Dear Clients and Friends,
As the developments affecting the investment management industry continue to unfold, we have once again prepared our compendium of relevant Sidley Updates for our investment fund and adviser clients and friends.
The compendium includes a summary of each Sidley Update year-to-date, in reverse chronological order, along with a link to its full text. We have included all of the updates, making the compendium repetitive in instances where we revisited a topic to report on emerging information and breaking news in the industry.
If you would like additional information on any of these topics, please contact the Sidley lawyer with whom you usually work.
September 17, 2019
Ninth Circuit Sides With Web Scrapers
For years, companies seeking to block web scrapers from collecting the information on their website would invoke the Computer Fraud and Abuse Act (CFAA), a U.S. law that criminalizes accessing a computer “without authorization.” But the U.S. Court of Appeals for the Ninth Circuit has now ruled that merely instructing scrapers that they are not welcome on a public website, either through a restrictive terms of use or a cease-and-desist letter, is probably not enough to render their access “unauthorized” under the CFAA. This decision is encouraging news for the many hedge funds, academic researchers and other data aggregators that use software bots to compile information online.
September 16, 2019
California AB 5 Changes the Landscape for Use of Contractors
On September 10, the California Senate passed Assembly Bill 5 (AB 5). The California Assembly passed AB 5 on September 11, and Gov. Gavin Newsom is expected to sign it into law in the coming days. Once signed, AB 5 will take effect January 1, 2020. Although the media’s focus has been on AB 5’s impact on ride hailing companies, AB 5 will have significant consequences for any hiring entity that uses independent contractors in California, including, for example, those in the entertainment, trucking and, of course, gig economy businesses.
September 13, 2019
Monetary Authority of Singapore Invites Applications for New Digital Bank Licences
On August 29, 2019, the Monetary Authority of Singapore (MAS) announced that it will begin accepting applications for new digital bank licenses. Interested parties have until December 31 to submit their applications. This follows the MAS’ initial announcement in June to issue up to two digital full bank (DFB) licenses and three digital wholesale bank (DWB) licenses, effectively opening up digital bank licenses to nonbank players.
September 11, 2019
On August 15, the Division of Investment Management of the U.S. Securities and Exchange Commission (SEC) issued to Redwood Trust, Inc., a mortgage finance real estate investment trust (REIT), a no-action letter (the Redwood No-Action Letter). The Redwood No-Action Letter may make it easier for certain entities to satisfy the asset composition test required by the SEC staff (the Staff) in its interpretation of Section 3(c)(5)(C) (Section 3(c)(5)(C)) under the Investment Company Act of 1940 in respect of their holdings of certain mortgage servicing rights and cash proceeds. The Staff also continued its trend of granting principles-based relief in the context of Section 3(c)(5)(C) and expanding the assets that satisfy the asset composition test by focusing on their indicia of engaging in a real estate finance business.
August 29, 2019
Substantive Changes to EU Solvency II Remuneration Requirements on the Horizon
On July 25, the European Insurance and Occupational Pensions Authority published a consultation paper, “Draft Opinion on the Supervision of Remuneration Principles in the Insurance and Reinsurance Sector” (Draft Opinion). The Draft Opinion provides guidance on the application of the existing Solvency II remuneration requirements.
If finalized in its current form, the Draft Opinion will require insurers and reinsurers subject to Solvency II to review and, in many cases, substantially overhaul their existing remuneration policies.
The consultation period for comments on the proposals in the Draft Opinion is open until September 30,2019.
August 27, 2019
Last week, the U.S. Securities and Exchange Commission published (i) guidance to assist investment advisers in fulfilling their proxy voting responsibilities, particularly when relying on proxy advisors such as ISS or Glass Lewis (the Investment Advisers Release), and (ii) a new interpretation and related guidance regarding the applicability of the federal proxy rules to proxy voting advice furnished by proxy advisors (the Proxy Rules Release). The new guidance was approved by a 3-2 vote along party lines at an open meeting on August 21.
