For more information on these and other developments, we encourage you to reach out to your regular Sullivan & Cromwell contact.
Highlights
1. Recent Rulemakings & Guidance
SEC and CFTC extend the compliance date for amendments to Form PF. On January 29, the SEC and CFTC postponed the compliance date for the amendments to Form PF adopted on February 8, 2024 to June 12, 2025. The original deadline was March 12, 2025. The adopted amendments “enhance the Financial Stability Oversight Council’s ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts.”
SEC updates FAQs for Names Rule. On January 8, the SEC Division of Investment Management released an updated set of FAQs regarding amendments to Rule 35d-1 under the Investment Company Act, otherwise known as the Names Rule. The FAQs are a response to amendments to the Names Rule from 2023. The FAQs address (i) the necessity of shareholder approval to revise a fundamental 80% investment policy to comply with the 2023 amendments, (ii) questions regarding tax-exempt funds and (iii) questions regarding specific terms commonly used in fund names. Funds will not be required to seek shareholder approval to adopt a fundamental 80% investment policy unless such adoption deviates from an existing fundamental policy. The tax-exempt fund questions provide insight regarding single-state tax exempt funds and funds with “municipal” in their name. In the latter case, these funds will be treated as tax-exempt funds under the Names Rule. Lastly, the FAQs address terms such as “high-yield,” “tax-sensitive,” “income,” or “money market” in fund names. Funds with “high-yield” or “income” in the name would need to adopt an 80% investment policy, whereas more generic fund names, such as “tax sensitive”, “income” and “money market” would not.
The FAQs also include a chart indicating the portions of previous SEC guidance and no-action letters addressing compliance with the Names Rule that the Staff is withdrawing or modifying in connection with the 2023 amendments, including certain of the FAQs published after the adoption of the Names Rule in 2001. Among other things, the 2023 amendments (i) significantly expanded the applicability of the 80% investment policy requirement to capture funds with names that suggest that the funds focus on “particular characteristics” and (ii) established recordkeeping requirements. For more information on the 2023 amendments, please see our firm publication here.
SEC publishes FAQs for Amended Form PF. On December 20, the SEC Division of Investment Management published additional FAQs related to recently adopted amendments to Form PF, which followed an initial round of FAQs released in October. Collectively, the FAQs address substantive issues in connection with (i) amended Form PF, which has a compliance date of March 12, and (ii) the current event reporting requirements under Section 5 of Form PF, which must be complied with currently. Specifically, the FAQs confirm that filings, including annual filings and amendments and corrections, made on or after March 12, 2025 will be required to be filed on the amended version of Form PF, and clarifies timing requirements for quarterly filers with fiscal quarters that do not end on a calendar quarter end.
In addition, the FAQs clarify a range of topics, including that entities that meet the definition of trading vehicles under amended Form PF should be reported as such even if they were previously reported as funds, and how to report exposures for various Form PF questions. The questions address topics such as reporting net-negative mark-to-market exposures for derivative transactions, monthly hedge fund exposures, turnover of U.S. Treasury bond derivatives, netted exposure to a single referenced asset, netted exposure for fixed income assets, and the NAICS codes for industry exposures. The FAQs also include a section on withdrawals and redemptions that address various scenarios where a fund is required to file Item H on Section 5 of amended Form PF to report the receipt of cumulative withdrawal or redemption requests that are equal to or more than 50% of the fund’s most recent NAV.
Federal Court holds SEC’s Rule Significantly broadening the “dealer” definition exceeds the agency’s statutory authority. On November 21, the U.S. District Court for the Northern District of Texas granted motions for summary judgment in two related cases and vacated recently adopted Exchange Act Rules 3a5-4 and 3a44-2 (the “Dealer Rules”), which took effect earlier this year. The rules would have required certain liquidity providers to register with the SEC as dealers or government securities dealers. The court agreed with both sets of plaintiffs that the rules exceeded the SEC’s statutory authority and ordered that they be vacated in their entirety. The court’s decisions looked to the SEC’s historical approach to determine whether a particular entity is a dealer, concluding that if an entity is not providing services to a customer, it is not a dealer. For more information on these decisions and how they may apply to market participants, please see our firm publication here. Sullivan & Cromwell LLP represented the Crypto Freedom Alliance of Texas and the Blockchain Association in the litigation.
Department of the Treasury amends CFIUS Procedures and Enforcement Authority. On November 18, the Department of the Treasury issued a Final Rule that amends the regulations administered by the Committee on Foreign Investment in the United States (“CFIUS”). The amended regulations “enhance certain CFIUS procedures and sharpen its penalty and enforcement authorities” with respect to information requests, negotiation of mitigation terms, and imposition of civil monetary penalties. The Final Rule is largely consistent with Treasury’s Notice of Proposed Rulemaking dated April 4, 2024, with a few adjustments based on public comments.
