For more information on these and other developments, we encourage you to reach out to your regular Sullivan & Cromwell contact.
Highlights
- In this issue, we discuss key developments in Q3 2025, including recent legislation, rulemakings, enforcement actions and other key updates affecting the investment management industry.
Recent Legislation, Rulemakings and Guidance
GENIUS Act is Enacted. On July 18, President Trump signed into law the “Guiding and Establishing National Innovation for U.S. Stablecoins Act” or “GENIUS Act.” The GENIUS Act was passed by the U.S. Senate on June 17, 2025, by a vote of 68 to 30, and by the U.S. House of Representatives on July 17, 2025, by a vote of 308 to 122. The House passed the GENIUS Act unchanged from the version passed by the Senate. The GENIUS Act limits the issuance of payment stablecoins in the United States to “permitted payment stablecoin issuers” (“PPSIs”) and, among other things, amends the federal securities laws and the Commodity Exchange Act (the “CEA”) to provide that a payment stablecoin issued by a PPSI would not be a security under the federal securities laws or a commodity under the CEA, and that a PPSI would not be an investment company as defined in the Investment Company Act of 1940 (the “1940 Act”). For more information on the GENIUS Act, please refer to our publication here.
SEC Releases Spring 2025 Regulatory Agenda. On September 4, SEC Chairman Paul Atkins announced the publication of the Spring 2025 Unified Regulatory Agenda (the “Spring 2025 Regulatory Agenda” or “Agenda”), which provides insights into the SEC’s current rulemaking priorities. The Agenda includes three rulemakings in the prerule stage, 18 rulemakings in the proposed rule stage, and two rulemakings in the final rule stage. The Spring 2025 Regulatory Agenda indicates April 2026 as the target date for promulgating each of the proposals, but the Agenda is non-binding on the SEC and the indicated timelines often do not correlate with the actual agency action dates. The key investment management-related proposals are:
- Custody Rule: A new rulemaking item for “Amendments to the Custody Rules” is intended to amend existing rules and/or propose new rules under the Investment Advisers Act of 1940 (the “Advisers Act”) and the 1940 Act to improve and modernize the regulations around the custody of advisory client and fund assets, including to address, in each case, crypto assets. This indicates a renewed focus on custody following the withdrawal of the 2023 Safeguarding Proposal that was proposed under former SEC Chair Gary Gensler.
- Rule 17a-7: A new rulemaking item for “Amendments to Rule 17a-7 under the Investment Company Act” is intended to modernize the conditions for, and expand the availability of, the exemption from the prohibition of Section 17(a) of certain purchase or sale transactions between an investment company and certain types of affiliated persons.
- Form N-PORT: A new rulemaking item for “Amendments to Form N-PORT” is intended to address identified disclosure burdens in Form N-PORT. In August 2024, Form N-PORT was amended to require, among other things, more frequent reporting of portfolio holdings and expanded disclosure on liquidity risk management, which asset managers have found to be excessively burdensome.
- Crypto Assets and Crypto Market Structures: The Agenda includes “Crypto Assets” and “Crypto Market Structure Amendments” as new rulemaking items, which relate to the offer and sale of crypto assets, potentially to include certain exemptions and safe harbors, and permitting the trading of crypto assets on ATSs and national securities exchanges. For asset managers, these rulemakings may affect the extent to which digital assets may be incorporated into investment strategies.
- Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers: The Division of Investment Management is considering recommending that the SEC, jointly with FinCEN, issue a final rule with regard to certain investment advisers that requires those investment advisers to implement reasonable procedures to verify the identities of their customers.
For further information on the Agenda, please see our publication here.
President Trump Issues Executive Order on Alternative Assets in 401(k) Plans. On August 7, President Trump issued an executive order (the “Executive Order”) that directs the Secretary of Labor and the SEC to consider ways to facilitate access to certain alternative asset investments for participant-directed defined-contribution retirement savings plans by revising applicable regulations and guidance. The Executive Order emphasizes that exposure to alternative assets will offer plan participants opportunities for the investment returns and diversification from which institutional investors have traditionally benefited.
