Investment Management Updates – June 2020

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Liu v. SEC: Supreme Court Rules on the SEC’s Right to Seek Disgorgement

On June 22, 2020, the U.S. Supreme Court issued its much-anticipated decision in Liu v. SEC, which concerned whether the SEC may seek disgorgement in federal enforcement actions. In an 8–1 decision, the Supreme Court affirmed the SEC’s authority to seek disgorgement when it brings enforcement actions in federal court (the SEC has express statutory to seek disgorgement in administrative proceedings). The Court, however, significantly curtailed the SEC’s disgorgement authority. Specifically, the Court held that SEC disgorgement may not exceed an alleged wrongdoer’s net profits. In addition, the Court questioned whether the SEC may seek disgorgement when the recovered funds will not be distributed to victims of the alleged fraud and whether the SEC may seek to impose joint and several disgorgement liability. The case is now headed back to the Ninth Circuit Court of Appeals, which will decide whether the disgorgement in Liu complies with the new standard for SEC disgorgement that the Supreme Court has established.

Learn more in our advisory: Liu v. SEC: Supreme Court Rules on SEC’s Right to Seek Disgorgement

CFTC Approves Amendment to Expand Registration Exemptions for Non-U.S. CPOs 

On May 28, 2020, the Commodity Futures Trading Commission (CFTC) proposed an amendment to CFTC Regulation 3.10(c) that would allow non-U.S. commodity pool operators (CPOs) to claim a non-exclusive exemption from registration on a pool-by-pool basis; previously, non-U.S. CPOs could only claim the 3.10 exemption if they operated exclusively non-U.S. commodity pools. Under the proposed amendment, non-U.S. CPOs may claim the 3.10 exemption for pools that offer only to non-U.S. investors while also claiming other exemptions for other applicable pools, thus registering only those pools that otherwise do not qualify for any exemption. The proposed amendment also creates a safe harbor that allows non-U.S. CPOs to satisfy the 3.10 exemption requirements without having to certify the non-U.S. status of pool investors as long as they satisfy certain documentation, diligence, and distribution conditions. The proposed amendment would also allow non-U.S. pools to qualify for the 3.10 exemption even if such pools received seed capital from a U.S. controlling affiliate.

SBA Issues Revisions to First Interim Rule on Flexibility Act Provisions

On June 5, 2020, the Paycheck Protection Program (PPP) was modified through enactment of the Paycheck Protection Program Flexibility Act of 2020. On June 11, 2020, the Small Business Administration (SBA) published revisions to the first interim final rule to conform the PPP to the Flexibility Act. These revisions change key provisions such as loan maturity, deferral of loan payments, and forgiveness. Notably, the covered period for a PPP loan has been extended from June 30, 2020 to December 31, 2020, and the “loan forgiveness covered period” has been extended from the 8-week period to the 24-week period following the date your PPP loan is disbursed.

SEC Amends Regulation S-X to Improve Financial Disclosure

On May 21, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements in Regulation S-X, including provisions that affect investment companies. The amendments include (1) creating a separate definition of a “significant subsidiary” specific to investment companies; and (2) creating a new Rule 6-11 specific to investment companies’ acquired funds and supplemental financial information.

Learn more in our advisory: SEC Adopts Amendments to Regulation S-X to Improve Financial Disclosure

SEC Extends Regulatory Relief for In-Person Voting Requirements

On June 19, 2020, the SEC issued an order extending regulatory relief from in-person voting requirements through December 31, 2020. Registered management investment companies and business development companies will continue to be exempt from the requirement to cast votes at an in-person meeting. Instead, companies may vote at a meeting where directors can participate by any means of communication that allows all directors participating to hear each other simultaneously during the meeting, subject to certain conditions. The original relief was issued in March 2020 as part of broader exemptive orders providing temporary relief from several requirements of the Investment Company Act and Investment Advisers Act. At this time, the SEC has determined not to extend the other relief in those orders.

CFTC and NFA Extend Regulatory Relief for FCMs, IBs, SDs, RFEDs, and FBs

On June 9, 2020, the CFTC issued a no-action letter extending COVID-19 regulatory relief through September 30, 2020 for certain registrants. The relief was originally set to expire on June 30, 2020. The relief applies to futures commission merchants (FCMs), introducing brokers (IBs), swap dealers (SDs), retail foreign exchange dealers (RFEDs), and floor brokers (FBs). The National Futures Association (NFA) is extending similar relief through September 30, 2020. Note that the relief the NFA issued in March for Chief Compliance Officer (CCO) Annual Report filing deadlines has not been extended.

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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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