Category: SEC News

The SEC Spat Over Its Regulatory Agenda

The Securities and Exchange Commission publishes its Unified Agenda of Regulatory and Deregulatory Action List annually, setting up items that the SEC is working on or thinking about working on. Occasionally, we learn of something new. Usually, it’s a fairly boring exercise to meet the requirements under the Administrative Procedure Act.

There was one surprise for private funds on the list: Exempt Offerings

“The Division is considering recommending that the Commission seek public comment on ways to further update the Commission’s rules related to exempt offerings to more effectively promote investor protection, including updating the financial thresholds in the accredited investor definition, ensuring appropriate access to and enhancing the information available regarding Regulation D offerings, and amendments related to the integration framework for registered and exempt offerings.”

A surprise, but not really. Exempt offerings are right in the middle of the cross purposes of protecting investors and creating efficient capital markets.

The big surprise was that two of the SEC Commissioners published a criticism of the agenda. Commissioners Peirce and Roisman take issue with the agenda revisiting the recently adopted changes to the accredited investor definition. They also note the inclusion of the Proxy Rules, Resource Extraction Payments and the whistleblower rules.

“As far as we can tell, the agency has received no new information which would warrant opening up any of these rules for further changes at this time. We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.”

Looks like the new SEC is off to a rock start under the Chair Gensler.

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Withdrawal of No Action Letters

In connection with Securities and Exchange Commission’s new Marketing Rule, I’m expecting the SEC to withdraw a bunch of the no-action letters that address advertising by registered investment advisers. For example, the Clover no-action letter doesn’t seem to fit with the new Marketing Rule and will likely have to be withdrawn to avoid confusion.

The release for the Marketing Rule stated so.

Additionally, pursuant to the staff’s review, the staff will be withdrawing the staff’s remaining no-action letters and other staff guidance, or portions thereof, as of the compliance date of the final rules. [832]

https://www.federalregister.gov/d/2020-28868/p-1389

That footnote 832 said: “A list of the letters to be withdrawn will be available on the Commission’s website.“

That website now exists: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements

Or maybe it already existed and I never noticed that page on the SEC’s website before before. It looks new to me and the vast majority of the withdrawal dates are from the past year and moving forward.

However, there are no withdrawal notices for investment adviser marketing yet. I assume there will be a bigger announcement when it happens.

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Got Thoughts on Form PF or Private Fund Registration Requirements?

The Securities and Exchange Commission published a list of rules to be reviewed pursuant to the Regulatory Flexibility Act. The publication invites comments on whether the rules should be amended or continued without change. Two items caught my attention.

The first is Form PF. It was adopted in October 2011. The second is the registration requirement imposed on private funds and other Dodd-Frank requirement. That rule and rule amendments was adopted in June 2011.

Does this mean changes are coming?

The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an agency to review its rules that have a significant economic impact upon a substantial number of small entities within ten years of the publication of such rules as final rules. 5 U.S.C. 610(a). The purpose of the review is “to determine whether such rules should be continued without change, or should be amended or rescinded . . . to minimize any significant economic impact of the rules upon a substantial number of such small entities.”

The SEC notes that there were no comments on its initial Regulatory Flexibility Analysis for either rule.

The publication of these opening for comments seems like a pro forma step by the SEC to comply with the Regulatory Flexibility Act and not movement to make regulatory changes. But if the SEC gets comments, maybe it will think about making changes. The link to leave comments is on this page: https://www.sec.gov/rules/other.htm.

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SEC’s ESG Task Force


The Securities and Exchange Commission announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The Division of Corporate Finance announced an enhanced focus on climate-related disclosures in public filings. The Division of Examinations announced a focus on climate-related risks as part its 2021 examination priorities. Sounds like all of the SEC has turned to ESG and climate issues over the last two weeks.

Or not.

Commissioner Hester M. Peirce and Commissioner Elad L. Roisman issued a joint public statement calling into question these climate/ESG initiatives.

“What does this ‘enhanced focus’ on climate-related matters mean?  The short answer is: it’s not yet clear.  Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relations twist?  Time will tell.”

As the two commissioners point out, the Commission has not voted on any new standards or expectations relating to climate-related disclosure. They also point (as I did) although there is a big headline for climate issues in the press release for the 2021 examination priorities, there is little mention of it in the actual publication. As for the Enforcement Task Force, its clear these two commissioners are not on board.

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Increased SEC Enforcement?

The annual number of enforcement actions by the Securities and Exchange Commission decreased each year during the Trump administration. Starting at the high of 1,063 in 2016 and dropping to 827 in 2019, according to a tabulation in the Wall Street Journal. Now there is a new President and new Acting Chair of the Securities and Exchange Commission. Are enforcement actions going to increase?

Acting Chair Allison Herren Lee broadened the delegation of authority to senior officers in the Division of Enforcement. Under former Chair Clayton during the Trump administration, only the two co-heads of the Enforcement Division could approve the issuance of a Formal Order of Investigation. Now a broader group of officials in the Enforcement Division can do so.

