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 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.
January 4, 2021
SEC Adopts New Investment Adviser Marketing Rule
On December 22, 2020, the Securities and Exchange Commission adopted amendments to modernize and consolidate the rules under the Investment Advisers Act of 1940 addressing investment adviser advertisements and payments to solicitors. The Sidley Update provides a summary of the amendments, highlighting where the final rule deviates from the prior rules and the November 2019 proposed amendments.
December 23, 2020
Significant Energy Legislation Poised to Become Law with COVID-19 Relief
On December 21, 2020, The Consolidated Appropriations Act, 2021 (Act) passed both chambers for the purpose of funding the government in fiscal year (FY) 2021 and providing COVID-19 relief. It also included the most comprehensive bipartisan energy and climate legislation of the past decade. The legislation authorized over US$35 billion for the development of various clean energy technologies, including wind, solar, energy storage, energy efficiency, carbon capture utilization and storage (CCUS), carbon removal, and nuclear energy, primarily through programs run through the U.S. Department of Energy (DOE), and authorized additional monies to be allocated to emissions-reducing projects through the DOE’s Title XVII loan guarantee program. It also extended, and in some cases expanded, a number of energy tax incentives that support investments in renewable and clean energy projects. Many of these incentives would have otherwise expired or been reduced at the end of the year.
December 22, 2020
FinCEN Proposes Tracking and Reporting Virtual Currency Transactions Involving Unhosted Wallets
On December 18, 2020, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking (NPR) regarding a proposal to impose on banks and money service businesses (MSBs) new recordkeeping, reporting, and identity verification requirements in relation to certain transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (legal tender digital assets or LTDA) if the counterparty to the transaction does not have an account with, including a digital asset wallet hosted by, a financial institution regulated under the U.S. Bank Secrecy Act (BSA) or certain foreign financial institutions not located in designated problematic jurisdictions. If adopted, the proposed rule will impose significant new burdens only on banks and MSBs involved in digital asset businesses and undercut the role of U.S. institutions in digital asset economies, including in the growing area of “decentralized finance.” The NPR proposes to exclude broker-dealers, futures commission merchants, and mutual funds, among others that are subject to the BSA from these new reporting requirements, but specifically requests the industry’s comment on whether these types of institutions should also be included within the scope of the rule.
December 21, 2020
DOJ Brings First Criminal Wage Fixing Case
On December 10, 2020, the Antitrust Division of the U.S. Department of Justice (the Department) obtained an indictment against Neeraj Jindal for alleged participation in a conspiracy to fix the wages of physical therapists and physical therapist assistants in the Dallas area. The indictment is noteworthy because it is the first time the Department has brought a criminal case involving wage fixing. The case serves as a reminder that antitrust enforcers have increasingly focused on human resources issues, including no-hire and nonsolicitation agreements. In addition, the indictment alleges that the defendant obstructed an investigation of the same conduct by the Federal Trade Commission (FTC).
December 21, 2020
ERISA Fiduciary Rule 2.0: U.S. Department of Labor Finalizes New Prohibited Transaction Exemption
On December 15, 2020, the U.S. Department of Labor (DOL) issued the final version of a reproposed fiduciary rule to regulate “investment advice fiduciaries” under the Employee Retirement Income Security Act of 1974, as amended (ERISA). The rule is meant to replace the DOL’s previous rule on this topic, which was promulgated in 2016 but vacated in 2018 by the U.S. Court of Appeals for the Fifth Circuit.
December 17, 2020
On December 11, 2020, the U.S. Department of Labor (DOL) issued its final rule, which amends its 1979 investment duties regulation under the Employee Retirement Income Security Act of 1974, as amended (ERISA), to add new rules for plan fiduciaries to follow when voting proxies or exercising other shareholder rights on behalf of ERISA plans. This rule was proposed on September 4, 2020, and is consistent with the DOL’s recent guidance requiring plan fiduciaries to focus on “pecuniary factors” when making investment decisions for ERISA plans.
December 16, 2020
SEC Finalizes Framework for Registered Fund Valuation Practices
On December 3, 2020, the U.S. Securities and Exchange Commission adopted new Rule 2a-5 (New Rule 2a-5) addressing registered fund valuation practices and, especially, the role of a fund’s board of directors in the fair valuation process. New Rule 2a-5 replaced decades-old guidance and interpretations and is intended to modernize the regulatory framework of registered fund valuation practices to reflect recent market developments and an increase in both the variety of asset classes held by funds and the volume of data used in fair valuation.
December 11, 2020
On December 8, 2020, the Monetary Authority of Singapore (MAS) issued: (a) its response to the feedback received on the Consultation Paper on Proposed Guidelines on Environmental Risk Management for Asset Managers (Response) that was issued on June 25, 2020 and (b) the Guidelines on Environmental Risk Management for Asset Managers (Guidelines).
These developments are most relevant to, (a) holders of a capital markets services license for fund management and (b) registered fund management companies, (collectively, Asset Managers), and are not intended to be exhaustive.
December 8, 2020
Hong Kong’s Real Estate Investment Trust Code Enhanced
On December 4, 2020, the Hong Kong Securities and Futures Commission (SFC) gazetted changes to the Code on Real Estate Investment Trusts (REIT Code) following a two-month industry consultation on the enhancements. The amendments to the REIT Code (Reforms) provide Hong Kong real estate investment trusts with more flexibility in making investments, which include:
- allowing REITs to make investments in minority-owned properties (subject to conditions)
- allowing REITs to make investments in property development projects in excess of the existing limit of 10% of gross asset value (GAV) (subject to unitholders’ approval and other conditions)
- increasing the borrowing limit for REITs from 45% to 50% of their GAV
The Reforms include other changes that broadly align the requirements applicable when REITs engage in connected party transactions and notifiable transactions with the requirements for listed companies, in line with existing policy and practices. A transitional period of six months is allowed for existing REITs to comply with these revised requirements.
The Reforms are widely welcomed by the industry and represent the latest in a series of recent changes introduced by the Hong Kong government to bolster Hong Kong’s position as a premier asset and wealth management hub.
December 7, 2020
On December 4, 2020, the U.S. Internal Revenue Service and Department of the Treasury released final and proposed regulations relating to passive foreign investment companies (PFICs) relevant to foreign insurance companies and their investors, insurance-linked securities (ILS) funds, and other participants in transactions involving foreign insurers. The 246-page final regulations retain the basic approach and structure of prior proposed regulations published on July 11, 2019, with certain significant revisions, and the 116-page proposed regulations include further proposed rules and important modifications.
December 3, 2020
UK/EU Investment Management Update (December 2020)
This Update covers, among other things, the status of Brexit, the latest relevant UK and EU responses to the COVID-19 pandemic, the Markets in Financial Instruments Directive (MiFID II), the UK Investment Firms Prudential Regime (UK IFPR), the London interbank offered rate (LIBOR) transition, sanctions imposed under the Alternative Investment Fund Managers Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, a Financial Conduct Authority (FCA) sanction for nonfinancial misconduct, Securities Financing Transactions Regulation (SFTR) data reporting, the FCA’s Financial Services Register, and the latest in the environmental, social, and governance (ESG) space.
December 2, 2020
CFTC Adopts Long-Awaited Federal Position Limit Rules
The Commodity Futures Trading Commission adopted significant amendments to its position limit regulations, adopting federal limits for certain futures contracts and over-the-counter derivatives. The revised rules will be phased in over the next two years and will affect market participants trading derivatives on agricultural and energy-related commodities and metals.
December 2, 2020
On November 30, 2020, the California Occupational Safety and Health Administration (CalOSHA) adopted temporary emergency standards imposing additional COVID-19 protections for workers. The regulations include a number of requirements already applicable to employers in California, such as providing free personal protective equipment (PPE) to employees, sending sick employees home, identifying and addressing workplace hazards, and notifying the local health department of a workplace outbreak. The emergency regulations will be in effect for a total of 180 days unless extended or adopted through the normal rulemaking process.
December 1, 2020
Observations on OCIE’s Risk Alert on Investment Adviser Compliance Programs
On November 19, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a risk alert (the Alert) providing an overview of the OCIE staff’s observations from examinations of SEC-registered investment advisers. The Alert focused on compliance issues related to Rule 206(4)-7 (Compliance Program Rule) under the Investment Advisers Act of 1940 (Advisers Act), one of the most common sources of deficiencies cited by the OCIE staff.