August 9, 2019
SEC Issues Concept Release on Harmonization of Securities-Offering Exemptions
The Securities Act of 1933 requires that all securities offerings in the U.S. be registered with the U.S. Securities and Exchange Commission (Commission) unless an exemption is available. The exempt offering framework is complex, having evolved over time through successive legislative developments, Commission rulemaking and guidance, court cases and industry practices. On June 18, the Commission issued a concept release to solicit feedback “on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.” Although the concept release does not propose specific rule changes, input provided to the Commission will likely play a significant role in shaping future proposed rulemaking.
August 2, 2019
On July 24, 2019, the Monetary Authority of Singapore (MAS) issued the Consultation Paper on the Proposed Framework for Variable Capital Companies Part 3 (the Consultation Paper), which covers the proposed subsidiary legislation relating to the insolvency and winding up of a variable capital company (VCC) and, where relevant, its underlying sub-funds (the VCC Insolvency Regulations).
July 15, 2019
Monetary Authority of Singapore to Issue up to Five Digital Bank Licenses
On June 28, 2019, the Monetary Authority of Singapore (MAS) announced that it will issue up to five new digital bank licenses. Out of the five digital bank licenses, MAS will issue up to two digital full bank licenses and up to three digital wholesale bank licenses. This is in addition to any digital banks that the Singapore banking groups may also establish under the existing internet banking framework introduced in 2000. In effect, MAS’ announcement opens up digital bank licenses to nonbank players.
July 11, 2019
Digital Asset Securities: Joint SEC and FINRA Statement Aimed at Broker-Dealer Custody
On July 8, the long-awaited statement (Statement) on custody of digital asset securities was released jointly by the staffs (Staffs) of the U.S. Securities and Exchange Commission Division of Trading and Markets and the Financial Industry Regulatory Authority (FINRA). The Statement is based on industry discussions with the Staffs and highlights the following:
- Certain noncustodial broker-dealer models may have a path forward for FINRA approval.
- The Staffs have concerns relating to broker-dealer custody of digital asset securities that remain unanswered, but certain good control locations (i.e., banks, issuers and transfer agents) may provide a viable custody solution under the Customer Protection Rule.
- Market participants should consider other broker-dealer requirements, including books and records and financial reporting rules.
July 11, 2019
Proposed PFIC Regulations Released
On July 10, the U.S. Internal Revenue Service and Department of the Treasury released proposed regulations relating to passive foreign investment companies (PFICs) that will be of keen interest to foreign insurance companies and their investors, insurance-linked securities funds and other participants in transactions involving foreign insurers. The proposed regulations provide guidance relating to changes in the PFIC regime made by the 2017 Tax Cuts and Jobs Act, address the application and interaction of certain “look-through” rules contained in the Internal Revenue Code and introduce new rules relating to the determination of the “active conduct” test.
July 1, 2019
On June 21, the Financial Action Task Force (FATF) published several documents (Release) that, according to U.S. Treasury Secretary Steve Mnuchin, will require virtual asset service providers to implement the same anti-money-laundering and counterterrorism financing (AML/CTF) requirements as traditional financial institutions. The Release includes three binding documents and nonbinding guidance.
June 21, 2019
On April 26, 2018, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on Proposed Guidelines on Individual Accountability and Conduct (First Consultation Paper) where the MAS proposed to issue a set of guidelines (Proposed Guidelines) to promote the individual accountability of senior managers, strengthen oversight of material risk personnel and reinforce standards of proper conduct among all employees of financial institutions (FIs). The Proposed Guidelines set out five accountability and conduct outcomes (Outcomes) that FIs are expected to work toward (see Annex A below). Please click here to view our client briefing on the First Consultation Paper issued on May 23, 2018.
June 19, 2019
On June 14, the U.S. Internal Revenue Service and the Department of the Treasury published proposed regulations (Proposed Regulations) addressing (i) phantom income inclusions under both the subpart F income rules and the global intangible low-taxed income (GILTI) rules by investors who invest in non-U.S. corporations through U.S. partnerships and (ii) a new “high-tax kick-out” for active business income under the GILTI rules. The Proposed Regulations provide immediate welcome relief from certain adverse tax consequences to private equity funds and their sponsors caused by 2017 U.S. tax reform.