Specifically, the Final Rule (i) expands the scope of information that CFIUS may request from non-notified transaction parties beyond purely jurisdictional information; (ii) permits the CFIUS Staff Chairperson to determine the time frame for responding to requests for additional information; (iii) broadens CFIUS’s subpoena authority; (iv) expands CFIUS’s ability to impose civil monetary penalties due to a party’s material misstatements or omissions; (v) lengthens the time frame for petitioning for a reconsideration of a CFIUS-imposed penalty; and (vi) increases the maximum civil monetary penalties for violations of the CFIUS statute, regulations and agreements, orders and conditions.
The Final Rule is consistent with CFIUS’s increased focus on monitoring and enforcement. For further information on the Final Rule, please see our firm publication here.
2. Recent Enforcement Actions
SEC brings a pair of charges against advisory firms for cash sweep program compliance failures. On January 17, the SEC announced settled charges with three registered investment advisers (“RIAs”), two of which are affiliated, for failure to adopt and implement reasonably designed policies and procedures to consider the best interests of their clients when selecting cash sweep program investment options and managing uninvested cash in advisory accounts, in violation of the Advisers Act. The Order alleges that during a period of high interest rates, the RIAs only offered bank sweep programs with interest rates that had yield differentials almost 4 percent lower than alternatives, creating a financial benefit to the firms and disadvantaging clients.
SEC charges RIAs for breach of the duty of care for failing to reasonably address vulnerabilities in its investment models. On January 16, the SEC announced settled charges with two affiliated RIAs for breach of fiduciary duties after the RIAs failed to address known vulnerabilities in investment models that negatively affected clients’ investment returns and separately for violations of the SEC’s whistleblower protection rule by requiring employees who left the RIAs to sign separation agreements stating that they had not filed a complaint with any government agency. The SEC order notes that the RIAs were made aware of, and did not address for years, the ability of certain employees to access and potentially make changes to certain live-trading models. The order further notes that one of the RIAs failed to appropriately supervise an employee who made changes to 14 live-trading models resulting in the RIA making investment decisions for clients it otherwise would have not made. The SEC order found that the RIAs failed to implement policies and procedures reasonably designed to prevent these and other violations of the Advisers Act. The SEC noted that “[a]s investment advisers rely more heavily on models and advanced technology when investing client assets, the importance of a robust compliance program grow,” and any identified material vulnerabilities should be addressed “promptly and fully”.
SEC settles charges with 12 firms for recordkeeping failures for more than $63 million. On January 13, the SEC announced settled charges against nine investment advisers and three broker-dealers for failure to maintain and preserve off-channel electronic communications in violation of the recordkeeping provisions of the Advisers Act or the Securities Exchange Act, as applicable. The firms admitted to the alleged conduct, including by supervisors and senior managers, committed to implementing improved policies and procedures, and agreed to cease and desist from future violations of record-keeping requirements. The firms agreed to pay a cumulative $63.1 million in fines. One firm self-reported its violations to the SEC and paid significantly lower penalties than it would have otherwise. These charges are the latest in the SEC’s multi-year focus on off-channel communications and compliance with the recordkeeping rules, including a more recent focus on investment advisers.
SEC charges RIA with violations regarding target date retirement funds. On January 17, the SEC announced settled charges with an RIA relating to allegedly misleading statements on tax consequences in a fund’s prospectus. A decision to change a fund’s investment minimum resulted in redemptions from a similar fund with a higher expense ratio, as investors in the second fund transferred assets to the first fund, causing the second fund to realize capital gains that were distributed to its remaining investors. The SEC order alleged that the prospectus disclosure of the second fund was materially misleading because even though it disclosed the potential for capital gains from investment activities and flows, it failed to disclose the potential for capital gains distributions resulting specifically from lowering an investment minimum and the resulting redemption activity. The SEC alleged failure to adopt and implement written policies and procedures to prevent violations of the Advisers Act and rules promulgated thereunder with respect to the accuracy of fund disclosures.
SEC charges RIA with failing to establish, implement and enforce written policies and procedures designed to prevent the use of material nonpublic information (“MNPI”). On December 20, in a complaint filed in the U.S. District Court for the District of Connecticut, the SEC announced charges against an RIA for failing to establish, implement and enforce written policies to prevent the misuse of MNPI received as part of its strategy to invest in distressed companies in violation of certain provisions of the Advisers Act, which require RIAs to establish and enforce reasonably designed compliance policies and procedures. The SEC alleges that a long-term consultant for the RIA sat on the creditors’ committee on behalf of the RIA in connection with the restructuring of Puerto Rico municipal bonds and received MNPI from a related confidential mediation. During that time, the consultant also participated in over 500 calls with the RIA’s trading desk, which continued to buy over $260 million in Puerto Rico bonds. The SEC complaint alleges that this created a substantial risk of misusing information from the mediation in connection with trading the bonds.