November 23, 2020
U.S. Credit Markets: Interconnectedness and Risks
On October 5, 2020, the Securities and Exchange Commission (SEC) published “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock” (the Report). In Hamlet, Polonius counsels his son, Laertes: “Neither a borrower, nor a lender be.” The size and breadth of the U.S. credit markets are proof that this Shakespearean advice has largely been ignored. The Securities and Exchange Commission (SEC) examined in this report how the U.S. credit markets functioned in the face of the early economic effects of the COVID-19 pandemic. As the SEC’s press release notes, the Report addressed “the origination, distribution and secondary market flow of credit across U.S. credit markets” and “how the related interconnections in our credit markets operated as the effects of the COVID-19 pandemic took hold.” It is a “must read” for credit market participants seeking a comprehensive understanding of U.S. credit markets today.
November 19, 2020
Asia Funds and Financial Services Newsletter
This issue of Sidley’s Asia Funds and Financial Services Newsletter discusses important regulatory and enforcement developments that impact financial institutions, investment advisers, and investment funds operating in the Asia-Pacific region in a fast-changing regulatory landscape, with a special focus on post-pandemic priorities for the Hong Kong regulator, including increased focus on regulation of virtual assets and compliance with U.S. sanctions in Hong Kong following the enactment of the new National Security Law.
November 19, 2020
SEC Adopts Derivatives Rule for Registered Investment Companies
In an effort to modernize the regulatory framework to reflect the evolution of derivatives use and related investor protection concerns, a divided U.S. Securities and Exchange Commission (SEC) approved, by a 3-2 vote, Rule 18f-4 under the Investment Company Act (the Act). This long-awaited derivatives risk management rule, which applies to mutual funds (other than money market funds), exchange-traded funds (ETFs), registered closed-end funds, and business development companies (BDCs) (collectively, funds), pulls back from some of the more controversial aspects of the 2019 proposed rule (which was itself a reproposal of a version of the rule from 2015). Rule 18f-4 replaced the current decades-old approach, which Chairman Jay Clayton called “outdated and unclear.”
November 17, 2020
On November 9, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a risk alert (the Alert) providing an overview of the OCIE staff’s observations from examinations of SEC-registered investment advisers. The Alert focused on advisers that operate multiple branch offices that are geographically dispersed from the advisers’ principal offices, with a particular emphasis on assessing the compliance and supervisory practices relating to advisory personnel working at such branch offices.
November 16, 2020
The CFTC’s Final Cross-Border Swaps Rule
On November 13, 2020, a new Commodity Futures Trading Commission (CFTC) rule took effect, which determines the cross-border application of certain of the CFTC’s swaps regulations for swap dealers and major swap participants, including applicable registration thresholds. The rule extends the cross-border approach of the CFTC’s 2016 cross-border rule relating to the application of margin requirements for uncleared swaps, and it harmonizes, to a significant degree, the CFTC’s cross-border approach to swap dealer regulation with the Securities and Exchange Commission’s cross-border approach to security-based swap dealer regulation. The rule supersedes the CFTC’s 2013 cross-border interpretive guidance with respect to the requirements that the rule addresses. In other respects, the 2013 interpretive guidance will remain relevant.
November 11, 2020
Hong Kong Proposes New Licensing Regime for Virtual Asset Service Providers
On November 3, 2020, the Hong Kong Financial Services and Treasury Bureau (FSTB) issued a public consultation paper (Consultation) outlining, among other things, a proposed new licensing regime for virtual asset service providers (VASPs) in order to implement the recommendations of the Financial Action Task Force.
Under the proposed VASP licensing regime (VASP Regime) outlined in the Consultation, the business of operating a virtual assets exchange will be a regulated virtual asset activity under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and will require a VASP license from the Securities and Futures Commission (SFC).
November 11, 2020
Rule for Fund of Funds Arrangements
On October 7, 2020, the U.S. Securities and Exchange Commission adopted new Rule 12d1-4 under the Investment Company Act of 1940 to consolidate previous rulemaking, no-action relief, and other guidance and to streamline and enhance the regulatory framework applicable to funds of funds. This Update provides an overview of Rule 12d1-4 and the related amendments.
November 10, 2020
SEC Division of Enforcement Annual Report Reveals Clear Contrast
On November 2, 2020, the Enforcement Division (Division) of the U.S. Securities and Exchange Commission (SEC or Commission) released its annual report providing a detailed overview of the Commission’s enforcement efforts and accomplishments for the 2020 fiscal year ending September 30, 2020. In a trying and unusual year plagued by the COVID-19 pandemic, the report reveals a clear contrast between 2019 and 2020. The total actions the Commission brought were markedly down in comparison to 2019, while the financial remedies assessed reached new highs.
November 5, 2020
UK/EU Investment Management Update (November 2020)
In this Update we cover, among other things, news on Brexit, a COVID-19 update, HM Treasury’s consultation on the Future Regulatory Framework Review, the European Commission (Commission) consultation on the Alternative Investment Fund Managers Directive (AIFMD), the Financial Conduct Authority’s (FCA) first fine under the EU Short Selling Regulation, an extension to certain deadlines under the Senior Managers and Certification Regime (SMCR) regime, market abuse risks arising from home working, the U.S. Securities and Exchange Commission (SEC) return to registration of UK-based managers, developments in the environmental, social, and governance (ESG) space, and the latest on the London interbank offered rate (LIBOR) transition.
November 3, 2020
AIFMD 2020 – Analysis of the European Commission Consultation on the AIFMD
On October 22, 2020, the European Commission launched its public consultation (Consultation) on the EU Alternative Investment Fund Managers Directive (AIFMD).
The Consultation marked the next step in the Commission’s formal review of the AIFMD. It follows the Commission’s June 2020 report to the European Parliament and the Council assessing the scope and application of the AIFMD (the Commission Report), and European Securities and Markets Authority (ESMA) August 2020 letter to the Commission highlighting areas for improvements to the AIFMD (the ESMA Letter); see our previous Update on the Commission Report and Update on the ESMA Letter.
November 2, 2020
On October 30, 2020, the U.S. Department of Labor (DOL) issued its final rule, which amends its 1979 investment duties regulation under the Employee Retirement Income Security Act of 1974, as amended (ERISA), to set forth strict rules requiring plan fiduciaries to consider only pecuniary factors in making investment decisions. This rule was proposed on June 23, 2020, and generated a significant response, under which the DOL received more than 1,100 written comments and more than 7,600 submissions in the form of six form letters.
October 29, 2020
SEC Adopts Fund Derivatives Rule, Expands Leverage Limits, Forgoes Sales Practice Rules
On October 28, 2020, a divided U.S. Securities and Exchange Commission (SEC) approved a long-awaited derivatives risk management rule that pulls back from some of the more controversial aspects of the original 2019 reproposal.
The new rule, which applies to mutual funds (other than money market funds), exchange-traded funds (ETFs), and registered closed-end funds (including business development companies), replaced the decades-old approach that Chairman Jay Clayton called “outdated and unclear.” The rule provides for an 18-month compliance transition period.
October 22, 2020
On October 14, 2020, the UK Financial Conduct Authority (FCA) issued a Final Notice, imposing a fine of £873,118, on Asia Research and Capital Management Ltd. (ARCM) for its failure to notify the FCA under the EU Short Selling Regulation (SSR) of net short positions held by ARCM in Premier Oil plc between February 2017 and July 2019. Although a number of other European regulators have issued fines for similar notification breaches, this was the first known fine imposed by the FCA for such a breach.
In this Update we describe the case and provide commentary on the key issues that arouse out of the FCA findings.
October 22, 2020
SEC Lifts Moratorium on Registration of UK-Based Managers
Communications from the U.S. Securities and Exchange Commission (SEC) indicate that the SEC was again considering registration of advisers located in the UK. The SEC had delayed approving UK and European Union (EU) investment managers’ applications for registration since the adoption of the EU’s General Data Protection Regulation (GDPR), due to concerns that the GDPR would impede the SEC’s ability to collect data from, and supervise, these UK and EU investment managers.