June 13, 2019
SEC Adopts Regulation Best Interest and Form CRS; Issues Investment Advisers Act Interpretations
On June 5, the U.S. Securities and Exchange Commission (SEC), by a 3-1 vote, adopted two rules and two interpretations related to the standard of conduct requirements for broker-dealers and investment advisers:
- Regulation Best Interest (Regulation BI), a new rule imposing a “best interest” standard of conduct on broker-dealers making recommendations to retail clients (compliance date: June 30, 2020)
- Form CRS Relationship Summary and Form ADV Amendments (Form CRS), a new rule requiring both broker-dealers and investment advisers to provide retail clients with information about the nature of their relationship (compliance date: June 30, 2020)
- Standard of Conduct for Investment Advisers, a new interpretation clarifying an investment adviser’s fiduciary duty to its clients (effective upon publication in the Federal Register, expected June 2019)
- Broker-Dealer “Solely Incidental” Exclusion, a new interpretation of Section 202(a)(11)(C) of the Investment Advisers Act of 1940 (Advisers Act), which excludes from the definition of “investment adviser” any broker or dealer that provides advisory services when such services are “solely incidental” to the conduct of the broker or dealer’s business and when such incidental advisory services are provided for no special compensation (effective upon publication in the Federal Register, expected June 2019)
June 11, 2019
Taxpayer Friendly Proposed Regulations Clarify FIRPTA Exemption for Non-US Pension Plans
On June 6, the U.S. Internal Revenue Service and the Department of the Treasury published proposed regulations (Proposed Regulations) concerning the exemption from the Foreign Investment in Real Property Tax Act (FIRPTA) rules of the Internal Revenue Code of 1986, as amended, set forth in Sections 897 and 1445 for certain qualifying non-U.S. pension plans (each a qualified foreign pension plan). The Proposed Regulations provide taxpayer-friendly clarifications concerning (i) the scope of the exemption, (ii) the key definition of “qualified foreign pension plan,” (iii) certification of status as a qualified foreign pension plan and (v) the application of the withholding tax rules to qualified foreign pension plans. The Proposed Regulations provide welcome certainty regarding this important FIRPTA exemption and should permit significantly greater certainty for non-U.S. pension plans to structure their U.S. real estate investments in reliance on such exemption.
May 29, 2019
SEC Proposes Regulatory Changes for Cross-Border Security-Based Swap Transactions
On May 10, the U.S. Securities and Exchange Commission proposed rule changes and interpretive guidance (the Proposal) related to the treatment of security-based swaps (SB swaps) that have certain cross-border characteristics. Most important, the SEC is reconsidering the treatment of SB swaps that are “arranged, negotiated or executed” by U.S.-based personnel of non-U.S. dealers. The SEC had addressed that subject through rulemaking in February 2016.
May 15, 2019
In ERISA “Plan Assets” Case, Court Orders Limited Discovery Relating to Debt Status of RMBS Notes
A federal judge in the Southern District of New York has issued a ruling in a case brought by pension plans alleging violations of the Employee Retirement Income Security Act (ERISA) by the servicers in two residential mortgage-backed securitization (RMBS) transactions. The plaintiffs had bought notes that had investment grade ratings when issued and had an intended ERISA and federal income tax characterization of debt. Certificates issued to other investors in the transaction were the intended equity for such purposes and were subject to ERISA-related ownership and transfer restrictions. However, the plaintiffs’ case, which they brought in 2018, depends in part on a finding that the notes were in fact equity, not debt, for ERISA purposes. A finding of equity status would mean that the assets of the RMBS issuers were “plan assets” subject to ERISA and that the servicers were ERISA fiduciaries with respect to the plaintiffs and any other ERISA investors in each issuer.
