A Roundup of 2023 SEC Proposals for Investment Advisors

We recently held our annual investment industry update, which covered a host of topics including the latest updates on GIPS, the SEC Marketing Rule, fair value guidance, taxes, and compliance, as well as a discussion on valuation drivers in an investment firm.

During one of the sessions, John Canning, Director, Chenery Compliance Group provided an overview of the SEC rules becoming effective in the near future, a more detailed look at the private fund rulings, and a review of the rule relating to outsourcing services.

SEC Rules Becoming Effective in The Near Future

Some of the SEC’s rules that are on target to become effective within the next 12 months include:

  • Cybersecurity Risk Governance Rule This rule is related to cybersecurity risk management, reporting, and recordkeeping requirements for investment advisors and funds. The proposal would require firms to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risk. It would also require any significant cybersecurity incidents to be reported on a new form, ADV-C.
  • Amendments to Form PF – Large private equity advisers and liquidity fund advisers will be required to file reports within one business day of events that would indicate significant stress at a fund that could harm investors or signal that there is a risk in the financial system.
  • Money Market Fund Reforms This rule would expand liquidity requirements, mandate swing policies for certain funds, amend fund disclosures, and eliminate provisions related to liquidity fees and redemption gates that were put in place in the earlier market rules.
  • Private Fund Advisors This rule would increase the regulation of private fund advisors. It includes accounting and auditing requirements and would require distributing quarterly statements to advisors that include a detailed explanation of all fees and expenses paid by the fund. Disclosure of the fund’s performance would also be required.
  • Form PF This rule would increase confidential reporting for private fund advisors, especially large hedge funds. It would also increase reporting for exposure on open positions and certain large positions.
  • Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps; Prohibition Against Undue Influence Over Chief Compliance Officers; and Disclosure of Security-Based Swap Positions These proposals would require new disclosures for certain large swap positions. They would also institute new protections designed to prevent fraud and shield chief compliance officers from coercion and other improper influence.
  • Investment Company Names This proposal is designed to end funds’ use of misleading or deceptive names. Because fund names are usually the first piece of information potential investors see, the SEC believes that the names can have a large impact on whether an investor chooses to invest money in a particular fund.
  • Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices The proposal would require additional disclosures related to environmental, social, and governance (ESG) strategies in fund prospectuses, annual reports, and advisor brochures, including fund claims about whether it will achieve a certain ESG impact.
  • Short Sale Disclosure Reforms This proposed rule would require institutional investment managers to report monthly short sale information to the SEC.

Private Fund Advisors; Documentation of Registered Investment Advisor Compliance Reviews

The SEC proposed new rules and amendments under the Investment Advisers Act of 1940 to enhance the regulation of private fund advisors. The proposed rules would enact the following:

  • Require private fund advisors registered with the Commission to provide investors with quarterly statements detailing information about private fund performance, fees, and expenses;
  • Require registered private fund advisors to obtain an annual audit for each private fund and notify the SEC upon certain events;
  • Require registered private fund advisors, in connection with an advisor-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the advisor and the opinion provider;
  • Prohibit all private fund advisors, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors; and
  • Prohibit all private fund advisors from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.
  • Additionally, the SEC is proposing to require all registered advisors, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

Investment Advisor Outsourcing

The SEC proposed a new rule and related amendments to prohibit SEC-registered investment advisors from outsourcing certain services or functions to service providers without meeting minimum requirements. The proposal includes:

  • New requirements for advisors to conduct due diligence before outsourcing and to periodically monitor service providers’ performance and reassess whether to retain them;
  • Related requirements for advisors to make and/or keep books and records related to the due diligence and monitoring requirements;
  • Amendments to the adviser registration form, Form ADV, to collect census-type information about advisors’ use of service providers; and
  • A requirement for advisors to conduct due diligence and monitoring for third-party recordkeepers, along with a requirement to obtain reasonable assurances that the third-party will meet certain standards.

We will continue to monitor these SEC developments and keep you apprised of future updates. In the meantime, if you’d like to watch the rebroadcast of this presentation or any of the other presentations from our annual investment industry update, click here.

If you have any questions about this information or would like to discuss your firm’s needs, please contact Frank Varanavage, Manager, Investment Industry Group.


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