Whether you’re a Securities and Exchange Commission (SEC)-registered investment adviser firm, broker-dealer, hedge fund or private company, the rapid-fire pace of news and updates coming from Washington is enough to keep any CCO up at night.
At the inaugural ComplyConnect Conference & Expo, Kirkland & Elis LLP Partner Investment Funds Marian Fowler and Eversheds Sutherland (US) LLP Partner John Walsh sat down at the aptly named panel “What’s happening in D.C.?” to discuss the numerous and substantive regulations which have been proposed or finalized by the SEC this year as well as the role the mid-term elections will play in 2023 SEC priorities.
1. The impact of the mid-term elections on new SEC updates.
While the panel was held prior to the release of election results, both speakers were clear: no matter what happened the night of Nov. 8, the SEC and its agenda would be impacted.
“I would suggest that elections today are much more important for regulations and compliance than they ever used to be.” – Walsh
Why? In part because, while both sides of the partisan line have differing views, they agree on one thing: high expectations for the regulators.
“Regardless of the outcome, the SEC and particularly Chairman Gensler, will continue to be under a microscope.” – Fowler
A statement reflective of a recently released report which highlights potential issues including the pace of SEC rulemaking and lack of resources.
2. Chair Gensler’s stated SEC enforcement themes
It’s safe to say, we are in an active enforcement era with the SEC. A fact which is wholly supported when you look at the judgements and orders obtained in 2022. While the SEC filed over 700 enforcement actions this year – slightly higher than last year but still on trend – it obtained judgements and orders totaling $6.4 billion, $4 billion of which were civil penalties.
In regards to their enforcement actions, the SEC has noted five main themes:
- Economic reality.
- Accountability.
- High-impact cases.
- Processes.
- Positions of trust.
It was noted during the panel, investor harm has not been a theme of recent enforcement actions. Instead, high-impact cases, which can be seen as one of the most powerful tools in the SEC’s toolkit, included cases regarding:
- Books and records.
- Fee disclosures.
The SEC does appear to be rewarding “good behavior” for those firms who self-report and remediate, often reducing or eliminating fines.
3. Major Questions Doctrine
Two recent court cases have shone a light on possible amendments to the regulatory authority of the SEC. While one case involved the EPA, the panelists noted the response from the court could be applied to the SEC in the future. In the second case – Cochran vs. SEC – the question was raised of when an individual can raise a constitutional claim or issue with the SEC.
In response to the first case, the Supreme Court articulated a doctrine known as the Majors Questions Doctrine, which essentially states, if an agency is taking an action which will have a big impact – possibly reorganizing industry – they will be held to a stricter standard for how much delegated authority they get from congressional statutes.
What could this indicate? Congress wants to hold major policy decision-making and not push it off to the regulators.
4. Marathon of SEC regulation and rule making
The SEC has proposed 30 rules for 2022 to-date, a number, which we have not seen since the Dodd-Frank act.
The panelists provided some commentary around recent rulemakings, which included:
- Due diligence of service providers: Gives advisers greater regulatory responsibility for their service providers. Is this the solution or should the SEC have regulatory authority over service providers?
- Environmental, Social and Governance (ESG) proposed rules: The industry needs better guidance around ESG. Firms want to know what the SEC is expecting, an especially difficult task given there is no current definition of E, S or G. One piece of advice from the panel? Ensure whatever you are saying, whatever disclosures you have, you are doing in practice.
- Private fund rule proposal: There are a number of proposed rules within this item, however the three specific aspects which the panel focused on included:
- Private funds being required to provide quarterly statements to investors around performance, fees and expenses, compensations, etc.
- Private funds being prohibited from seeking indemnities and exculpation for even ordinary negligence, with no grandfathering – an act which could require amendments of decades old contracts.
- Provisions around side letters which would require disclosure to other investors about key side letter arrangements and prohibit certain practices under side letters.
- The new Marketing Rule: The SEC has not issued any guidance on the new rule, which went into effect Nov. 4. The panelists argued this was a purposeful act from the regulator as they seek to include everything within the four corners of the rule itself. Advice from the panelists: Make sure you’ve updated policies and procedures, trained your employees, updated your marketing materials and expect a sweep exam.
As financial firms continue to grapple with the news and updates coming from Washington, one thing remains clear, compliance is an ever-changing landscape. One which requires discipline and a thorough understanding of the requirements for your SEC-registered firm.