May 15, 2019
A New Roadmap: CFTC Releases Its First-Ever Public Enforcement Manual
On May 8, the Commodity Futures Trading Commission (CFTC) Division of Enforcement (DOE or Division) released its first publicly available Enforcement Manual. The manual provides an overview of the Division and sets out the general policies and procedures that guide its staff in detecting, investigating and prosecuting violations of the Commodity Exchange Act and CFTC regulations. According to its simultaneous press release, in publishing the manual the CFTC intends to “increase transparency, certainty, and consistency, and, more generally, to advance the rule-of-law principles that underpin all DOE and CFTC enforcement actions.”
May 14, 2019
On Tuesday, May 7, the Internal Revenue Service released proposed regulations under Section 1446(f) of the Internal Revenue Code of 1986, as amended (the Code), and certain related Sections (the Proposed Regulations). The Proposed Regulations would supersede existing interim guidance provided by Notice 2018-08 and Notice 2018-29.
May 6, 2019
Monetary Authority of Singapore Issues Further Consultation on Variable Capital Companies Regime
On October 1, 2018, the Variable Capital Companies Act was passed and enacted, setting out the overarching features and requirements of the variable capital company (VCC). The VCC is essentially a Singapore-domiciled investment company that can operate as an open-ended or closed-ended fund entity, with the option to be set up as a stand-alone fund or an umbrella fund with separate subfunds.
On April 30, 2019, the Monetary Authority of Singapore (MAS) issued a consultation paper on the proposed regulations for the VCC regime and other proposed amendments to the existing rules and regulations to facilitate the implementation of the same. The consultation paper covers the operational aspects of the VCC framework, including the incorporation of a VCC, the registration of subfunds and the redomiciliation process to Singapore of foreign corporate entities as VCCs.
Separately, the MAS issued another consultation paper on the proposed notice on prevention of money laundering and countering the financing of terrorism (AML/CFT for VCCs. The consultation paper and the proposed notice sets out the AML/CFT requirements for VCCs and draws reference from international best practices and the standards set by the Financial Action Task Force.
May 2, 2019
DOJ Publishes New Guidance on Evaluating Corporate Compliance Programs
On April 30, the Criminal Division of the U.S. Department of Justice (DOJ) released a new guidance document titled “The Evaluation of Corporate Compliance Programs,” which updates a version of the guidance first issued in February 2017 (previously analyzed here). The new guidance provides additional insights into how DOJ will assess the effectiveness of a company’s overall compliance program in an enforcement action, focusing on the program’s design, implementation and effectiveness.
May 2, 2019
SEC Proposes Offering Reforms for Business Development Companies and Registered Closed-End Funds
The SEC has proposed rule and form amendments intended to improve access to capital and facilitate investor communications by business development companies and registered closed-end investment companies. The proposed rule and form amendments would enable eligible business development companies and closed-end funds to use securities offering rules that are currently available only to certain operating company issuers, including
- use of short-form registration statements and forward incorporation by reference
- WKSI status for eligible affected funds
- final prospectus delivery reforms: access equals delivery
- communications reforms
- new registration fee payment method for interval funds
- broker-dealer research reports
- disclosure and reporting parity proposals
May 2, 2019
D.C. Circuit Tells SEC That a Negligent Omission Can’t Be Willful
A decision this week by the U.S. Court of Appeals for the D.C. Circuit rejected the traditional approach of the Securities and Exchange Commission (SEC) that “willful” conduct is a low standard that simply means that a respondent knows what he or she is doing. On April 30, in The Robare Group, LTD. v. SEC, No. 16-1453 (D.C. Cir., Apr. 30, 2019), the court held that an adviser’s negligent failure to disclose conflicts under Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act cannot also support a finding of willfulness under Section 207 of the Advisers Act because “willful” requires an intent to omit the information that constituted the disclosure violation. This result could have a significant effect on the SEC staff’s ability to allege or prove violations as “willful,” which could affect when the SEC can impose administrative sanctions in an administrative proceeding (e.g., pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) or Section 203(e) or (f) of the Advisers Act) as well as limit circumstances where SEC registrants may otherwise be subject to collateral consequences for negligent conduct alone.
