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.
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:
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.
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:
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.
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:
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.
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:
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.
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.
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 firstname.lastname@example.org, Julie Lowry at email@example.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.
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