SEC Trends - November 2024
As the Securities and Exchange Commission (SEC) continues to evolve its examination and enforcement priorities, fund managers are increasingly in the spotlight. The SEC’s National Examination Program plays a critical role in promoting compliance, reducing fraud risk, and informing regulatory policy—all while serving as a key source of enforcement referrals. With these trends in mind, fund managers must be vigilant and prepared. Here’s what to watch for in 2024 and beyond.
1. ESG Compliance: Moving Beyond the Hype
The SEC has normalized questions around Environmental, Social, and Governance (ESG) issues during exams. While the initial wave of ESG enforcement has subsided, the topic remains a core part of the regulatory landscape. Fund managers should ensure that ESG claims in marketing materials are consistent with actual practices to avoid allegations of greenwashing. Integrating ESG considerations into routine compliance programs, rather than relying on specialized teams, is key to staying prepared.
2. The Rise of “AI Washing”
With artificial intelligence (AI) transforming various sectors, the SEC has taken a keen interest in how funds use and market AI capabilities. “AI washing”—or making misleading statements about the use of AI—has emerged as a new area of regulatory scrutiny. Fund managers must ensure that disclosures around AI are accurate and reflect real, verifiable practices. As with ESG, any misalignment between what’s promised and what’s delivered will attract attention.
3. Off-Channel Communications: Recordkeeping Remains Critical
The SEC’s emphasis on off-channel recordkeeping—such as text messages and other non-official communication platforms—continues. The past year has seen numerous enforcement actions, and this trend shows no sign of slowing down. Fund managers should invest in advanced monitoring systems and consider providing employees with work-specific devices to ensure proper oversight of all business-related communications.
4. The Marketing Rule: Continuous Oversight Required
The SEC’s Marketing Rule remains a focal point during exams. Examiners are closely scrutinizing marketing materials and assessing the internal processes used to review and approve these communications. Demonstrating compliance oversight and having a robust framework for vetting investor-facing content are essential. Fund managers should ensure that marketing materials are aligned with regulatory standards and reflect the true nature of the investment strategies and risks.
5. Pay-to-Play Regulations: Election Season Compliance
Political contributions by employees were under heightened scrutiny. The SEC is vigilant about potential violations of the Political Contributions Rule, often cross-referencing public records with fund disclosures. Fund managers should educate employees on the risks associated with political donations and consider using Political Action Committees (PACs) with proper safeguards to mitigate compliance risks.
6. Whistleblower Protections: A Compliance Imperative
The SEC’s focus on whistleblower protections has expanded beyond employment agreements to include fund documents and confidentiality provisions. Even in the absence of evidence that whistleblowers have been impeded, the SEC has brought enforcement actions against companies with restrictive language. Fund managers should ensure that all confidentiality agreements include whistleblower carve-out language and are consistent with SEC requirements.
7. Indemnification and Exculpation Provisions: Tread Carefully
The SEC has clarified that overly broad indemnification and exculpation provisions in fund documents may breach fiduciary duties under the Advisers Act, particularly when dealing with retail investors. Fund managers should review their agreements to ensure that these provisions do not waive any non-waivable duties. Including a “savings clause” that preserves these duties is advisable to avoid enforcement risk.
8. Timely Beneficial Ownership Filings: Avoid Easy Mistakes
Late filings related to beneficial ownership and insider transactions remain low-hanging fruit for SEC enforcement. Sweep investigations aimed at identifying late filers have become more frequent. Fund managers should have systems in place to monitor relevant transactions and ensure timely filings, especially given the tighter deadlines imposed by new rules.
9. Custody Rule: Consistent Enforcement
The SEC’s Custody Rule remains a steady area of focus. Minor infractions that once flew under the radar now risk triggering enforcement actions, especially for parallel fund vehicles or SPVs lacking audits. Fund managers must be diligent in following custody regulations and conducting regular reviews to ensure full compliance.
10. MNPI Policies: Robust and Documented
Material nonpublic information (MNPI) remains a sensitive area for fund managers. Recent enforcement cases have focused on MNPI obtained through credit-related investment activities and private securities. To mitigate risk, fund managers should implement comprehensive, written policies that are tailored to their risk profile and ensure they are well-documented. Even without trading violations, the SEC expects strong, proactive compliance in this area.
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