April 26, 2019
SEC FinHub’s Digital Asset Framework: A Guide for Issuers and Secondary Trading Markets
On April 3, the U.S. Securities and Exchange Commission (SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) released its much-anticipated guidance, the Framework for “Investment Contract” Analysis of Digital Assets (Framework), regarding its views on factors to consider in applying the Howey test to digital assets. In conjunction with the Framework, the SEC’s Division of Corporation Finance published its first no-action letter in connection with the sale of digital assets, providing relief to TurnKey Jet, Inc., for its proposed token sale.
April 11, 2019
Hong Kong Regulatory Newsletter
This issue of Sidley’s Hong Kong Regulatory Newsletter discusses important regulatory and enforcement developments affecting entities that conduct regulated activities or trade securities in Hong Kong, with a special focus on those affecting the asset management sector.
- Editorial: Hong Kong regulatory outlook for 2019 - the rise of ‘Suptech’
- SFC introduces significant changes to the licensing regime
- SFC curbs improper practices by assets managers and tightens rules for margin financing
The newsletter also notes the SFC’s recent policy stance to classify security token offerings as regulated investment products, and extends the licensing regime to net persons who market or distribute tokens (whether in Hong Kong or targeting Hong Kong investors).
March 2019
Chambers Investment Funds 2019 Guide: USA
Sidley has a premier, global practice in structuring and advising investment funds and advisers. The Investment Funds practice group serves virtually every type of investment fund and investment manager as well as many other market participants. The group has approximately 130 corporate, securities and derivatives lawyers dedicated to investment funds, investment management and derivatives work worldwide, with lawyers practicing in New York, Chicago, Boston, Los Angeles, San Francisco, London, Munich, Hong Kong, Singapore, Shanghai and Tokyo.
March 28, 2019
New Swaps Proficiency Requirements for All Swap-Related Associated Persons
On March 25, the National Futures Association (NFA) published amendments to NFA Bylaw 301 and Compliance Rule 2-24 to require all associated persons of registered swap dealers, major swap participants, futures commission merchants, commodity pool operators, commodity trading advisors and introducing brokers who engage in or supervise activities involving swaps to satisfy new swaps proficiency requirements.
February 15, 2019
Investment advisers registered with the Securities and Exchange Commission (the SEC (each, an RIA) are subject to certain annual requirements under the Investment Advisers Act of 1940 (the Advisers Act; some of these requirements also either apply to exempt reporting advisers (each, an ERA) or warrant consideration as best practices for ERAs. This Sidley Update alerts investment advisers to certain annual regulatory and compliance obligations, including a number of significant 2019 reporting or filing deadlines.
This Sidley Update also reminds advisers that are registered as commodity pool operators (CPOs or commodity trading advisors with the Commodity Futures Trading Commission (CFTC and members of the National Futures Association (NFA of certain CFTC and NFA reporting requirements.
This Sidley Update provides important information regarding
- annual Form ADV updating requirements
- compliance program review and testing
- other annual reminders for RIAs and ERAs
- SEC examination priorities for 2019
- preparing for an SEC exam
- recent regulatory developments and guidance
- SEC focus on digital assets and ICOs
- recent SEC enforcement proceedings
- Form PF reporting requirements
- CFTC and NFA reporting requirements for certain investment advisers
February 14, 2019
Blockchain Technology: SEC Commissioner Peirce Presents an Opportunity to Rethink Regulation
On February 8, U.S. Securities and Exchange (SEC Commissioner Hester Peirce delivered a speech addressing the relationship between technological innovation and regulation, in particular addressing some of the pending regulatory challenges surrounding blockchain and digital assets. The key takeaways from Commissioner Peirce’s speech, titled “Regulation: A View From Inside the Machine,” are these:
- Not all digital assets are securities. The sale of digital assets to raise financing is a securities offering, while digital assets sold for use in a functioning or decentralized blockchain network are not investment contracts that are within the definition of securities.