October 20, 2020
CFTC Amends Foreign CPO Registration Exemption
On October 15, 2020, the U.S. Commodity Futures Trading Commission (CFTC) approved amendments to CFTC Regulation 3.10(c), which exempts non-U.S. commodity pool operators (CPOs) from registering with the CFTC with respect to non-U.S. commodity pools operated by the non-U.S. CPOs that are not marketed or sold in the United States.
October 19, 2020
On October 7, 2020, the International Swaps and Derivatives Association (ISDA) published model clauses for use with the 2005 ISDA Commodity Definitions (the ISDA Commodity Definitions) to address negative commodity prices for transactions that reference the ISDA Commodity Definitions. The model clauses arrived in the wake of the historic collapse of West Texas Intermediate (WTI) crude oil futures prices, which on April 20, 2020, fell to negative US$40.32 per barrel before settling at negative US$37.63 per barrel at the close. Before the WTI collapse, the Chicago Mercantile Exchange (CME) had announced its plan to switch models for option pricing if futures for certain contracts traded at negative prices and also announced that it had updated its trading systems to process negative prices for exchange-traded contracts, but ISDA had not expressly addressed negative commodity pricing for over-the-counter trades that reference the ISDA Commodity Definitions. In fact, as part of its publication of the model clauses, ISDA expressly noted the “publication of the Model Clauses does not imply, and should not be construed as implying, that a negative floating amount would or would not be payable under the terms of the Commodity Definitions (absent use of one of the Model Clauses).”
October 12, 2020
SEC Proposes Exemptive Order for Certain Activities of Finders
On October 7, 2020, the U.S. Securities and Exchange Commission (Commission or SEC) released for notice and comment a proposed exemptive order (Notice) that once approved ultimately granted conditional exemption from the broker-dealer registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (Exchange Act) for certain activities of “finders.” It marked the Commission’s broadest statement ever about the ability of persons not registered as broker-dealers to take transaction-based compensation for U.S.-based solicitation of investors on behalf of issuers in connection with capital-raising activities, something that historically has been considered a core activity that requires registration as a broker-dealer under the Exchange Act. In addition to easing capital raising for operating company issuers, private fund advisers seeking investors in their funds may also benefit from the exemption if such advisers do not own, or are otherwise affiliated with, a registered broker-dealer.
October 7, 2020
On October 1, 2020, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published an advisory that highlights the risk of potential U.S. sanctions law violations if U.S. individuals and businesses comply with ransomware payment demands.
October 7, 2020
The San Francisco Board of Supervisors, which oversees the U.S. city and county, passed an emergency ordinance that was effective September 11, 2020 until November 10, 2020. This emergency ordinance applied to all workers, including part-time employees and independent contractors, who provide labor or services within the city or county of San Francisco.
October 7, 2020
UK/EU Investment Management Update (October 2020)
In this Update we cover, among other things, news on Brexit, a COVID-19 update (including the Financial Conduct Authority’s (FCA) 10% depreciation rule), an EU Short Selling Regulation update, Markets in Financial Instruments Directive (MiFID II) (including some findings on research unbundling by the European Securities and Markets Authority (ESMA)), ESMA’s review of the EU Market Abuse Regulation, FCA statistics on market abuse, a UK case on market manipulation, the latest on London interbank offered rate transition, and developments in the environmental, social, and governance space.
October 7, 2020
SEC Charges Investment Adviser with Schedule 13D Reporting Violations
The U.S. Securities and Exchange Commission (SEC) entered into an enforcement settlement with a registered investment adviser (Adviser) managing five private funds (Funds) for violating the “beneficial ownership” reporting requirements of Section 13(d) of the Exchange Act and Rule 13d-2 thereunder. More specifically, the SEC determined that the Adviser failed to timely file two amendments to its Schedule 13D, reporting its beneficial ownership of shares of common stock in a prosthetics care company (Company).
October 5, 2020
CFTC Report Details Threats of Climate Change to the U.S. Financial System
In September 2020, the Climate-Related Market Risk Subcommittee (the Subcommittee) of the Market Risk Advisory Committee (the MRAC) of the U.S. Commodity Futures Trading Commission (CFTC) published a report, “Managing Climate Risk in the U.S. Financial System” (the Report). The Report reflected on the potential economic costs of climate change and set out recommendations directed toward regulators and market participants throughout the U.S. financial system. The report first described risks to the stability of the financial system posed by climate change. It then set forth certain findings of the Subcommittee with respect to those risks. The report concluded with specific recommendations to the CFTC itself, other state and federal regulators, and even Congress for managing and mitigating those risks.
September 29, 2020
SEC Issues No-Action Letter for Certain Alternative Trading Systems Trading Digital Asset Securities
On September 25, 2020, the U.S. Securities and Exchange Commission (SEC)’s Division of Trading and Markets issued its first no-action letter (Letter) to the Financial Industry Regulatory Authority, Inc. (FINRA), related to digital asset securities. Based on the Letter, the SEC staff (Staff) would not recommend enforcement action pursuant to SEC Rule 15c3-3 (the Customer Protection Rule) under the U.S. Securities Exchange Act of 1934 (Exchange Act) if a registered broker-dealer operates a noncustodial alternative trading system (ATS) that trades digital asset securities issued and/or transferred using blockchain technology, subject to certain conditions. The Letter elaborated on the July 28, 2019, joint statement (Joint Statement) issued by the staffs of the SEC and FINRA, which discussed a broker-dealer’s ability to comply with the Customer Protection Rule with respect to digital asset securities and outlined potential noncustodial broker-dealer models for digital assets, including operating an ATS that only matches buyers and sellers of digital asset securities but does not custody such securities for the account of customers.
September 29, 2020
Hong Kong Launches Consultation on Anti-Money-Laundering Guidelines
On September 18, 2020, the Hong Kong Securities and Futures Commission (SFC) launched a three-month consultation on proposals to amend its anti-money-laundering and counterfinancing of terrorism (AML/CFT) guidelines. The SFC was seeking comments primarily on
- institutional and customer risk assessments
- risk mitigation for cross-border correspondent relationships, suspicious transactions, and third-party deposits and payments
- further guidance on PPTA (person purporting to act on behalf of the customer) as well as establishing source of funds and source of wealth
September 23, 2020
On September 21, 2020, the U.S. Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (Notice) that would materially change the premerger notification rules (Rules) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) applicable to investment funds and master limited partnerships (MLPs) and pertaining to partial acquisitions.
September 21, 2020
FinCEN Seeks Input on Proposed Clarifications of Anti-Money Laundering Program Requirements
On September 16, 2020, the Financial Crimes Enforcement Network (FinCEN) solicited public comment through an Advance Notice of Proposed Rulemaking (ANPRM) regarding extensive potential changes to its Bank Secrecy Act (BSA) regulations. Among 11 key groups of questions raised under ANPRM, comments were sought on:
- AML program standards
- mandated institutional risk assessments
- effective and streamlined approaches to reporting obligations
- establishing criteria for independent testing
September 18, 2020
New Rules on CFIUS Mandatory Filings
On September 15, 2020, the U.S. Department of the Treasury published a final rule modifying the types of foreign investments that would trigger a mandatory filing before the Committee on Foreign Investment in the United States (CFIUS). The final rule largely tracks a proposed rule published by CFIUS on May 21, 2020. The final rule came into effect on October 15, 2020, and applies only to transactions that take place on or after that date. It is not retroactive.
September 15, 2020
Monetary Authority of Singapore Issues Guidelines on Individual Accountability and Conduct
On September 10, 2020, the Monetary Authority of Singapore (MAS) issued the Guidelines on Individual Accountability and Conduct (Guidelines). The Guidelines focus on the measures financial institutions (FIs) should put in place to promote the individual accountability of senior managers, strengthen oversight over material risk personnel, and reinforce standards of proper conduct among all employees.
September 14, 2020
Hong Kong’s Open-Ended Fund Company Revamped
On September 2, 2020, the Securities and Futures Commission (SFC) released the conclusions of its two-month industry consultation (Consultation Conclusions) on proposed enhancements to the Open-Ended Fund Company (OFC) regime. The Consultation Conclusions outline several key enhancements to the OFC regime (Reforms), including:
- removing all investment restrictions applicable to private OFCs
- expanding the scope of persons permitted to act as custodians for private OFCs
- introducing a statutory mechanism for the re-domiciliation of overseas corporate funds to Hong Kong
September 3, 2020
UK/EU Investment Management Update (September 2020)
In this Update we cover, among other things, an update on Brexit, the European Securities and Markets Authority (ESMA) recommendations on the Alternative Investment Fund Managers Directive (AIFMD) review, ESMA’s opinion on third-country trading venues as relevant to the Markets in Financial Instruments Regulation (MiFIR) transaction reporting requirements, new Financial Conduct Authority (FCA) webpages on the Senior Managers and Certification Regime (SMCR), an update to the EU net short position notification requirements, an update on the London interbank offered rate (LIBOR) transition, and a recent insider dealing conviction.
