December 27, 2023
Compliance Year in Review: 2023
2023 was a busy year for the SEC. From the sweeping Private Fund Adviser Rules to the SEC’s proposed predictive analytics rules and more, investment advisers are in for a busy 2024 as well.
Here are some highlights from 2023. Be on the lookout for our SEC- and compliance-related predictions in 2024.
The Private Fund Adviser Rules
On August 23, 2023, a divided SEC voted to adopt enhanced regulations of private fund advisers and to update the Compliance Rule for all investment advisers. “By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency. Consistent with our mission and Congressional mandate, we advance today’s rules on behalf of all investors — big or small, institutional, or retail, sophisticated or not,” said SEC Chair Gary Gensler, according to the Commission’s press release.
The new rules—which include several sweeping changes for all private fund advisers—were met with significant industry pushback. On September 1, 2023, six private equity and hedge fund trade groups sued the SEC to block new private fund reforms adopted in August.
What to expect in 2024
While trade groups have filed a lawsuit to challenge the SEC, the new Private Fund Adviser rules are and will remain final unless and until vacated by the court. Advisers should prepare to move forward in preparing to comply with the final rules by the applicable compliance dates. For more details on the rules and how advisers can prepare, please view our webinar, The New Private Fund Rules—Legal and Compliance Considerations, featuring Fairview General Counsel Amber Allen and Troutman Pepper Partner Genna Garver.
The rules were effective Nov. 13, 2023. For a full list of compliance dates for large and small private fund advisers, click here.
The Proposed Cybersecurity and Risk Management Rule
Overview Despite its much-anticipated finalization, the SEC’s proposed Cybersecurity Risk Management Rule remains just that—proposed. That said, firms would be wise to prepare for the proposed rule’s significant changes. The rule is still on the SEC docket and is now expected to be finalized in early 2024. Some of the key requirements included in the proposed rule are:
What to expect in 2024
The rules are expected to be finalized in early 2024, and advisers should go ahead and begin to prepare, particularly since many of the proposed rules have been seen in SEC Exams.
To learn more about the proposed rule and how you can prepare, check out our Flash Report or our SEC Proposed Cybersecurity Risk Management and Outsourcing Rule Webinar.
The Proposed AI Rule
ChatGPT was released in November 2022, and by January 2023, it had become the fastest-growing consumer software application in history, spurring the development of a litany of related products. In response, regulators, including the SEC, responded with guidance on how to utilize these new technologies.
On July 26, 2023, the SEC proposed new rules that would require broker-dealers to take steps to mitigate conflicts of interest between the firm and its clients that result from the firm’s usage of predictive data analytics and similar technologies (“covered technologies”).
The SEC states a “covered technology” includes a broker-dealer or investment advisers’ “use of analytical, technological, or computational functions algorithms, models, correlation matrices, or similar methods or processes that optimize, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor.”
If finalized, the proposed rule will require updates to the following:
What to Expect in 2024
The proposed AI rule has received significant industry pushback. Nevertheless, it is expected to be finalized in 2024 based on the SEC’s updated regulatory agenda. Even without a final rule, advisers have already begun to receive AI-related questions in SEC Exams. For more information the proposed AI rule, click here. You may also want to view our flash report about SEC AI Sweep Exams.
On September 20, 2023, the SEC adopted enhancements to the Investment Company Act “Names Rule,” aiming to address names for a registered investment company or business development company (“BDC”) that could be misleading or deceptive. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors,” said SEC Chair Gary Gensler, according to the Commission’s press release. The amendments to the Names Rule will enhance the rule’s current requirement for registered investment companies whose names suggest a focus in a particular type of investment to adopt a policy to invest at least 80 percent of the value of their assets in those investments.
To read our full flash report on the Name Rule, click here.
What to Expect in 2024
Fund Groups with net assets of $1 billion or more will have 24 months to comply with the new rule, and fund groups with net assets less than $1 billion will have 30 months to comply. If you fall into these categories, you should review current fund strategies to determine what funds you manage are within scope of this rule. If you have questions, we can help.
The compliance date for the final amendments is December 10, 2025, for larger entities, and June 10, 2026, for smaller entities.
What does this mean for me?
This past year was a busy rule-making year for the SEC. Even if compliance dates for some of the finalized rules don’t hit until 2025, preparation will need to start sooner rather than later given the substantial updates ahead for compliance programs. If you have any questions about timing, or about how to prepare for any of these rules, someone on our team of regulatory experts can help. Contact us today if you’re interested in learning more.