- Notwithstanding SEC enforcement actions related to digital asset securities, regulatory uncertainty remains as to the treatment of digital assets. Regulatory clarity will need to come from either SEC guidance or legislative action.
- Digital asset trading platforms present novel regulatory considerations for secondary trading and custody.
February 13, 2019
NFA Creates New Internal Controls Requirements for CPO Members
Effective April 1, National Futures Association (NFA members that are commodity pool operators (CPOs will be required to implement internal controls systems designed to (i) protect customer funds, (ii) maintain accurate books and records and (iii) assure compliance with all requirements of NFA and the Commodity Futures Trading Commission . The new internal controls requirements are set forth in Interpretive Notice 9074 (Interpretive Notice), which NFA released on January 31 in a notice to members. These requirements are a component of each NFA member’s broader obligation under NFA Compliance Rule 2-9 to diligently supervise its employees and agents in their commodity futures activities on behalf of the member.
In the Interpretive Notice, NFA acknowledges that the standards for assessing the adequacy of a CPO’s internal control system may vary according to the size and complexity of the member’s operations. NFA also recognizes that certain CPOs may be subject to similar requirements of other regulators, compliance with which may satisfy the CPO’s obligations under the Interpretive Notice. However, NFA sets forth a series of key components that must be incorporated into the CPO’s internal control system.
January 29, 2019
SEC Goes Back to Work, but Slow Response Times Are Expected
SEC employees are returning to work after the partial government shutdown, but response times may take longer than usual. Unless there is an articulated need for expedited treatment, the SEC expects to address matters in the order in which they were received. It is too soon to quantify the anticipated duration of any delays or when the SEC will clear the backlog of requests contributing to delays.
January 23, 2019
U.S. House Introduces Bipartisan Bill to Restrict Rule 10b5-1 Trading Plans
The Democratic and Republican leaders of the House Committee on Financial Services announced last week the introduction of a bipartisan bill to try to ensure that issuers and their insiders cannot indirectly engage in illegal insider trading through adopting or changing their trading plans. On Friday, January 18, Chairwoman Maxine Waters, D-Calif., and Ranking Member Patrick McHenry, R-N.C., introduced HR 624, the Promoting Transparent Standards for Corporate Insiders Act, to require the Securities and Exchange Commission to explore and possibly implement amendments to SEC Rule 10b5-1 concerning what are commonly called Rule 10b5-1 trading plans.
January 16, 2019
Investment Funds – Year-End Recap of Our 2018 Client Updates
Dear Clients and Friends,
As the developments affecting the investment management industry continue to unfold, we have once again prepared our annual compendium of relevant Sidley Updates for our investment fund clients and friends.
The compendium includes a summary of each 2018 Sidley Update, in reverse chronological order, along with a link to its full text. We have included all of the Updates, making the compendium repetitive in instances where we revisited a topic to report on emerging information and breaking news in the industry.
If you would like additional information on any of these topics, please contact the Sidley lawyer with whom you usually work.
January 9, 2019
SEC Announces Examination Priorities for 2019
On December 20, 2018, the Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission released its report setting forth its list of examination priorities for 2019 (the Exam Priorities). OCIE announces its exam priorities annually to provide insights into the areas it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets. The Exam Priorities can serve as a roadmap to assist advisers in assessing their policies, procedures and compliance programs; testing for and remediating any suspected deficiencies related to the Exam Priorities; and preparing for OCIE exams.
January 3, 2019
On December 19, 2018, federal prosecutors in the Southern District of New York announced the first-ever criminal charge against a U.S. broker-dealer for a Bank Secrecy Act violation. The charge against Central States Capital Markets, LLC (CSCM), which the government agreed to dismiss upon completion of a deferred prosecution agreement, stems from serious gaps in CSCM’s anti-money laundering compliance program: CSCM failed to follow its own customer due diligence procedures, ignored known red flags when opening accounts and failed to adequately employ its monitoring system to capture and report suspicious transactions.
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