August 28, 2020
SEC Broadens Accredited Investor and Qualified Institutional Buyer Definitions
On August 26, 2020, the U.S. Securities and Exchange Commission voted 3-2 to adopt amendments broadening the definitions of “accredited investor” and “qualified institutional buyer.” While the amendments to the definition of “qualified institutional buyer” were largely uncontroversial, each Commissioner released a statement for or against the amendments to the definition of “accredited investor.” This divergence in perspectives may signal widely different approaches for the SEC’s rulemaking focus in the coming years.
August 27, 2020
AIFMD 2020 – ESMA’s Recommendations on the AIFMD Review
On August 28 2020, the European Securities and Markets Authority (ESMA) sent a letter to the European Commission (Commission), titled “Review of the Alternative Investment Fund Managers Directive” (the ESMA Letter).
It is clear that, like the Commission Report, the ESMA Letter was influenced by what the post-Brexit EU asset management landscape should look like.
August 25, 2020
Joint Statement Seeks to Provide Additional Guidance Regarding Customer Due Diligence Expectations for Politically Exposed Persons
On August 21, 2020, the Financial Crimes Enforcement Network (FinCEN) and the U.S. banking agencies released a Joint Statement regarding Bank Secrecy Act (BSA)/Anti-Money-Laundering (AML) due diligence requirements for customers who may be considered politically exposed persons (PEPs) (the Statement). Banks and other financial institutions have historically created anti-money-laundering programs that include considerations of money-laundering risk associated with PEPs. However, questions have arisen in the financial institution community regarding regulatory expectations with respect to evaluation and monitoring of PEPs from an anti-money-laundering perspective.
August 24, 2020
Observations on OCIE’s Risk Alert for COVID-19 Compliance Risks and Considerations
On August 12, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a risk alert providing certain observations about COVID-19-related issues, risks, and practices relevant to SEC-registered investment advisers and broker-dealers.
August 20, 2020
SEC Proposes Wholesale Overhaul to Mutual Fund and Exchange-Traded Fund Shareholder Reporting
The SEC is proposing a package of new rules that would streamline shareholder reports for mutual funds and exchange-traded funds. The proposals would allow annual reports to stand in for many annual prospectus update mailings, and generally reimagine how funds communicate with current shareholders. These are strikingly ambitious changes that, if adopted, will require significant investment and thought to implement.
August 7, 2020
IRS Releases Proposed Regulations on Recharacterization of Carried Interest
On July 31, 2020, the U.S. Internal Revenue Service (IRS) released proposed regulations (Proposed Regulations) applicable to the carried interest provision enacted as part of the 2017 Tax Cuts and Jobs Act, Section 1061 of the Internal Revenue Code of 1986, as amended (the Code). Section 1061 recharacterizes certain long-term capital gains of a noncorporate partner that holds one or more applicable partnership interests (APIs) as short-term capital gains unless the gains are from assets held for more than three years. For a further description of Section 1061, see Congress Finalizes Tax Reform.
August 5, 2020
UK/EU Investment Management Update (August 2020)
In this Update we cover, among other things, news on Brexit, updates of relevance from the UK Financial Conduct Authority (FCA), Markets in Financial Instruments Directive (MiFID II) “quick fixes,” potential changes to the packaged retail investment and insurance-based products (PRIIPs) rules, a delay to the Central Securities Depositories Regulation (CSDR) settlement failure regime, and a new/additional EU sustainable finance disclosure requirement.
July 31, 2020
SEC and FINRA Issue Guidance on How to Characterize Certain Broker-Dealers Under SEC’s Customer Protection Rule
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA) issued guidance in the form of Frequently Asked Questions (FAQs) regarding the characterization of certain SEC-registered broker-dealers (which are members of FINRA) under the various exemption provisions set forth in Rule 15c3-3(k) under the U.S. Securities Exchange Act of 1934 (Exchange Act), the SEC’s customer protection rule. The guidance changed the way many broker-dealers characterize as not being subject to the full requirements of SEC Rule 15c3-3 in their FINRA membership agreements, and impacts the way such firms are characterized in their periodic FOCUS Report filings and their annual Exemption Report filings with respect to SEC Rule 15c3-3.
July 20, 2020
Delaware Supreme Court Clarifies Contractual Inspection Rights in Private Fund Documents
On July 13, 2020, the Delaware Supreme Court clarified in Murfey v. WHC Ventures, LLC the standard that may govern a Delaware limited partnership’s obligations to produce books and records. Borrowing from the familiar standards that govern demands for corporate books and records under 8 Del. C. § 220, Delaware courts have long held that statutory demands for a limited partnership’s books and records under 6 Del. C. § 17-305 must be accompanied by a showing that each such request is “necessary and essential” to the demanding party’s stated purpose. In this split decision, however, the Delaware Supreme Court held that limited partners seeking books and records under a contractual provision in a partnership agreement (as opposed to 6 Del. C. § 17-305) need not make the “necessary and essential” showing where the partnership agreement does not “expressly condition” the inspection right upon satisfying the “necessary and essential” standard.
July 20, 2020
In July 2018, the U.S. federal agencies that administer the Volcker Rule (collectively, the Agencies) initiated a series of proposed rulemakings to amend the original regulations implementing the Volcker Rule. The Agencies amended the Volcker Rule’s covered fund restrictions on June 25, 2020 (the 2020 Revisions). The 2020 Revisions generally leave intact the original regulation’s core restrictions on covered fund activities and proprietary trading, while providing relief from many of the Volcker Rule’s restrictions and simplifying how banking entities may comply with the restrictions as they remain.
July 15, 2020
SEC Proposes Amendments to Increase Form 13F Reporting Threshold
On July 10, 2020, the U.S. Securities and Exchange Commission (SEC) proposed amendments to Rule 13f-1 under the Securities Exchange Act of 1934 (Exchange Act) and Form 13F (Proposed Amendments) that, among other things, would increase the filing threshold from US$100 million to US$3.5 billion.
July 9, 2020
UK/EU Investment Management Update (July 2020)
In this Update we cover, among other things, news on Brexit, the European Commission’s report on the Alternative Investment Fund Managers Directive (AIFMD), COVID-19-related updates, the new UK and EU investment firm prudential regimes, recent market abuse fines, an update on LIBOR transition, and an update on emerging environmental, social, and governance (ESG)/sustainable finance regulation affecting investment managers.
July 9, 2020
DOJ and SEC Release Second Edition of FCPA Resource Guide
On July 3, 2020, the U.S. Department of Justice (the DOJ) and the Securities and Exchange Commission (the SEC) jointly released the second edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act (the Guide), updating the first edition that was issued in November 2012. The Guide maintains the general structure and content of the previous edition and does not contain any unexpected updates in light of Foreign Corrupt Practices Act (FCPA) developments over the past eight years. It does, however, update the DOJ’s and the SEC’s stated enforcement positions and statutory interpretations, based on policy announcements, enforcement actions, and the expanding case law interpreting the FCPA (due to an increasing number of individual defendants who have challenged FCPA prosecutions — and the government’s aggressive positions — in recent years). Reflecting another instance of the government’s increased efforts in transparency regarding FCPA enforcement, this new Guide is a key resource for companies across the spectrum of FCPA compliance, investigation, and enforcement issues. This Client Alert analyzes some of the key developments in the Guide.
July 7, 2020
Observations From Private Fund Adviser Examinations: Practical Tips and Best Practices
On June 23, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a risk alert (the Alert) providing an overview of the OCIE staff’s observations from examinations of advisers to private funds (i.e., private equity and hedge funds). According to the staff, the Alert intends to (1) assist private fund advisers in reviewing and enhancing their compliance programs and (2) provide investors with information regarding private fund adviser deficiencies.
July 2, 2020
AIFMD – European Commission Report – the Groundwork for AIFMD II?