SEC charges seven private fund advisers for repeated failures to provide required Form PF information. On December 13, the SEC announced settlements it reached with seven RIAs for failing to file annual reports on Form PF over multi-year periods regarding private funds they advise, as required by Rule 204(b)-1 under the Advisers Act. The seven advisers were issued civil monetary penalties totaling $790,000.
SEC charges global asset manager with making misleading claims regarding ESG-related investments. On November 8, the SEC announced settled charges with an RIA for making allegedly misleading statements in board materials, proposals to prospective clients and marketing materials about the percentage of its assets under management that integrated ESG consideration in violation of the Advisers Act. The SEC order notes that the RIA determined that integrating ESG considerations into its investment strategies was of commercial importance and accelerated its ESG integration efforts, resulting in the RIA overreporting the percentage of assets under management that incorporated ESG considerations, including by counting passive fund assets. The SEC order further notes that the RIA did not have policies and procedures in place that defined how it would determine if a fund or strategy integrated ESG considerations. This order follows SEC charges announced on October 21 against another RIA for failing to follow its own investment criteria for ESG marketed funds, which was covered in our Q3 2024 Newsletter, available here.
SEC charges RIA with Marketing Rule violations. On November 1, the SEC announced settled charges against an RIA for violations of Advisers Act Rule 206(4)-1 (the “Marketing Rule”). According to the SEC order, the RIA disseminated advertisements containing paid endorsements from professional athletes that lacked required disclosures and advertised hypothetical performance to the general public on its website without adopting required policies and procedures. Under the Marketing Rule, RIAs are prohibited from including any endorsement in an advertisement, unless, among other things, the investment adviser clearly and prominently discloses that the endorsement was given by a person other than a current client or investor and that compensation was provided, and provides a brief statement of any material conflicts of interest.
Subsidiaries of Global Financial Institution resolve five SEC enforcement actions. On October 31, the SEC announced settled charges against two subsidiaries of a global financial institution in five separate enforcement actions across multiple business lines for certain alleged failures including allegedly misleading disclosures to investors, breaches of fiduciary duty, prohibited joint transactions and principal trades, and failures to make recommendations in the best interest of customers. One order found that an RIA/broker-dealer subsidiary failed to fully disclose the financial incentives some advisers had when they recommended one investment program in violation of the Advisers Act. Another order found that the same entity recommended certain mutual fund products to its customers when materially less expensive ETF products that offered the same investment portfolios were available, in violation of Regulation Best Interest. Notably, the SEC did not impose a penalty in this case because the subsidiary had promptly self-reported this issue to the SEC. Finally, two orders alleged that an RIA subsidiary of the global financial institution engaged in or caused prohibited transactions. One found that the RIA caused affiliated transactions to benefit an affiliated foreign money market fund during the pandemic and the other found that that the RIA engaged in or caused 65 prohibited principal trades.
SEC publishes enforcement results for 2024. On November 22, the SEC announced the results of its enforcement actions for fiscal year 2024. The SEC filed 583 total enforcement actions and obtained $8.2 billion in remedies, the highest annual recoveries in SEC history, although the total number of enforcement actions brought by the Commission declined in comparison to 2023. $4.5 billion of the total was won in a jury trial against Terraform Labs and Do Kwon, who were charged with a multi-billion-dollar crypto asset securities fraud involving crypto assets offered and sold as securities.
Particular highlights from the announcement include: recordkeeping and off-channel communication cases resulting in more than $600 million in penalties; an entry regarding heightened investor risks from emerging technologies relating to AI, social media, and crypto, and false or misleading disclosures relating to these areas; and an enforcement action against audit firm BF Borgers for fraud impacting over 1,500 SEC filings.
The SEC published an addendum providing high-level information on the number of proceedings, total money recovered, and distributions to investors compared to previous years, and including a list of enforcement actions, available here.
3. Recent Staffing Changes
Departure of Chairman Gary Gensler. On January 21, President Trump named Commissioner Mark Uyeda as Acting Chairman of the SEC following Gary Gensler’s resignation. Mr. Uyeda has occupied the role of Commissioner since June 2022. Mr. Uyeda also made several selections for acting senior staff roles at the SEC:
- Jeffrey Finnell, Acting General Counsel
- Robert Fisher, Acting Director of the Division of Economic and Risk Analysis
- Kathleen Hutchinson, Acting Director of the Office of International Affairs
- Samuel Waldon, Acting Director of the Division of Enforcement
- Ryan Wolfe, Acting Chief Accountant
Mr. Uyeda will serve as Acting Chairman pending confirmation of President Trump’s pick for the permanent role, former SEC Commissioner Paul Atkins. From 2002-2008, Mr. Atkins served as an SEC Commissioner and is currently the founder and CEO of Patomak Global Partners, a financial consulting firm that has served cryptocurrency exchanges and digital token projects. Atkins also sits as co-chairman of the Digital Chamber’s Token Alliance.
