Especially in today’s economic and work environment, we find it helpful – and we therefore thought our clients would also find it helpful – to keep track of the important litigation and regulatory enforcement developments impacting the asset management industry in real time. The result is our “flash report,” which we will continue to maintain and circulate on a regular basis.

Regulatory Enforcement

News and Announcements

• Bloomberg Invest Talks: Markets in Focus with SEC Chairman Jay Clayton and More (June 2, 2020)

  • The Commission expects to be finished with the Proxy rules by the end of this fiscal year.

  • Without providing a definitive timeline, Chairman Clayton indicated that the Commission has a pending rulemaking with regard to ESG disclosure, reiterating his concerns about lumping together ESG preferences in a single score and noting that they are very different considerations.

  • Chairman Clayton confirmed that the previous suggestion that the SEC Staff would not bring people back to the office until at least July 15 is realistic, and commenting that the SEC functions very well in a virtual environment.

  • Where the SEC is bringing actions against someone, Chairman Clayton stated that if people want the benefit of being interviewed face to face, or as virtually face-to-face as is possible, “we need to provide that to them….We believe in due process.”

• SEC Chairman Jay Clayton; Remarks at Meeting of the Asset Management Advisory Committee (May 29, 2020)

  • Chairman Clayton noted that the SEC has provided industry participants with targeted, conditional, and temporary exemptive relief with the intent to enable participants affected by COVID-19, including funds and advisers, to meet regulatory obligations and the expectations of investors, while recognizing that they may face temporary operational disruptions.

  • With regard to ESG products, Chairman Clayton stated his belief that that “in many cases one or more ‘E’ issues, ‘S’ issues, or ‘G’ issues are material to an investment decision”, and that he has not seen “circumstances where combining an analysis of E, S and G together, across a broad range of companies …, would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise.”

Recent Enforcement Activity

• SEC obtains final judgment and more than US$30 million in monetary relief in an action against an investment advisory firm and its founder and chief investment officer in an action concerning the use of marketing materials alleged to have included false and misleading statements regarding the past performance of the firm's investment strategies. The SEC had previously prevailed on certain claims in the action on a motion for summary judgment. (June 4, 2020)
• SEC sues purported Internet investment adviser firm alleged to have been operating COVID-19-related investment websites for, among other things, failure to provide required books and records to the Commission during the course of an examination. (June 4, 2020)
• SEC settles enforcement action with owner and president of an entity providing advisory services including primary violations of antifraud provisions of the Advisers Act concerning share class selection practices. (June 2, 2020)
• SEC settles enforcement action with dually registered investment adviser and broker dealer concerning share class selection practices and receipt of fees for shareholder servicing. (June 1, 2020)
• SEC settles enforcement action with investment adviser concerning share class selection practices. (May 29, 2020)
• SEC settles enforcement action with investment adviser concerning alleged failure to implement and enforce policies and procedures reasonably designed to prevent the misuse of material non-public information. (May 26, 2020)
• SEC settles enforcement action with investment adviser concerning timely distribution of annual audited financial statements in accordance with Custody Rule and failure to adopt and implement policies and procedures reasonably designed to prevent Custody Rule violations. (May 22, 2020)

Disclosure-based litigation

• Still in early stages of COVID-19 based securities fraud class actions, larger and more sophisticated plaintiffs’ firms still have not entered this fray … yet.

• Recent stock market gains only heighten the risks—and exposure—from a downturn (whether linked to second COVID-19 wave or otherwise).

Section 36(b) litigation

• Two more appellate affirmances of post-Jones trial court rulings in favor of adviser (Davis Ventures (2nd Cir. affirmance of summary judgment) and BlackRock (3rd Cir. affirmance of trial ruling)).

• But … more recent articles and blog posts from “new” plaintiffs’ attorneys confirms continued interest in this space, notwithstanding string of defense victories in post-Jones wave.

Reg BI and Fiduciary Rule (Take Three)

• On June 2, the Second Circuit heard argument in a challenge to the SEC’s Reg BI brought by numerous states and a financial advisor organization.

  • The challengers argued that the SEC was required under the Dodd-Frank Act to impose the fiduciary standard under the Investment Adviser Act of 1940 (“1940 Act”) on broker-dealers (rather than “best interest” standard) because the advice that broker-dealers provide clients is nearly identical to that provided by registered investment advisors and not “solely incidental” to trigger an exemption under the 1940 Act.

  • The panel expressed skepticism with the challengers’ arguments. One panel member noted that had the SEC done nothing, the status quo would be a lesser “suitability” standard for broker-dealers, not a fiduciary one. Others noted that Dodd-Frank’s language regarding a uniform fiduciary standard appears to be permissive and the 1940 Act itself does not require that the fiduciary standard be imposed on broker-dealers.

  • The compliance date for Reg BI is June 30. It is not known if the Second Circuit will issue its decision before then.

• Also, on June 1, the Department of Labor released its third attempt at a “Fiduciary Rule” to the Office of Management and Budget (“OMB”) for review. Although the substance of the rule has not been released to the public, the proposed rule’s title, “Improving Investment Advice for Workers & Retirees Exemption,” may suggest it is a continuation of the “best interest” non-enforcement position left over from the Best Interest Contract Exemption. OMB has 30 days to conduct its review.