On June 10, 2020, the European Commission (the Commission) published its long-awaited Report to the European Parliament and the Council assessing the scope and application of the EU Alternative Investment Fund Managers Directive (AIFMD). The Report was mandated under Article 69 of the AIFMD and follows KPMG’s report to the Commission on the AIFMD in January 2019.
July 2, 2020
SEC and DOJ Sign Memorandum of Understanding
On June 22, 2020, the SEC and the DOJ Antitrust Division signed a Memorandum of Understanding (MOU) to foster cooperation and communication with respect to promoting competitive conditions in the securities industry. Although the two enforcement agencies have worked together in recent years in relation to their respective enforcement responsibilities, this MOU was intended to foster even greater collaboration around law enforcement and regulatory matters.
July 1, 2020
The Once and Future DOL Fiduciary Rule: A Redux with a Proposed Prohibited Transaction Exemption
On June 29, 2020, the U.S. Department of Labor (DOL) issued its much-anticipated reproposal of a fiduciary rule to regulate “investment advice fiduciaries” under the Employee Retirement Income Security Act of 1974, as amended (ERISA). The proposed rule is meant to replace the DOL’s previous rule on this topic, which was promulgated in 2016 but vacated in 2018 by the U.S. Court of Appeals for the Fifth Circuit.
June 29, 2020
On June 25, 2020, the U.S. Commodity Futures Trading Commission (CFTC) and five prudential regulators approved final and proposed rule amendments related to their respective implementation of uncleared swaps margin requirements pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Also on June 25, 2020, the CFTC adopted final rules relating to post-trade name give-up and inter-affiliate swap clearing and took several actions to advance the CFTC’s regulatory approach to automated trading.
June 25, 2020
On June 18, 2020, the European Parliament adopted a new EU Regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation). The Taxonomy Regulation was published in the EU Official Journal on 23 June 2020.
The adoption of the Taxonomy Regulation follows the entry into force of the Sustainable Finance Disclosure Regulation (the SFDR) in December 2019.
This Update discusses the impact of the SFDR and the Taxonomy Regulation on asset managers, including non-EU managers who market their funds into the EU. Please also see our Update, EU Advances ESG Related Reforms to Financial Services Regulations, for a general overview of the EU’s ESG reforms.
June 23, 2020
Supreme Court Upholds Disgorgement as SEC Remedy
On June 22, 2020, in Liu v. SEC, No. 18-1501, the Supreme Court held that the Securities and Exchange Commission (SEC), in federal court enforcement actions, may continue to seek, and courts may continue to award, disgorgement as “equitable relief” under Section 21(d)(5) of the Securities Exchange Act of 1934. This was a question the Court had expressly declined to reach in its 2017 decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017). Although the Liu Court ruled in favor of the SEC, the 8-1 decision effectively limited the scope of this remedy, holding that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under the statute. The decision raised numerous questions about when, and how, tribunals will impose disgorgement in SEC enforcement actions.
June 23, 2020
Sustainability-Linked Bonds — A New Feature of the Sustainable Finance Landscape
In September 2019, Enel Finance International NV (Enel Finance), the Dutch-registered finance subsidiary of the Italian energy group Enel, structured and issued the first-ever Sustainability-Linked Bond (SLB) (the Enel USD SLB), borrowing the concept from the already developed sustainability-linked loan market and applying it to a bond issue. The new structure was well received by the market, with the deal being oversubscribed by almost three times. Enel followed the Enel USD SLB with the issue in October 2019 of a €2.5 billion multitranche SLB. To date, there had been no other issuances of SLBs.
June 12, 2020
The U.S. Office of the Comptroller of the Currency Seeks Comment on Digital Innovation by Banks
The U.S. Office of the Comptroller of the Currency (OCC) issued an Advance Notice of Proposed Rulemaking (ANPR) seeking input on how best to accommodate new technology and innovation in the business of banking, in connection with the OCC’s “comprehensive review” of its regulations at 12 C.F.R. part 7, subpart E (national banks), and part 155 (federal savings associations) (collectively, Rules). The ANPR offered industry participants an opportunity to shape future guidance and remove regulatory burdens to offering innovative new products, partnering with technology companies and enhancing operations through deployment of new technologies. The ANPR followed on the heels of regulators’ other efforts to address technological developments, with the caveat that the OCC was not seeking comment on authority to issue special purpose national bank charters.
June 11, 2020
Insider trading and the potential misuse of material nonpublic information (MNPI) have long been areas of intense focus of the U.S. Securities and Exchange Commission’s (the SEC) examination and enforcement programs. Recent SEC actions reflect a trend toward increased scrutiny of the potential for investment advisers to receive — and possibly to misuse — MNPI as a result of frequent interactions with the issuers in their investment portfolios, even where there is no evidence of misuse. Even in instances where the SEC does not allege that insider trading actually occurred, these actions reflect that investment advisers may face challenging regulatory examinations, enforcement actions, and civil money penalties if the SEC alleges that an investment adviser’s policies and procedures were not adequately and effectively designed, implemented, and enforced to address the potential for such misconduct. Accordingly, we suggest best practices with respect to the design and implementation of policies and procedures relating to the treatment of MNPI.
June 11, 2020
CFTC Extends COVID-19-Related Relief
On June 9, 2020, the Divisions of Swap Dealer and Intermediary Oversight and Market Oversight (the Divisions) of the Commodity Futures Trading Commission (CFTC) issued a joint no-action letter that extended certain COVID-19-related relief previously granted by these Divisions to futures commission merchants, swap dealers, floor brokers, retail foreign exchange dealers, swap execution facilities, and designated contract markets in a series of no-action letters on March 17, 2020 (a summary of this relief can be found here and in the attached tables). This relief was otherwise set to expire on June 30, 2020. Due to the continued disruption caused by the COVID-19 pandemic, the Divisions extended the previously issued relief through September 30, 2020, subject to the conditions specified in the original no-action letters.
June 8, 2020
On June 4, 2020, the Commodity Futures Trading Commission (CFTC) adopted a final rule (the Final Rule) prohibiting a commodity pool operator (CPO) that has, or whose principals have, a statutory disqualification listed in section 8a(2) of the Commodity Exchange Act (CEA) in their backgrounds (Disqualifying Conduct) from claiming an exemption from CPO registration under Rule 4.13.
June 4, 2020
DOJ Updates Guidance on Evaluating Corporate Compliance Programs
On June 1, 2020, the Criminal Division of the U.S. Department of Justice (DOJ) publicized an updated version of its “Evaluation of Corporate Compliance Program” guidance. This is the third version of the document, with the DOJ having issued the guidance in 2017 and revised it in April 2019 (which we analyzed here). This further revision is another reminder of the DOJ’s heightened focus and increasing sophistication regarding evaluating compliance programs during investigations. While the overall structure of the guidance generally remains consistent with the prior version, the revisions provide additional insight into the DOJ’s expectations for corporate compliance programs. More specifically, the revisions highlight the importance of an adequately resourced and empowered compliance department, a constantly evolving compliance program based on the company’s current risk profile and relevant compliance issues, and the use of key compliance metrics to test the effectiveness of a compliance program.
June 4, 2020
UK/EU Investment Management Update (June 2020)
In this Update we cover, among other things, news on Brexit negotiations, EU short selling bans, updated Q&As on the Markets in Financial Instruments Directive (MiFID II) and European Market Infrastructure Regulation (EMIR), Financial Conduct Authority (FCA) concerns about market abuse in a remote working environment, a new UK Regulatory Initiatives Grid, ESMA guidelines on outsourcing to cloud service providers, a new EU-wide anti-money-laundering (AML) action plan, and the European Commission’s 2020 Work Programme.
June 3, 2020
Market Conduct in an Era of Remote Working – UK Financial Conduct Authority Market Watch 63
On May 27, 2020, the UK Financial Conduct Authority (FCA) published the 63rd edition of its Market Watch newsletter. The newsletter set out the FCA’s expectations for market conduct in the context of increased capital-raising events and alternative working arrangements due to COVID-19.
May 21, 2020
Asia Funds & Financial Services Newsletter
The May issue of Sidley’s Asia Funds and Financial Services Newsletter discussed important regulatory and enforcement developments that impact financial institutions, investment advisers, and investment funds operating in the Asia-Pacific region in a fast-changing regulatory landscape, with a special focus on Hong Kong’s new private fund regime as well as the regulatory responses in Hong Kong and Singapore amid the COVID-19 outbreak.