The Executive Order defines “alternative assets” broadly to include private market investments, real estate, digital assets, commodities, projects financing infrastructure development and lifetime income products. The Executive Order directs the Secretary of Labor to, within 180 days of the Executive Order, (i) reexamine guidance from the Department of Labor (“DOL”) regarding fiduciary duties under ERISA relevant to making available to plan participants asset allocation funds that include investments in alternative assets and (ii) seek to clarify the DOL’s position on the appropriate fiduciary process associated with making available these types of investment options. The Executive Order also instructs the Secretary of Labor to propose rules, regulations, or guidance, which may include appropriately calibrated safe harbors that reduce uncertainty and curb the use of ERISA litigation tactics that constrain fiduciaries. The Executive Order further directs the Secretary of Labor to consult with the SEC, Treasury, and other federal regulators as necessary, including as to parallel regulatory changes.
The Executive Order also directs the SEC to consider ways to facilitate access to alternative assets for participant-directed defined contribution retirement plans by considering revisions to applicable regulations and guidance, including those that condition an investor’s ability to invest in alternative assets based on their status as an accredited investor or qualified purchaser.
On August 12, following the issuance of the Executive Order, the Department of Labor rescinded its December 21, 2021 Supplemental Statement that cautioned that, except in limited circumstances, plan fiduciaries of small, individual account plans, which include many 401(k) plans, are unlikely to be suited to evaluate the use of alternative assets in plan investment menus.
SEC Issues Guidance for Registered Closed-End Funds Investing in Private Funds. On August 15, the staff of the SEC’s Division of Investment Management (“IM Staff”) issued Accounting and Disclosure Information 2025-16 on Registered Closed-End Funds of Private Funds (the “ADI”), which provides that the IM Staff will no longer request registered closed-end funds that invest in private funds (“CE-FOPFs”) to either (i) include requirements for accredited investor status and a minimum initial investment amount (the minimum initial investment had previously been $25,000) or (ii) limit their private fund investments to 15% of their assets. The ADI formalizes statements made by the former Director of the Division of Investment Management earlier this year that had reversed the SEC staff’s informal historical position that required closed-end funds investing 15% or more of their assets in private funds to impose a minimum initial investment requirement of $25,000 and restrict sales to investors that satisfy the accredited investor standard. The ADI recognizes that investors who invest indirectly in private funds through CE-FOPFs enjoy regulatory protections under existing federal securities laws, including management by a registered investment adviser that owes fiduciary duties, oversight by a board with fiduciary duties to the fund, and being subject to periodic disclosure requirements, as well as requirements under the 1940 Act such as restrictions on transactions with affiliates.
The ADI highlights the areas that the IM Staff will continue to focus on when reviewing registration statements of CE-FOPFs, including compliance with the “plain English” rule; costs, strategies and risks; fee structures and netting risk; and underlying private fund characteristics. The ADI also outlines applicable SEC filing requirements for existing CE-FOPFs that wish to take advantage of the guidance. The ADI is expected to increase investment opportunities in private funds for retail investors.
SEC Issues No-Action Letter on Custody of Crypto Assets by State Trust Companies. On September 30, IM Staff issued a no-action letter providing that it would not recommend enforcement action under Rule 204(6)-2 (the “Custody Rule”) under the Advisers Act or Section 17 of the 1940 Act against registered investment advisers, registered investment companies or business development companies that treat certain state trust companies as “banks” (and, therefore, an institution permitted to custody assets) with respect to the placement and maintenance of crypto assets and related cash and/or cash equivalents.
The Custody Rule requires registered investment advisers with custody of client funds or securities to maintain those assets with a “qualified custodian,” which includes a “bank” as defined in the Advisers Act. Similarly, Sections 17(f) and 26(a) of the 1940 Act generally provide that registered funds must maintain securities and similar investments with specified types of custodians, including banks. The definition of “bank” under both statutes includes a trust company, provided that: a substantial portion of its business consists of receiving deposits or exercising fiduciary powers comparable to those of national banks, it is supervised by appropriate state or federal authorities, and it is not structured to evade the 1940 Act or Advisers Act, as applicable. The IM Staff acknowledged that determining whether a state trust company meets this definition involves a facts-and-circumstances analysis, especially with respect to whether a “substantial portion” of its business involves exercising fiduciary powers or receiving deposits. The IM Staff conditioned the no-action relief on registered advisers and regulated funds satisfying certain requirements, including conducting initial due diligence and ongoing oversight of the state trust companies, maintaining policies and procedures to safeguard crypto assets, obtaining audited financial statements and internal control reports, entering into written custody agreements with the state trust companies, and disclosing any material risks of the arrangements to clients or fund boards.
