The pace and intricacies of regulatory change in the investment industry are, at times, nothing short of overwhelming. Yet, organizations in this space need to have a clear understanding of evolving regulations, their timing and overall impact. 

To help you stay up to date, below is Cohen & Company’s quarterly recap of the latest developments at a variety of regulatory agencies likely to impact our clients.

SEC

Proposal to Increase Reporting of Private Funds 

The SEC recently proposed additional rules expanding the reporting requirements of not only registered investment advisers, but also private fund advisers that fall under the exemptions typically afforded venture capital fund advisers, foreign private advisers and smaller advisers. 

Under the proposed rules, SEC registered advisers would be required to:

• Provide quarterly statements detailing certain information regarding fund fees, expenses and performance to investors within 45 days after quarter ends.
• Have an annual audit for each private fund, with additional requirements of the auditor to notify the SEC upon certain events, such as termination of the audit relationship.
• Document the annual review of their compliance policies and procedures in writing.

In addition, all advisers to private funds would be prohibited from participating in activities the SEC deems contrary to public interest. These include, among other items, charging certain fees to funds such as those associated with examinations by regulatory agencies and providing certain private fund investors with preferential redemption terms or information about portfolio holdings.

Impact: The comment period originally ended on April 25; however, it was extended through June 13, 2022. Many commenters felt the rules, as proposed, overstepped the SEC’s mission by protecting a more sophisticated class of investors.  

Cybersecurity Risk Management Rules for Registered Investment Advisers and Funds

In a recent proposal for comment, the SEC has proposed additional requirements around cybersecurity risk management rules and amendments, with the goal of enhanced preparedness and improved resilience of investment advisers and investment companies against cybersecurity threats and attacks.  

If adopted, some of the items require: 

• Advisers and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks.
• Advisers to report significant cybersecurity incidents to the SEC on proposed Form ADV-C within 48 hours.
• Disclosures related to cybersecurity risks and incidents in fund prospectuses.
• Advisers and funds to create and retain certain cybersecurity-related documentation.

Impact: The most impactful portion of this rule will be the notification requirements, where information about cyber events will be available in the public forum for two years through communication in the n-1a and an advisers’ ADV Part 2A.  

Comment Period for Proposed Amendments to Mutual Fund Name Rule

On May 25, 2022, the SEC issued proposed changes to Rule 35d-1 under the Investment Company Act of 1940, the names rule. The SEC felt that investment decisions may be made by investors based on risks or characteristics associated with names suggesting a certain investment focus, which may be misleading or “materially deceptive.” As such, the proposed modifications would expand the applicability of the Rule to:

• Expand the 80% investment policy requirement to include any fund name with terms suggesting that the fund focuses on investments that have certain characteristics such as growth, value or other environmental, social, and governance (ESG) factors. 
• Specify situations where a fund may deviate from its 80% investment policy and, in certain circumstances, define a 30-day time period for funds to come back into compliance with the policy.
• Require the use of a derivatives instrument’s notional amount when determining the fund’s compliance with its 80% investment policy, rather than the market value.
• Amend prospectus disclosure requirements by requiring defined terms used in the name, including the related criteria employed to select the investments described by the term.
• Designate as materially deceptive and misleading the use of ESG or related terms in names of “integration funds” (funds that consider one or more ESG factors alongside other, non-ESG factors in its investment decisions, where the ESG factors are generally no more significant than the others).

Impact:  This rule, as proposed, expands the requirement to fund descriptors that historically were thought to be investment strategies not typically within the 80% requirement. If adopted, the expansion would require all funds currently without an 80% policy to consider if they should be implementing one.

Proposal to Provide Disclosure Around ESG

The SEC has set a goal to increase transparency and confidence in funds that consider ESG factors as part of their investment process. This is primarily due to increasing focus by investors. As such, the SEC recently released a proposal creating a disclosure and reporting framework for funds to promote consistent, comparable and reliable information concerning the use of ESG factors, which amends the registration and reporting funds provide. 

The amendments, if adopted, would enhance disclosures by: 

• Requiring funds that hold themselves out as considering ESG factors to provide specific disclosures in the prospectus about those factors considered.
• Implementing a layered disclosure approach depending on the fund type, as follows:
  • Funds that integrate ESG factors alongside non-ESG factors in investment decisions would be required to describe how ESG factors are incorporated into their investment process.
  • Funds where ESG factors are a significant consideration in investing decisions would be required to provide detailed disclosures, including a standardized ESG strategy overview table.
  • A subset of ESG-focused funds, defined as impact funds, that seek to achieve a particular ESG impact would be required to disclose how it measures progress on its objective, both in quantitative and qualitative terms, as well as the key factors that materially affected their ability to achieve their objective(s). The SEC proposes to define impact funds as a subset of ESG-focused funds, and, therefore, impact funds also would be required to include in their prospectuses the disclosures noted above for ESG-focused funds.
• In addition, environmentally focused funds will be required to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments, unless they affirmatively disclose in the ESG strategy overview table that they do not consider GHG emissions as part of their investment strategy.

Impact:  The current environment at the SEC indicates this proposal will be adopted, suggested by significant fines recently handed out to advisers and fund groups where they felt there was misleading ESG information being published. As such, fund groups should be ready to incorporate the disclosure requirements, once finalized. 

PCAOB

Request for Comment on the Impact of New Auditing Standards

The PCAOB reached out to stakeholders to understand the initial impact of the auditing requirements imposed by the new auditing standards issued addressing auditing estimates and the use of specialists, which were effective for audits of fiscal years ended on or after December 15, 2020. The request for comment targets specific questions to investors, auditors, audit committees and other stakeholders.  

With regard to investors, the PCAOB specifically asked whether investors believe the new standards improved the quality of audits and confidence in the markets, and to understand any additional benefits. The auditor, audit committee and other stakeholders’ questions specifically focused on approach to implementation, changes in auditing practices as a result, and the costs to the auditing firms and clients, among others.

Impact: This reach out effort by the PCAOB is to develop a post-implementation assessment of the overall impact of the new auditing requirements, as well as the economic effect.

FASB

Proposed ASU on Reference Rate Reform

In April, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that included two modifications to the optional accounting guidance provided by ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.   

The first extends the sunset date of the optional accounting guidance to December 31, 2024, due to the UK Financial Conduct Authority extending the expectation for the publication of LIBOR through June 30, 2023.  

The second amends the definition of the SOFR Overnight Index Swap Rate to include other versions of SOFR, such as SOFR term as a U.S. benchmark interest rate under Topic 815.

Impact: The extension of time allotted by the proposed ASU is expected to be sufficient to allow for a continued orderly transaction from LIBOR.

Contact Lori Novak at lnovak@cohencpa.com, Julie Lowry at jlowry@cohencpa.com or a member of your service team to discuss these topics further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.