May 18, 2020
EU Bans on Short Positions — Implications for Market Participants
On May 18, 2020, all of the six EU Member State regulators announced that their respective bans would be lifted at 23:59 or 24:00 CET of May 18, 2020. Accordingly, the bans no longer applied from the start of the trading day on May 19, 2020.
May 7, 2020
UK/EU Investment Management Update (May 2020)
In this Update we cover, among other things, guidance and expectations of the UK Financial Conduct Authority (FCA) on COVID-19, extensions of the EU bans on short selling, news on Brexit, updates on the London interbank offered rate (LIBOR) transition, the FCA Business Plan 2020/21, and the Report of the Board of the International Organization of Securities Commissions (IOSCO) on its Fifth Hedge Fund Survey.
May 4, 2020
New Executive Order Will Prohibit Certain Acquisitions of Foreign-Made Bulk-Power Systems Equipment
On Friday, May 1, 2020, President Donald Trump issued an executive order (EO) prohibiting any transaction that (i) involved bulk-power system (BPS) equipment designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary and (ii) posed an unacceptable risk to national security. The EO directed the U.S. Secretary of Energy (the Secretary) to issue implementing regulations by September 28, 2020. The EO also required the Secretary to review the risk of existing BPS equipment sourced from foreign adversaries and to establish a task force to review and recommend federal procurement policies and procedures consistent with the considerations identified in the EO.
May 4, 2020
Strategic Acquisitions of Distressed Companies in the COVID-19 Environment
During the course of the most recent bull market, merger and acquisition (M&A) activity generally remained robust. We increasingly saw competitive auctions for desirable companies, some of which also had the ability to pursue an initial public offering instead of a sale. In the years since the 2008 financial crisis, many acquisitive companies have become accustomed to pursuing target companies with solid balance sheets and bright prospects.
May 4, 2020
Returning to Work: Employer COVID-19 Testing
In this article, we explored if testing plays a meaningful role in the return to work plans employers were contemplating. In their efforts to provide a safe return to work and reassure workers that the workplace actually was safe for their return, we discussed the need for employers to evaluate this question, based on the testing available, employment and privacy laws, and the individual circumstances of their workplaces and workforces.
May 4, 2020
COVID-19: Consolidated U.S. Investment Management Update
In this Update, we summarized and consolidated links to various Sidley alerts and other sources of information relating to the global COVID-19 pandemic and governmental and regulatory responses to it that were relevant for investment managers.
April 30, 2020
The U.S. Board of Governors of the Federal Reserve System (Federal Reserve) announced substantial changes to and an expansion of its Main Street Lending Program authorized under the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide financing to small and midsize businesses. The announcement was in response to comments the Federal Reserve received from approximately 2,200 individuals, businesses, and nonprofits, solicited when it initially announced the Main Street Lending Program.
April 28, 2020
CFTC Proposes First Comprehensive Rewrite of Bankruptcy Rules Since 1983
On April 14, 2020, the U.S. Commodity Futures Trading Commission proposed to comprehensively rewrite its bankruptcy rules for the first time in 37 years. These rules, along with the Bankruptcy Code, govern the distribution of assets in the bankruptcy of a futures commission merchant or derivatives clearing organization. Comments on the proposal are due July 13.
April 27, 2020
COVID-19’s Potential Impact on Venture Capital Investment Terms
We live in ever-changing times with the presence of COVID-19 affecting every aspect of our business and personal lives. The world of venture capital is not exempt. The outbreak has effectively curtailed what had been a steadily growing market opportunity for venture-backed companies and investors. Venture-backed companies have shifted from seeking new paths to growth, to seeking new paths to merely survive.
April 27, 2020
SEC Proposes Amendments to Modernize Framework for Registered Fund Valuation Practices
On April 21, 2020, the U.S. Securities and Exchange Commission (SEC) proposed a new framework for valuation practices under the Investment Company Act of 1940 (Investment Company Act) for registered open-end funds and closed-end funds, including business development companies (BDCs).
Proposed Rule 2a-5 (Proposed Rule), which would replace decades-old guidance and interpretations, is designed to modernize the regulatory framework of registered fund valuation practices. It would clarify how fund boards can satisfy their valuation obligations in light of recent market developments, including an increase in the variety of asset classes held by funds and an increase in both the volume and types of data used in valuation determinations.
April 21, 2020
SEC Adopts Offering Reforms for Business Development Companies and Registered Closed-End Funds
The U.S. Securities and Exchange Commission has adopted rule and form amendments allowing business development companies and closed-end investment companies registered under the Investment Company Act to use the securities offering rules available since 2005 for other issuers (i.e., operating company issuers), including:
- Use of Short-Form Registration Statements and Forward Incorporation by Reference
- WKSI Status for Eligible Affected Funds
- Automatic or Immediate Effectiveness for Filings by Affected Funds Conducting Certain Continuous Offerings
- 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 Amendments
April 20, 2020
U.S. Warns of Threat to Financial Industry Posed by North Korean Cyberattacks
On April 15, 2020, the U.S. Departments of State, the Treasury and Homeland Security and the Federal Bureau of Investigation issued a joint advisory (the Advisory) discussing the threat to the international community posed by cyberattacks linked to the Democratic People’s Republic of Korea (North Korea), in particular highlighting concerns for the financial services sector. North Korea has been subjected to comprehensive international sanctions implemented to pressure its government to denuclearize. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) implemented additional unilateral sanctions in response to other North Korean activities, including cyberattacks, human rights violations, and money laundering. In addition to broad prohibitions on trade with North Korea, U.S. sanctions bar domestic financial institutions from conducting or facilitating any significant transaction in connection with trade with North Korea or on behalf of any person whose property has been blocked under executive orders imposing sanctions on North Korea. Foreign financial institutions risk secondary sanctions for engaging in the same.
April 15, 2020
During the market volatility resulting from the COVID-19 pandemic in March and early April, we saw a growing number of inquiries from investment manager clients concerned about breaching default triggers in their trading agreements tied to a decline in a fund’s net asset value (NAV) over a designated period of time. Concurrently, we also saw many clients concerned about potential dealer counterparty insolvencies and thinking about measures they could take to mitigate their counterparty risks. This Sidley Update provides some recommended actions for funds experiencing concerns about these issues.
April 15, 2020
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security Act (the CARES Act or Act). The CARES Act provides economic relief to individuals and businesses facing hardship due to the COVID-19 crisis, including extensive financial assistance for businesses under Title IV of the Act. These benefits, however, are tied to public disclosure requirements, which may expose businesses to an increased risk of regulatory scrutiny and enforcement activity, as well as to suits from the plaintiffs’ bar. Businesses should weigh the risks of possible disclosure of their participation and/or sensitive business information against the benefits of receiving relief. The Sidley Update provides an overview of those public disclosure requirements, focusing on the two aspects of available relief under Title IV.
April 8, 2020
OCIE Announces Plans to Assess Compliance With Reg BI and Form CRS as Scheduled
On April 7, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) released two risk alerts regarding Regulation Best Interest (Reg BI) and Form CRS. This followed SEC Chairman Jay Clayton’s announcement that the SEC will not extend the compliance date for Reg BI and Form CRS (discussed here).
April 3, 2020
Final Implementation Phases of Initial Margin for Uncleared Derivatives Set for Deferral
On April 3, 2020, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) announced that they agreed to a one-year extension of the deadlines for completing the final two implementation phases of initial margin requirements for uncleared derivatives. This extension was issued in response to industry advocacy efforts requesting BCBS, IOSCO, and global regulators suspend the current timeline for the initial margin phase-in to allow market participants to focus their resources on ensuring continued access to the derivatives markets in light of the significant challenges posed by the COVID-19 pandemic.
April 2, 2020
UK/EU Investment Management Update (April 2020)
In this Update we cover guidance from various sources on COVID-19 which are relevant for investment managers, the EU short selling bans, London interbank offered rate (LIBOR) transition, UK Financial Conduct Authority (FCA) proposals for climate-related disclosures, European Market Infrastructure Regulation (EMIR) reporting best practices, and the UK Financial Services Regulatory Initiatives Forum.
