Financial updates on private funds, FINRA and SEC regulations

What to worry about with the SEC’s decision to regulate private funds

The Securities and Exchange Commission (SEC) has been particularly busy in recent weeks, as evidenced by a series of rule proposals published under what looks like an ambitious program for 2022. This includes areas such as cybersecurity, risk management, more reporting under Form PF, environmental, social and governance (ESG) disclosures, proposed changes to the beneficial ownership regime and new reporting under short selling rules. The SEC also reported a major change to the Investment Advisers Act of 1940 that could affect the day-to-day operations of nearly all private fund advisers, as well as all other advisers (even those exempt from registration). Learn more about the proposed rules.

SEC Exam Division Announces Exam Priorities for 2022

On March 30, the SEC’s Examinations Division (the Division) announced its examination priorities for 2022. The Division publishes its examination priorities on an annual basis and identifies areas it believes present potential risks for investors and the integrity of US financial markets. For this year, the Division intends to focus on private funds, environmental, social and governance (ESG) investments, retail investor protection, information security, emerging technologies and crypto- cash. Read a detailed description of the Division’s 2022 review priorities.

When will FINRA hold a CCO responsible for oversight failures?

On March 17, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 22-10, “FINRA reminds member firms of the scope of FINRA Rule 3110 with respect to liability potential liability of compliance officers in the event of non-compliance with designated oversight responsibilities. “Compliance officers (CCOs) at member firms rightly fear being held accountable for every oversight and compliance failure of their firm. This regulatory notice is designed to remind industry of what is in and out of CCO’s scope of responsibility. Read the full review.

Beware of SEC DeFi-ing!

The SEC’s regulatory jurisdiction over decentralized finance (DeFi) and crypto-assets may expand in the near future. Proposed regulations by the SEC published on January 26, and currently undergoing public comment, would expand the scope of ATS regulation, the regulatory regime governing alternative trading systems. While not specifically referring to DeFi or crypto-assets, the regulations would expand the definition of “exchange” under Section 3b-16 of the Securities Exchange Act of 1934 to include “protocol systems communications,” which may cover some DeFi and/or centralized finance. (CeFi) crypto-asset trading platforms, subjecting them to registration requirements under the law.

Most recently, on March 28, the SEC proposed to expand the definition of “securities trader” in a way that could potentially be interpreted as applying to automated market makers with more than $50 million in assets under management, potentially subjecting certain DeFi platforms to SEC registration requirements to the extent that they are not already considered subject to registration as a national securities exchange (unless expressly exempt). Read the month of January and March Releases.

New York Employee Watch Notice

Effective May 7, all New York State employers must provide employees with written notice when hiring electronic monitoring, including interception or monitoring of telephone conversations or transmissions, e -emails or Internet use. The law does not apply to the maintenance or general protection of the computer system. Read New York Senate Bill S2628.

The CFTC’s Focus on Retail Markets: Three Areas to Watch

A growing number of people are interacting with financial markets and their engagement has broadened. These participants look not only to traditional stocks and mutual funds to seek returns, but also to the more complex products regulated by the Commodity Futures Trading Commission (CFTC). The CFTC tracks the evolving interests of players in the retail market, which includes complex commodities ranging from precious metals to digital assets. With changes to the composition of the CFTC under the new administration, the CFTC seeks to balance its responsibilities to retail market participants in three areas: retail commodity trading, social media, and binary options. Read the full article.

SEC proposes to expand scope of dealer registration requirements

The SEC has proposed two new rules that, if passed, would significantly expand who can be considered a broker or dealer in government securities under the Securities Exchange Act of 1934, as amended (the Exchange Act) , and be required to register as such. .

If passed, these proposed new rules would largely eliminate decades of established precedent distinguishing between “distributor” activity requiring registration and “trader” activity that does not. In particular, under the proposed new rules, the following activities would require registration as a broker-dealer and/or state securities dealer: (i) regularly engage in day trading; (ii) make bids and offers on both sides of the market; and (iii) derive revenue “primarily” from capturing the bid-ask spread or capturing the incentives offered by trading venues to provide liquidity. In addition, the proposed new rules include a catch-all provision requiring the registration of a state securities dealer for any company that buys and sells more than $25 billion in state securities during a period of six calendar months. Read the full review.

Lance A. Zinman also contributed to this article.

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