SEC pursues its regulatory agenda

The SEC continues to be highly active from both an examination and rulemaking perspective. The Division of Examinations (EXAMS) and the Division of Investment Management (IM) continue to work closely together in order to further rein in the asset management industry. In June, EXAMS released another Risk Alert (“the Alert”) related to the revised Marketing Rule, the Spring 2023 SEC Regulatory Agenda was released around the same time, while a new Proxy Voting Rule took effect on July 1, 2023.

Another Alert on Marketing Rule

The Marketing Rule Risk Alert, issued June 8, 2023, basically stated that the Examination Staff has moved on to Phase 2 of its targeted examinations of marketing activity by firms. Phase 1 focused on the substantiation requirement for claims made in marketing materials. Phase 2 involves reviewing firms for the use of testimonials and endorsements, as well as third-party ratings. In addition, the SEC staff will begin monitoring Form ADV Part 1 responses under Item 5L for accuracy.

Many firms have yet to embrace the use of testimonials or endorsements until an industry precedent has been set due to fears of a “regulation by enforcement” approach by the Staff, since this part of the rule is still quite ambiguous. Third-party ratings, however, are another matter, as firms often make use of ratings in marketing materials. Examination Staff plans to focus on the use of specific disclosures for third-party ratings and how firms utilize questionnaire and survey data. Questionnaires and surveys may not be structured in such a way as to create a predetermined result that favors the adviser. The Staff is concerned that adviser bias may be built into these information gathering techniques.

Form N-PX and Proxy Voting

Form N-PX filings are not new for registered investment companies, but recent amendments to the proxy voting rules now require new data to be captured on Form N-PX, such as the number of shares voted and the number of shares loaned and not recalled (so not voted). This will help the SEC identify the effect of securities lending activity on proxy voting. The form now must be filed utilizing the structured data XML format, with separate reporting for each fund within a series. The layout of the form has been modified to allow for specific categories of votes to be more easily identified by investors.

Institutional money managers with an aggregated $100 million or more in securities with discretionary proxy voting authority will now be required to file Form N-PX annually if they exercise voting power over any say-on-pay proxies. It will require full disclosure of a manager’s say-on-pay voting record.

2023 Spring Regulatory Agenda

The publication of the SEC’s Spring Regulatory Agenda within the Federal Register always lags behind on the calendar. In June, the Agency Rule List was published and was already out of date due to recent rulemaking activity.

Certain hot topic proposals are still on the list, and many are in the final rule stage. Those rule proposals include the following:

  • Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices
  • Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews
  • Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies
  • Outsourcing by Investment Advisers
  • Safeguarding Advisory Client Assets

Importantly, the bullets above all refer to new regulations for investment advisers. The Safeguarding Advisory Client Assets proposal is a full-scale revision to the Custody Rule and will require significant changes for advisers and their qualified custodians. The Private Fund rule aims to further regulate the fast-growing private market arena and add greater transparency for investors and the SEC regarding private fund activity.

The SEC is seeking to finalize the rules this year. It will be interesting to see if that comes to fruition along with the frequency and order of the rules that are adopted. All of the proposals mentioned here could be voted on as early as October. Now is the time to prepare for these rules so that the compliance and firm-wide burden will be less extensive and more manageable in the future.

View Risk Alert, “Examinations Focused on Additional Areas of the Adviser Marketing Rule,” June 8, 2023

View Fact Sheet, “Amendment to Form N-PX and Say-on-Pay Vote Disclosure”

View SEC’s “Agency Rule List – Spring 2023”