April 1, 2020
COVID-19: Proposed Changes to UK Insolvency Laws
On March 28, 2020, during the UK government’s daily COVID-19 press conference, Business Secretary Alok Sharma announced that changes to insolvency laws were to be introduced at the “earliest opportunity,” to provide businesses with greater flexibility and support to “weather the storm.”
March 30, 2020
SEC Provides Certain Conditional, Temporary Regulatory Relief for Registered Funds Due to COVID-19
The U.S. Securities and Exchange Commission (SEC) issued exemptive orders providing certain conditional, temporary relief relating to the impact of COVID-19.
March 26, 2020
Senate Passes Economic Stimulus Package in Response to COVID-19 Crisis
On March 25, 2020, the U.S. Senate by a vote of 96 to 0 passed HR 748, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion emergency relief bill that attempted to arrest the financial disruption caused by COVID-19.
March 26, 2020
Update: Form ADV and Form PF Conditional Relief
On March 25, 2020, the U.S. Securities and Exchange Commission (SEC) issued an order superseding its previous, March 13 order that provided targeted relief with respect to Form ADV and Form PF filing and delivery obligations of registered investment advisers or exempt reporting advisers where the filing deadline cannot be met “due to circumstances related to current or potential effects of COVID-19.” Please see the Sidley Update included for more information on the order from March 13.
March 25, 2020
On March 20, 2020, the Commodity Futures Trading Commission (CFTC) released its third wave of COVID-19 pandemic-related relief, issuing a no-action letter (the No-Action Letter) that extended the deadlines for CFTC-registered commodity pool operators (CPOs) to (1) file Form CPO-PQR; (2) file and deliver pool annual reports; and (3) distribute periodic account statements. On March 23, NFA sent a notice to its members providing relief to member CPOs and commodity trading advisors (CTAs).
March 23, 2020
Delaware Supreme Court Upholds Federal-Forum Provisions
On March 18, 2020, the Supreme Court, in Salzberg v. Sciabacucchi, upheld the validity under Delaware law of “federal-forum provisions,” in which Delaware corporations mandate that claims brought under the Securities Act of 1933 be filed in a federal court.
The highly anticipated opinion, reversing a Chancery Court decision, underscored Delaware’s preference for private ordering and confirmed that corporate managers and stockholders have significant latitude in choosing the forum for certain types of litigation.
March 23, 2020
Application of Stay-at-Home Orders to Financial Institutions
As more and more restrictive orders were being issued nationwide, businesses in the financial services sector were racing to confirm whether or not they were considered an “essential business” able to remain open despite state- and county-issued orders in each of the jurisdictions in which they may have affected employees. Federally, President Trump indicated that individuals in critical infrastructure industries “have a special responsibility to maintain [their] normal work schedule,” and in guidance issued March 19, 2020, by the Cyber-Infrastructure Security Agency (CISA) within the Department of Homeland Security, the federal government defined “critical infrastructure” industries (the Guidance) to include the financial services sector.
March 20, 2020
New York COVID-19 Sick Leave: Implications for Employers
Similar to other states, New York took action to respond to employment issues related to the COVID-19 pandemic. New York passed a law for sick leave relief measures for employees who cannot work remotely and are subject to a mandatory or precautionary order of quarantine or isolation issued by the State of New York, the department of health, local board of health, or any governmental entity duly authorized to issue such order due to COVID-19.
March 20, 2020
Following the industry consultation by the Hong Kong government on the proposal to establish a limited partnership regime for investment funds in August 2019, the long-awaited Limited Partnership Fund Bill was gazetted on Friday, March 20, 2020.
The Limited Partnership Fund Bill aimed to address the inherent limitations of the Limited Partnership Ordinance (Cap. 37) (“LPO”), which was enacted in 1912 before the advent of the modern private fund industry. The LPO was widely viewed as outdated and ineffective, and acted as a significant disincentive to the domiciliation of private funds in Hong Kong.
March 20, 2020
Market Turmoil May Cause Fund Managers to Breach Commodity Pool Operator Exemption Thresholds
Operators of investment funds that trade commodity interests (commodity pools) are required to register with the U.S. Commodity Futures Trading Commission (CFTC) as commodity pool operators (CPOs) and become members of the National Futures Association (NFA) unless they are able to rely on an exemption or exclusion. Among the most common exemptions and exclusions are CFTC Regulation 4.5(a)(1) (applicable to managers of publicly offered registered investment companies and business development companies, among others) and CFTC Regulation 4.13(a)(3) (applicable to managers of privately offered hedge funds).
March 19, 2020
On March 17, 2020, Chairman Heath Tarbert of the U.S. Commodity Futures Trading Commission (CFTC) released a video statement identifying the CFTC’s actions to address the COVID-19 pandemic. Chairman Tarbert provided five key objectives: (i) monitoring derivatives markets and their participants; (ii) using the CFTC’s regulatory framework to promote orderly and liquid markets; (iii) responding swiftly to changing conditions with practical, targeted relief; (iv) communicating consistently and transparently with all stakeholders; and (v) maintaining the CFTC’s commitment to advancing strategic policy goals.
March 10, 2020
Market Making in Hong Kong A New Frontier for Exchange Participants?
The proliferation of automated trading systems had accelerated competition across the financial industry. Continued global economic instability, domestic civil unrest, and the recent pandemic had weakened balance sheets for less established firms. Many had looked afresh at opportunities to diversify the scope of their services while leveraging existing resources. Market making — which traditionally does not depend on any specific informational advantages — was considered to be a viable option worthy of attention. This article, and the key trends and drivers described herein, explores the changing nature of the market-making industry as well as broader implications for market functioning and robustness in increasingly turbulent trading cycles.
March 6, 2020
This Sidley Update alerts investment advisers to certain regulatory and compliance obligations. These obligations include a number of 2020 reporting or filing deadlines, in particular those required under the Investment Advisers Act of 1940 for registered advisers and exempt reporting advisers, as well as under the Commodity Exchange Act for registered CPOs and CTAs. The Update also provides information regarding regulatory developments that may affect an investment adviser’s compliance program, a summary of enforcement proceedings that reflect SEC concerns relevant to advisers, and what the SEC staff’s examination priorities were for 2020.
March 4, 2020
Massachusetts Promulgates Broker-Dealer Fiduciary Rule
On February 21, 2020, the Massachusetts Securities Division (the Division) became the first state regulator to finalize a rule to hold broker-dealers and their agents to a fiduciary standard of conduct when making recommendations and providing investment advice to their customers. To meet this fiduciary duty, broker-dealers and their agents must adhere to duties of utmost care and loyalty to the customer. Breaches of the duty could be deemed “unethical or dishonest conduct or practices” and could result in potential enforcement remedies, including fines or registration revocation, and thereby could give rise to other collateral consequences under the federal securities laws.
March 3, 2020
UK/EU Investment Management Update
In this Update we cover news on Brexit negotiations, a Financial Conduct Authority (FCA) platform for short selling notifications, the EU Securities Financing Transactions Regulation (SFTR) reporting obligation, the FCA “Dear CEO” letter to investment managers on London interbank offered rate (LIBOR) transition, the European Commission’s consultation on the review of Markets in Financial Instruments Directive (MiFID II), and the addition of the Cayman Islands to the EU list of Non-Cooperative Tax jurisdictions for tax purposes, among other topics.
February 28, 2020
EU SFTR Reporting for Investment Managers — Top Five Things to Know
The EU Securities Financing Transactions Regulation (SFTR) introduced a reporting obligation for certain counterparties to securities financing transactions (SFTs). The reporting obligation started in April 2020 and extends to January 2021.
For alternative investment funds (AIFs), undertakings for the collective investment in transferable securities (UCITS), and/or any trading vehicles underneath an AIF or UCITS that fall within the scope of the SFTR reporting requirement, the most relevant phase-in dates were October 11, 2020, and January 11, 2021.
February 21, 2020
FTC Targets M&A Agreements in Continued Campaign Against Noncompete and No-Poach Clauses
In the span of five months, the U.S. Federal Trade Commission (FTC) brought two cases alleging that noncompete and no-poach clauses contained in acquisition agreements violated antitrust laws. In September 2019, the FTC filed a complaint challenging an allegedly unreasonable noncompete clause in an underlying acquisition agreement, and, in January 2020, the FTC filed a complaint alleging that two merging parties substantially lessened competition by entering into a series of unlawful noncompetes and no-poach agreements pursuant to the parties’ underlying transactions. These complaints followed modifications to reporting instructions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) that require filers to submit to the antitrust agencies all noncompete agreements between the parties when notifying a reportable transaction.
