Investment Management, Trading & Markets Updates – January 2021

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SEC Final Rule on Modernized Marketing for Investment Advisers

On December 22, 2020, the Securities and Exchange Commission (SEC) passed a final rule to modernize marketing under the Investment Advisers Act of 1940, as amended. The amendments create a single rule that replaces the current advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. The staff of the Division of Investment Management also expects to withdraw no-action letters and other guidance that previously applied to the advertising and cash solicitation rules. Additionally, the SEC has made related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule, to reflect the new rule. The revised Rule 206(4)-1 generally: (1) codifies the previous guidance that prohibits untrue statements of material facts, omitting material facts, misleading statements, and any presentations that could be misleading; (2) will now allow for the use of testimonials, endorsements, and third-party ratings so long as the adviser satisfies certain disclosure requirements and other criteria, such as disclosing whether the person giving the testimonial is a client and whether that person was compensated for the testimonial; and (3) codifies the previous guidance on the inclusion of performance information in advertisements, such as requiring net performance to be disclosed if gross performance is presented. The final rule will be effective 60 days after publication in the Federal Register, with a compliance date that is 18 months after the effective date.

SEC Modernizes Framework for Fund Valuation Practices

On December 3, 2020, the SEC adopted a final rule under the Investment Company Act of 1940 that establishes an updated regulatory framework for fund valuation practices and addresses the “role of the board of directors with respect to the fair value of the investments of a registered investment company or business development company.” The rule establishes requirements for satisfying a fund board’s obligation to determine fair value in good faith for purposes of the Investment Company Act and requires a board or its valuation designee to assess material risks associated with fair value determinations and apply fair value methodologies. The purpose of the rule is to clarify how fund boards of directors can satisfy their valuation obligations in light of recent market developments, such as an increase in the variety of asset classes held by funds and an increase in both the volume and type of data used in valuation determinations.

Department of Labor Issues Final Prohibited Transaction Exemption

On December 18, 2020, the U.S. Department of Labor (DOL) issued its final prohibited transaction exemption relating to investment advice that fiduciaries provided to ERISA benefit plan investors, effective February 16, 2021. The final exemption requires fiduciary investment advice to be given pursuant to “impartial conduct standards” that provide: (1) a best interest standard; (2) a reasonable compensation standard; (3) a duty of best execution; and (4) a provision requiring no materially misleading statements about investment recommendations. For a financial institution to rely on the exemption, it must maintain certain policies and procedures to ensure compliance with the exemption’s requirements. Under the exemption, financial institutions also have the expanded ability to self-correct violations by determining the violation did not cause investment loss, correcting the violation and notifying the DOL within 30 days, and completing the process within 90 days after discovery. The exemption is generally aligned with the SEC’s Regulation Best Interest (Regulation BI), adopted in June 2019, and financial institutions that already implemented Regulation BI compliance procedures should confirm whether any revisions may be appropriate. Please contact us if you would like our assistance in the review and coordination of your exemption compliance procedures.

Compliance Date for NFA’s Swaps Proficiency Requirements Approaching Fast

The compliance date for the National Futures Association’s (NFA) Swaps Proficiency Requirement is January 31, 2021. Any individual registered as an associated person (AP) of a futures commission merchant (FCM), introducing broker (IB), commodity pool operator (CPO), or commodity trading advisor (CTA) who engages in swaps activity subject to the Commodity Futures Trading Commission’s (CFTC) jurisdiction are required to satisfy the NFA’s Swaps Proficiency Requirements. Required persons may satisfy the requirement through either a long track or short track, each track having both a learning and testing component. Individuals approved as, or applying for approval as, an FCM, IB, CPO, or CTA member swap firm or swap AP of an FCM, CPO, or CTA member (intermediary swap AP) and individuals responsible for supervising intermediary swap APs are required to satisfy the short track. After January 31, 2021, individuals who do not satisfy the requirements will be unable to engage in swaps activities until they have done so.

SEC Harmonizes and Improves Exempt Offering Framework

On November 2, 2020, the SEC adopted amendments to the Securities Act of 1933 that simplify and harmonize the current exempt offering framework, including for offerings under Regulation A and Rule 504 of Regulation D of the Securities Act. For Regulation A, the amendments (1) raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and (2) raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million. For Rule 504 of Regulation D, the amendments raise the maximum offering amount from $5 million to $10 million. The SEC also adopted amendments to Rule 506(c), which allows issuers to generally solicit and advertise an offering made under Regulation D of the Securities Act, subject to certain conditions. Under the amended Rule 506(c), issuers may now rely on an investor’s written representation that the investor continues to qualify as an accredited investor for up to five years, provided that the issuer previously took reasonable steps to verify the investor’s accredited investor status pursuant to Rule 506(c)(2)(ii) and that the issuer is not aware of information to the contrary.

SEC Final Rule on Derivatives Use by Registered Funds and BDCs

On October 28, 2020, the SEC passed a final rule to modernize the regulatory framework for derivatives used by registered investment companies, including mutual funds (other than money market funds), exchange-traded funds, and closed-end funds, as well as business development companies. The new Rule 18f-4, an exemptive rule under the Investment Company Act of 1940, will permit the funds to enter into derivatives transactions subject to certain conditions. These conditions will include requiring a fund to implement a written derivatives risk management program that will be administered by a derivatives risk manager that is approved by the fund’s board of directors, complying with an outer limit on fund leverage risk based on value-at-risk and certain recordkeeping requirements. The new rule will be effective on February 19, 2021, with a compliance date of August 19, 2022.

CFTC Finalizes Position Limits Rule

On October 15, 2020, the CFTC approved a final rule amending regulations of speculative position limits to conform with certain Dodd–Frank amendments to the Commodity Exchange Act. The new rule will create new and amend certain federal spot month position limits for derivatives contracts associated with 25 physical commodities and amend single-month and all-months-combined federal limits for most of the agriculture contracts currently subject to federal position limits. The changes also include expanding the definition of a “bona fide hedging transaction or position.” The final rule will be effective 60 days after publication in the Federal Register.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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