($6.3 billion) of gilts by pensions and OEFs, with banks as the main buyers. The outcome depended on the following conditions and may have been worse had those conditions differed:

• bank willingness to warehouse gilts;
• continued availability of derivatives to hedge sterling rate risk;
• recapitalization of LDIs by their pension investors;
• NBFIs’ initial high level of resilience; and
• the ability to roll over existing gilt repos.

For example, if NBFIs had started the scenario with less resilience, there may have been greater demand for additional repo financing. Had banks decided to reduce their repo lending, hedge funds would have faced the largest cuts.

Sterling Corporate Bonds

The hypothetical shocks resulted in significant sales of sterling corporate bonds by:

• pensions recapitalizing LDI positions;
• insurers restoring cash buffers and taking other precautions;
• banks reducing exposure and managing risk; and
• credit-focused OEFs satisfying redemptions by pensions and insurers.

Moreover, these sales were relatively price-insensitive. Thus, market participants continued to sell, even as prices fell, resulting in a “jump to illiquidity.” Moreover, in those conditions, it would have taken many prospective purchasers weeks or months to enter the market. Consequently, at the end of the scenario, there were still £2 billion ($2.7 billion) of unmet sell orders.

Key Insights

“System-wide stress testing has proved to be an effective tool for financial stability authorities to understand system-level vulnerabilities,” said BoE. They provide insight into how changes in firms’ resilience, interconnectedness and behavior could affect market dynamics. Those types of insights are not available from sector-specific analyses. Consequently, BoE and the Financial Conduct Authority will use the SWES as a framework for future system-wide analyses.

Firms’ Collective Actions Amplified Shock

Even though LDIs entered the exercise with greater resilience than at the time of the 2022 rate spike, they still faced significant stress, causing some to sell assets rapidly, thereby amplifying the effect of the shocks to gilts. Other firms with high levels of leverage, including certain hedge funds, faced similar pressure.

Many of the NBFIs take similar approaches to risk management. For example, many base their stress testing on recent market events, which could drive correlated market behavior. Consequently, “individually prudent behavior to manage risk can affect conditions in markets,” noted BoE. Similarly, repo financing is concentrated in a limited set of banks. If those banks, acting individually and prudently, decide not to extend repo financing, there could be an adverse system-wide effect.

On a positive note, the improved resilience of NBFIs’ end investors reduced their need to redeem shares of MMFs and OEFs. Additionally, wider use of non-cash collateral mitigated the need to raise cash. Still, the impact of future shocks will depend on the type and severity of shock and the market participants’ resilience at the time of the shock, which is likely to vary over time.

Repo Market Resilience Is Critical

Many market participants rely on gilt repo financing for their cash needs. Banks may be unlikely to provide all the additional repo financing available during a shock – even when they draw on available BoE facilities. If banks increase haircuts or refuse to roll over repos, NBFIs may be forced to sell gilts, further amplifying shocks.

The resilience of this repo market could be improved by measures to reduce counterparty credit risk. In addition to the lending facilities available to banks, BoE is developing a Contingent NBFI Repo Facility that will enable eligible NBFIs to borrow against gilts. It will be made available at the discretion of BoE in times of gilt market dysfunction.

See our two-part series “Three Asset-Based Financing Options for Private Funds: Total Return Swaps, Structured Repos and SPV Financing”: Part One (Apr. 5, 2018); and Part Two (Apr. 12, 2018).

Gilt Market Resilience Has Improved

Actions by authorities and market participants following market shocks improved the resilience of the gilt market. For example, pursuant to guidance issued by the U.K. Pensions Regulator (TPR) in 2023, the LDI and pension sectors improved their operational resilience. The outcome of the SWES was also due in part to:

• the higher levels of NBFI resilience;
• banks’ ability to “warehouse risk” by holding gilts and other bonds; and
• proper functioning of the derivatives and gilt repo markets.

Risk to Sterling Corporate Bond Market Exists

The corporate bond market is susceptible to a “jump to illiquidity” in times of market stress. During the SWES, LDI funds issued capital calls to their pension investors. In response, many pensions rapidly sold fixed income assets, driving down prices. However, falling bond prices did not lead to significant purchases because potential purchasers needed further time to conduct due diligence and secure financing.

Consequently, the exercise raised questions about whether sterling corporate bonds are a reliable source of liquidity in stressed market conditions. BoE and other authorities are assessing whether additional data collection and/or disclosures could be used to raise awareness of potential correlated sales in corporate bond markets and help firms improve their liquidity management. TPR is also working on improving its understanding of how pensions operate during stressed conditions.

See “FCA and Bank of England Proposals Embrace Data‑Driven Regulation” (Feb. 20, 2020).

Ongoing Issues to Consider

“System-wide exercises are important for regulators, firms and markets,” concluded BoE. Firms should consider system-wide dynamics in their stress testing and contingency planning. BoE advised firms to consider and prepare for the following risks and concerns identified by the SWES:

• sensitivity of hedge funds operating in the U.K. to conditions in the U.S. Treasuries repo market;
• mismatch in expectations regarding availability of gilt repos;
• material variations between CCP and NBFI estimates of initial margin calls;
• MMFs’ and OEFs’ inability to accurately predict redemptions;
• reliance of many NBFIs on MMFs to meet liquidity needs;
• impact of types of OEF investors on volume of OEF redemptions;
• the need for pensions to sell corporate bonds and asset-backed securities to recapitalize LDI funds;
• the significant tightening of repo terms, as banks increased repo haircuts and reduced terms;
• banks acting conservatively in times of stress, even if not acutely affected;
• many firms’ use of similar approaches to risk management;
• increasing use of non-cash collateral;
• countercyclical buyers being slow to enter the corporate bond market; and
• reduced operational frictions in recapitalizing LDI funds.

Operational Frictions

Although the SWES did not contemplate any operational incidents, the participants did identify operational incidents that might have affected them during the scenario. Most did not anticipate that such frictions would have had a material impact on them. The potential frictions included:

• dependencies on IT systems and third parties;
• settlement failures due to high transaction volumes; and
• margin disputes.

SECIL Law, a law firm specializing in securities disputes, white-collar defense and complex civil litigation, has added Tom Gorman to its Washington, D.C., office. A former senior enforcement attorney at the SEC, he represents individuals, executives, investment advisers, broker-dealers and public companies in complex proceedings involving the SEC, CFTC, DOJ and other federal and state agencies.

See “Present and Former SEC Officials Discuss Strategy, Testimony, Proffers and Negotiations” (Feb. 27, 2025).

With more than four decades of experience navigating the intersection of government enforcement and securities law, Gorman launched his legal career inside the SEC’s Division of Enforcement and Office of General Counsel, where he helped shape the agency’s early litigation efforts against securities fraud and organized financial crime. He now uses that experience in his representation of clients in enforcement actions involving alleged:

• insider trading;
• accounting irregularities;
• whistleblower claims; and
• governance failures.

In addition to his legal practice, Gorman is the founder and author of SEC Actions, a widely read blog offering real-time analysis of every SEC enforcement case filed.

See “SEC, CFTC and FINRA Division Heads Discuss Enforcement Outlook” (Apr. 24, 2025).