February 13, 2020
SEC Commissioner Peirce Proposes Blockchain Token Safe Harbor
On February 6, 2020, U.S. Securities and Exchange Commission (SEC or Commission) Commissioner Hester M. Peirce (Commissioner Peirce) gave a speech describing the need for more clarity on application of the securities laws to the offer and sale of blockchain tokens or digital assets. As part of the speech, she proposed a safe harbor (Proposal or Safe Harbor) exempting certain tokens from the registration requirements of the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act), including an exemption for persons engaging in certain transactions with respect to such tokens from the definitions of “exchange,” “broker,” and “dealer” under the Exchange Act. The Proposal is of significance to any existing or future blockchain development team considering the distribution of tokens, as well as any digital asset exchange or over-the-counter desk that facilitates transactions in digital assets, blockchain tokens, or virtual currencies.
February 13, 2020
Asia Funds & Financial Services Newsletter
The February 2020 issue of Sidley’s Asia Funds and Financial Services Newsletter discussed 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.
The newsletter also notes the SFC’s recent enhancements to the investor compensation regime and its plans to extend the licensing regime to apply to trustees and custodians of SFC-authorised collective investment schemes under a newly proposed regulated activity (Type 13).
February 11, 2020
Top 10 Recent U.S. Trade and Investment Policy Developments
During December of 2019 and January of 2020, the Trump administration had been active on a wide range of trade issues. The administration released a number of trade-related presidential proclamations, executive orders, and regulations, and the President signed major legislation with trade implications.
February 6, 2020
CFTC Proposes Federal Position Limits on Physically-Settled Derivatives
On January 30, 2020, the U.S. Commodity Futures Trading Commission (CFTC) issued a proposed rulemaking on speculative position limits (the Proposal). This Proposal marked the CFTC’s fourth attempt since 2010 at establishing new federal speculative position limits in commodity derivatives markets pursuant to the Dodd-Frank Act. The CFTC indicated that this Proposal was one of its top priorities.
January 28, 2020
The U.S. Federal Trade Commission (FTC) had approved new thresholds for premerger notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The statute requires the FTC to revise the thresholds annually based on changes in gross national product. The newly-revised thresholds applied to transactions that closed on or after February 27, 2020.
With the changes approved, the minimum “size-of-transaction” threshold for any acquisition of voting securities, non-corporate interests, or assets not exempt from HSR notification requirements increased from $90 million to $94 million.
January 17, 2020
SEC and FINRA Issue 2020 Examination Priorities for Broker-Dealers and Investment Advisers
The U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) published their examination priorities (together, the Examination Priorities) for the 2020 calendar year. In general, the 2020 Examination Priorities were recurring themes from recent prior years.
OCIE’s 2020 Examination Priorities for broker-dealers and investment advisers included the protection of retail investors (including compliance with new standard of care requirements and interpretations), cyber and information security risks, anti-money laundering compliance, firms engaging in the digital asset space, and the provision of electronic investment advice.
January 16, 2020
SEC Warns Investors Regarding Digital Asset Initial Exchange Offerings
On January 14, 2020, the U.S. Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy published an investor alert (Alert) regarding initial exchange offerings (IEOs), type of digital asset fundraising facilitated by online trading platforms. Although the Alert is directed at investors, it provides important information to blockchain companies and trading platforms.
January 16, 2020
The CLEAN Future Act: Dawn of a New Season of Legislative Interest in Climate Change
On January 8, 2020, U.S. House Democratic leaders of the Energy and Commerce Committee previewed the first major attempt at federal climate change legislation in over a decade. In a 15-page summary, the committee described a sweeping draft bill it intends to release this month, the Climate Leadership and Environmental Action for our Nation’s Future Act (the CLEAN Future Act). The bill indicates several key areas of focus for addressing climate change.
January 14, 2020
National Futures Association Adopts Swaps Proficiency Requirements
The National Futures Association (NFA) requires each NFA member commodity pool operator (CPO), commodity trading advisor (CTA), futures commission merchant (FCM), and introducing broker (IB) engaged in swaps activities regulated by the Commodity Futures Trading Commission — for example, activities related to nondeliverable FX forwards, interest rate swaps, and certain security index derivatives — to be approved by NFA as a swap firm and requires each associated person (AP) of a swap firm whose activities involve swaps to be approved as a swap AP.
January 14, 2020
Investment Funds – Year-End Compendium of Our 2019 Client Updates
Once again we prepared our semiannual compendium of relevant Sidley Updates for our investment fund and adviser clients and friends. The compendium includes a summary of each Sidley Update for 2019, 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.
January 14, 2020
National Futures Association Adopts Swaps Proficiency Requirements
The National Futures Association (NFA) now requires each NFA member commodity pool operator (CPO), commodity trading advisor (CTA), futures commission merchant (FCM), and introducing broker (IB) engaged in swaps activities regulated by the Commodity Futures Trading Commission — for example, activities related to nondeliverable FX forwards, interest rate swaps, and certain security index derivatives — to be approved by NFA as a swap firm and requires each associated person (AP) of a swap firm whose activities involve swaps to be approved as a swap AP.
January 13, 2020
On January 8, 2020, the Staff of the SEC issued significant industry guidance through a “no-action” letter regarding so-called “concentrated debits” under SEC Rule 15c3-3, Appendix A, Note E(5) (the SEC’s customer protection rule).
The letter is beneficial for registered investment companies and unregistered “hedge” funds, in each case, that trade on margin extended to them by an SEC-registered broker-dealer, such as a U.S. prime broker (a “carrying firm”), where the same or affiliated managers manage multiple investment funds.
January 10, 2020
On December 18, 2019, the Commodity Futures Trading Commission (CFTC) proposed a rule that would prohibit the practice of “post-trade name give-up” by swap execution facilities (SEFs) for swaps that are anonymously executed and are intended to be cleared. This proposal followed the CFTC’s consideration of comments received in response to its November 2018 request for comments regarding the practice (2018 Release).
January 7, 2020
On January 3, 2020, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the U.S. Commodity Futures Trading Commission (CFTC) issued two cyber threat alerts regarding the hacking of approximately one dozen cloud service providers, as described in a Wall Street Journal article published December 30, 2019, entitled “Ghosts in the Clouds: Inside China’s Major Corporate Hack.”
January 6, 2020
On November 25, 2019, the U.S. Securities and Exchange Commission (SEC) issued a release (Proposing Release) proposing new Rule 211(h)-1 under the Investment Advisers Act of 1940, as amended (Advisers Act) (the sales practices rule), that would require an investment adviser that is registered (or required to be registered) with the SEC to exercise due diligence in approving a retail client’s account to buy or sell shares of certain “leveraged/inverse investment vehicles.” This is the first rule to be proposed pursuant to Section 211(h) of the Advisers Act.
January 6, 2020
SEC Reproposes New Rule to Regulate Funds' Use of Derivatives
On November 25, 2019, the U.S. Securities and Exchange Commission (the SEC) issued a release (the Proposing Release):
- reproposing new Rule 18f-4 (the Proposed Rule) under the Investment Company Act of 1940, as amended (the Act), intended to address the investor protection purposes and concerns underlying Section 18 of the Act with regard to the incurrence of leverage or other obligations arising from the use of derivatives by mutual funds (excluding money market funds), exchange traded funds (ETFs), registered closed-end funds, and companies electing to be treated as business development companies (BDCs) under the Act (collectively, Funds)
- proposing new Rule 15l-2 under the Securities Exchange Act of 1934, as amended (the Exchange Act), and new Rule 211(h)-1 under the Investment Advisers Act of 1940, as amended (the Advisers Act) (collectively, the sales practices rules), that would require a broker, dealer, or investment adviser that is registered (or required to be registered) with the SEC to exercise due diligence in approving a retail customer’s or client’s account to buy or sell shares of certain “leveraged/inverse investment vehicles”
- proposing amendments to Forms N-PORT, N-LIQUID (proposed to be renamed Form N-RN) and N-CEN, intended to provide the SEC with information regarding Funds’ derivatives exposure, and, for Funds subject to the limit on fund leverage risk, certain additional information, including value at risk (VaR)-related information
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