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    Mar. 23, 2023

SEC’s Proposed Safeguarding Rule: Parameters and Requirements of the Long Overdue Update to the Custody Rule (Part One of Two)

On February 15, 2023, the SEC proposed new Rule 223‑1 (Proposal) under the Investment Advisers Act of 1940 (Advisers Act) to address how investment advisers safeguard client assets (Safeguarding Rule). The Proposal significantly amends and replaces the current custody rule set out in Rule 206(4)‑2 under the Advisers Act (Custody Rule), but it also contains a number of potentially impractical modifications to target novel asset classes (notably, cryptocurrency assets). Although the Proposal includes substantial changes to the Custody Rule and accompanying practices, the implications for closed-end managers may be more limited and manageable compared to other recently proposed SEC rules. Nonetheless, industry experts anticipate substantial comments on the Proposal and a number of financial services trade groups have already written to the SEC asking that the comment period be extended by 60 days. In light of the Proposal being published in the Federal Register on March 9, 2023, the comment period will end on May 8, 2023. This first article in a two-part series summarizes the scope and key terms of the Safeguarding Rule and identifies the changes that are most likely to impact closed-end managers. The second article will describe the response of SEC commissioners and the private funds industry to the Proposal, including concerns about its purpose, overbreadth and unintended consequences. For coverage of other recently proposed rules, see our two-part series on the SEC’s proposed rules for overseeing service providers: “New Diligence, Monitoring and Recordkeeping Standards” (Dec. 1, 2022); and “Concerns, Criticisms and Critiques of the Practical Impact” (Dec. 15, 2022).

ELTIF II: European Retail Fund Structure for Alternative Investments Receives an Overhaul to Spur Adoption

On March 20, 2023, Regulation (EU) 2023/606 of the European Parliament and of the Council of March 15, 2023 was published in the Official Journal of the E.U. The regulation introduces a number of amendments to Regulation (EU) 2015/760 of the European Parliament and of the Council of April 29, 2015 on European long-term investment funds (ELTIF Regulation). The ELTIF Regulation was first introduced in 2015 with the aim of boosting European long-term investments in the real economy. It provides for a fully harmonized regulatory regime to establish a uniform label under which European investment funds can be authorized. ELTIFs are supposed to provide a high level of investor protection to attract private capital – particularly from retail investors – for long-term investments in projects, undertakings and infrastructure developments in Europe. Over the past eight years, however, only around 80 ELTIFs with moderate amounts of assets under management have been established in the European Member States. As a result, ELTIFs have generally been considered a political initiative that failed to reach its projected goals. The amendments that have now been approved by the European Parliament are intended to overcome many obstacles which have been perceived as preventing success of ELTIFs in the past. In a guest article, Willkie Farr & Gallagher partner David Jansen details the purpose of the ELTIF regime; the changes introduced by the revised ELTIF Regulation; and the likely impact on retailization efforts and marketing in the E.U. See our two-part series: “Update on Disclosure and Reporting Requirements for Marketing Funds in Europe Under AIFMD” (May 24, 2022); and “Non‑AIFMD Options for Marketing Funds in Europe and Other Regulatory Considerations” (May 31, 2022).

SEC Division of Examinations’ 2023 Priorities Include Focus on GP‑Led Secondaries and Use of Affiliate Service Providers

The SEC Division of Examinations (Division) recently published its 2023 examination priorities report (Annual Priorities). The report reflects concerted efforts by the agency to keep pace and address the risks associated with an ever-changing global environment, evolving technologies and rapidly growing industries, including the explosion of the private funds industry. The Division confirms a continued focus on core risk areas and emphasizes four key “notable new and significant” focus areas, all of which may affect private funds. This article identifies the key takeaways from the Annual Priorities that are most relevant to private fund managers. See our coverage of the Division’s 2022 Priorities, 2021 Priorities, 2020 Priorities, 2019 Priorities, 2018 Priorities, 2017 Priorities and 2016 Priorities; as well as “SEC’s Fall 2022 Reg Flex Agendas Offer No Relief From Relentless Rulemaking” (Feb. 23, 2023).

No Longer a Slap on the Wrist: SEC Penalties and Sentences on the Rise

A global shift in the regulatory approach to penalties is leading to greater fines across more geographies and the use of a wider variety of recourse against a bigger cross-section of targets, notably individuals and corporate executives. Not even annual bonuses, stock shares and promotions are safe under the broadening definitions of clawbacks being sought. A recent Women in White Collar Defense Association discussion featuring attorneys from the SEC, the U.K.’s Serious Fraud Office, the U.S. Sentencing Commission, Dechert, Morrison & Foerster and Kobre & Kim reviewed approaches to asset forfeiture and how collaboration and creativity could lead to a reduction in misconduct. This article highlights relevant insights from the discussion. See our two-part series “Why, When and How Fund Managers Should Self‑Report Violations to the SEC”: Part One (Oct. 18, 2022); and Part Two (Oct. 25, 2022).

SEC Sanctions Goldman Sachs for Failing to Follow ESG Policies and Procedures

Taking environmental, social and governance (ESG) factors into account during the investment process involves certain unique challenges, including inconsistent terminology, disparate methodologies and insufficient data. Nevertheless, a fundamental compliance rule continues to hold true for advisers that venture into ESG territory: “Say what you do, and do what you say.” Goldman Sachs Asset Management, L.P. (GSAM) recently ran afoul of that dictate on both counts. In a recently settled enforcement proceeding, the SEC claimed that GSAM failed to adopt appropriate policies and procedures for governing certain ESG products. Moreover, after it did adopt ESG policies and procedures, it failed to follow them. This article describes the alleged compliance shortcomings and the terms of the settlement. See “Typical Deficiencies Targeted in SEC Examinations of Advisers’ ESG‑Related Policies, Procedures and Disclosures” (Oct. 11, 2022); “Misleading ESG Claims Can Result in Significant SEC Penalties” (Aug. 16, 2022); and “Core Features of the SEC’s Proposed ESG Rules and the Ethos Driving Its Release” (Jul. 26, 2022).

Fried Frank Fortifies Its Washington, D.C. Office With the Addition of Michael L. Sherman

Michael L. Sherman has joined the Fried Frank as a partner in the asset management practice in its Washington, D.C. office. He provides counsel to investment advisers, investment funds and other financial institutions on regulatory, corporate and compliance matters. See “How Lawyers Can Leverage the Shifting Environment to Enhance Compliance Programs” (Dec. 1, 2022); and “Overview of the SEC’s Standards for Resilient and Effective Compliance Programs and Fiduciary Practices (Part Two of Two)” (Oct. 4, 2022).

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