4. Other Recent Key Updates
SEC announces formation of new Crypto Task Force. On January 21, Acting SEC Chairman Mark Uyeda announced a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets. The task force, led by Commissioner Hester Peirce, will collaborate with Commission staff and the public to provide a “comprehensive and clear” regulatory path for crypto assets. The SEC is seeking to clarify who must register with the Commission and practical solutions for those seeking to register. The task force hopes to add to the existing SEC framework regarding crypto, which has featured enforcement actions that regulate crypto retroactively and reactively. The task force is expected to hold roundtables in the future.
Texas District Court finds American Airlines breached ERISA Duty of Loyalty. On January 10, Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas ruled that American Airlines (“American”) and the American Airlines Employee Benefits Committee (“EBC”) breached their ERISA duty of loyalty as fiduciaries to American Airlines’ 401(k) plan participants. The court held that American Airlines and the EBC “fail[ed] to keep American’s own corporate interests separate from their fiduciary responsibilities,” by utilizing the investment management services of BlackRock and “allowing BlackRock to engage in ESG-oriented proxy voting and investment strategies using Plan assets.” In particular, the court found that BlackRock had an outsized influence on American due to BlackRock (1) being the largest manager of American’s 401(k) plans, (2) being one of the largest shareholders of American (owning over 5% of American stock), and (3) financing approximately $400 million of American’s debt. The court found that “ESG investing is a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end.” Therefore, American’s failure to monitor and oversee BlackRock’s ESG-oriented proxy voting and shareholder engagement revealed a “shared belief” in ESG that benefited American’s commitment to ESG and led it to breach its duty of loyalty by failing to act with the singular purpose of maximizing financial returns. At the same time, the Court found that American fulfilled its duty of prudence because the airline’s processes were “[c]onsistent with and, in many aspects, exceeded the processes of other fiduciaries.” The court deferred its decision on damages, pending further briefing on potential financial losses and remedies. For more on the decision and key takeaways, please see our firm publication here.
Vanguard enters into a new passivity agreement with the FDIC. On December 27, the FDIC announced the execution of a new passivity agreement with The Vanguard Group, Inc. that governs how the Vanguard funds’ holdings of certain bank stocks are treated for purposes of the Change in Bank Control Act. The agreement is designed to “add[ ] specificity to what it means to be a passive investor in FDIC-supervised banks or their holding companies” and “enhances the FDIC’s ability to monitor and confirm that passivity.”
The new agreement requires Vanguard to provide the FDIC with information about its holdings in bank holding companies of FDIC-supervised banks—which have historically been within the remit of the Federal Reserve—but it does not require Vanguard to submit Change in Bank Control Act notices to the FDIC and seek the agency’s approval with respect to those investments as long as notices are filed with the Federal Reserve. As mentioned in the 3Q 2024 Investment Management Newsletter, the FDIC adopted an Notice of Proposed Rulemaking (“NPR”) in July 2024 to amend its regulations under the Change in Bank Control Act to seek to exercise a second level of approval authority over investments in bank holding companies that have state nonmember bank subsidiaries broadly. The FDIC has not yet moved to finalize the NPR, and its fate under the new Administration remains uncertain. For more on the implications of the FDIC’s NPR, please see our firm publication here and our publication in Law360 on the NPR here.
TD receives temporary and permanent exemptions from Section 9(a) of the 1940 Act. On January 17, 2025, the SEC issued an order pursuant to Section 9(c) of the 1940 Act that excluded the onerous condition of CEO certification. On December 20, 2024, TD Bank, TD Bank US Holding Company (“TDBUSH”), TD Bank, N.A (“TDBNA”), and Epoch Investment Partners, Inc. (“Epoch,” an RIA and wholly owned subsidiary of TDBUSH, and collectively, the “Applicants”) filed an application to exempt Epoch and affiliated persons of the applicants, other than TDBUSH and TDBNA, from the statutory disqualification imposed by section 9(a)(1) of the 1940 Act. The disqualification was triggered by plea agreements entered into with the DOJ and USAO-DNJ in October relating to deficiencies in the TD Bank entities’ AML programs. TDBUSH, TDBNA and Epoch were represented by Sullivan and Cromwell LLP.
The SEC granted a temporary exemption on December 31, 2024, on several conditions, and granted a permanent exemption on January 17, 2025.