Will this result in more enforcement actions? My guess would be “no.” I think the number of enforcement actions is correlated more to the size of the enforcement staff. It was reduced by about 8% during the Trump administration. Enforcement staff can only handle so many cases per person.

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Division of Examination

Goodbye Office of Compliance Inspections and Examinations.
Hello Division of Examination.

The Securities and Exchange Commission decided that OCIE, with 23% of the SEC employees, is probably more than an office and elevated it to the level of “Division” by naming it the Division of of Examinations. That puts it on equal name status with Corporate Finance, Investment Management, Trading and Markets, Economic and Risk Analysis and Enforcement.

I’m not sure I ever felt that OCIE was somehow less important because it was an “Office” and not a “Division.” Names do matter and its good to see that the examination staff can now carry around a more prestigious division name.

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Doubling Down on Disgorgement

Back in 2017, the Supreme Court in Kokesh v. Securities and Exchange Commission pointed out that the disgorgement claims made by the Securities and Exchange Commission are penalties and therefore subject to the five-year statute of limitations. The Kokesh decision left some question about whether the SEC could pursue disgorgement at all. The Supreme Court did not mean to kill it and earlier this year upheld the SEC’s disgorgement power in Liu v. Securities and Exchange Commission.

Congress managed to tuck some some goodies in the National Defense Authorization Act. Sure, that went through gyrations after President Trump vetoed it because it didn’t have some things he wanted in it. On Jan. 1, Congress overrode President Trump’s veto of the defense spending bill.

Section 6501 of the NDAA specifically authorizes disgorgement and allows for a 10 year period in some instances.

SEC. 6501. INVESTIGATIONS AND PROSECUTION OF OFFENSES FOR VIOLATIONS OF THE SECURITIES LAWS.
(a) In General.–Section 21(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended–
…
(3) by adding at the end the following:

(7) Disgorgement.–In any action or proceeding brought by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may order, disgorgement.

(8) Limitations periods.–
(A) Disgorgement.–The Commission may bring a claim for disgorgement under paragraph (7)–
(i) not later than 5 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim occurs; or
(ii) not later than 10 years after the latest date of the violation that gives rise to the action or proceeding in which the Commission seeks the claim if the violation involves conduct that violates–
(I) section 10(b);
(II) section 17(a)(1) of the Securities Act of 1933 (15 U.S.C. 77q(a)(1));
(III) section 206(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(1)); or
(IV) any other provision of the securities laws for which scienter must be established.

The 10-year period is only for scienter-based claims. The SEC will have to allege intentional fraud.

What’s not clear in the statutory change is whether the Liu limiting principles will still apply to disgorgement claims. The Supreme Court laid out three limitation on disgorgement claims:

  • Disgorged funds should be returned to the victims.
  • Joint and several liability theory may not apply;
  • Should be limited to “net” profits, allowing deduction of legitimate business expenses

I’ll leave figuring out whether they still apply to the legal scholars and, inevitably, future court cases.

In addition to the disgorgement extension, there is a new anti-money laundering scheme as part of the NDAA. More to come on that.

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SEC Reaction to Form CRS

Registered Investment Advisers had a June 30th deadline for delivery of the new Form CRS to their clients. The forms also need to be filed with the SEC. If you thought the SEC would not look at them, you were wrong.

The SEC’s new Standards of Conduct Implementation Committee has been reviewing the Form CRS submissions to assess compliance with the format and standard requirements of the Form CRS regulations.

It sounds like the Committee is not happy with what it’s seen so far.

The relationship summaries reviewed to date generally reflect effort by firms to meet the content and format requirements of Form CRS….

That sounds like they’re giving out a participation trophy to a lot of firms. A comforting coach thanking players for coming out even though they lost.

Not all are mediocre or bad. The Committee found some good examples with simple, clear disclosure. It intends to find ways to share best practices and feedback. There should be a roundtable in the fall for the Committee’s staff to share ideas.

As for private fund managers, funds are not considered natural persons who would be retail investors under the Form CRS regulation.

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New SEC Commissioner to be Nominated

Commissioner Robert J. Jackson Jr. stepped down from the SEC when his term expired in February, 2020. President Trump had identified his replacement to serve on the Securities and Exchange Commission: Caroline Crenshaw.

Ms. Crenshaw currently serves in the Army JAG Corps and as senior counsel to the SEC. When she first joined the SEC in 2013, she served in the Office of Compliance and Examinations in the Division of Investment Management.

Is she the first SEC examiner to become SEC Commissioner?

From the New York Times

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More Filing Relief from the SEC

The SEC must have realized that its relief from Form ADV filing and Form PF filing deadlines was not providing much relief. The SEC issued a new order for the deadlines.

You still have to send the SEC a notice that your firm is relying on the Order, but you no longer have to say why you can’t file the forms on a timely basis and don’t have to provide an estimated date for delivery.

The SEC has not extended the deadline. It’s still only 45 days.

If you are relying on the Order, you still need to post a notice on your firm’s website.

I think most firm’s are not going to take advantage of the order. Nobody wants to tell the SEC that can’t meet a deadline, even in the case of a pandemic.

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