This relief facilitates broader use of state trust companies for crypto asset custody by advisers and funds. The SEC’s Spring 2025 Regulatory Agenda also includes Custody Rule amendments, suggesting that a comprehensive custody rulemaking is likely.
SEC Staff Publishes FAQs for Customer Protection Rule Amendments Related to U.S. Treasury Clearing. On August 6, the SEC Division of Trading and Markets published FAQs regarding amendments to Rule 15c3-3a (known as the Customer Protection Rule) under the Securities Exchange Act of 1934 (the “Exchange Act”) as they relate to the clearing of U.S. Treasury securities. The FAQs provide responses to questions in the following categories: reserve formula debits and credits; prefunding customer margin requirements; use of customer securities to meet a margin requirement; excess margin collateral; mark-to-market or variation margin payments; customer borrowing and margin loans; and application to proprietary securities accounts of broker-dealers.
SEC and CFTC Grant Further Extension of Compliance Date for Form PF Amendments. On September 17, the SEC and the CFTC jointly announced a further extension of the compliance date for the amendments to Form PF that were adopted on February 8, 2024. The compliance date, which was extended to June 12, 2025 and then October 1, 2025, has now been delayed to October 1, 2026. The joint announcement noted the extension would provide further time for the SEC and CFTC to complete a substantive review of the Form PF amendments in accordance with President Trump’s January 20, 2025 memorandum, which directed agencies to consider postponing the effective date for rules not yet in effect for the purpose of reviewing any questions of fact, law, and policy that such rules may raise. The agencies may take further appropriate actions, which may include proposing new amendments to Form PF. The Form PF amendments from February 2024 significantly expanded the scope of information required from all private funds advisers and increased disclosure obligations. For more information on the Form PF amendments, please refer to our Q1 2024 newsletter; for information on FAQs published regarding the Form PF amendments, please refer to our Q1 2025 newsletter.
Recent Enforcement Actions
SEC Charges Investment Advisers for Failures to Disclose Conflicts of Interest from Financial Advisor Compensation Arrangements. On August 29, the SEC announced that it had settled charges against a registered investment adviser for failing to adequately disclose conflicts of interest tied to its financial advisers’ compensation. The SEC found that the adviser used a compensation system that financially incentivized its advisers to recommend that clients enroll and remain in the advisory service without adequately disclosing the conflict of interest. The adviser agreed to the entry of a cease-and-desist order and to pay a civil penalty of $19.5 million.
Similarly, on the same day, the SEC announced that it had settled charges against another registered investment adviser for violating Section 206(2) of the Advisers Act and its affiliated registered broker-dealer for failing to comply with the Disclosure and Conflict of Interest Obligations of Regulation Best Interest. The SEC found that retirement plan advisers were financially incentivized with bonuses and merit raises to enroll plan participants in the managed account service, a fee-based advisory service that provides retirement plan participants with ongoing discretionary portfolio management. The SEC alleges that the investment adviser did not adequately disclose the conflicts of interest arising from the retirement plan advisors’ incentive compensation system, and further alleges that some retirement plan advisers routinely told clients they were “salaried and/or noncommissioned” and acting in a fiduciary capacity and in the client’s best interest, without mentioning the financial incentives tied to managed account enrollments. The investment adviser and broker-dealer agreed to the entry of a cease-and-desist order and to pay approximately $6 million in disgorgement, prejudgment interest, and penalties.
SEC Charges Investment Adviser for Custody Rule Violations. On August 1, 2025, the SEC announced that it had settled charges against a registered investment adviser for failing to comply with the independent verification requirement for client funds and securities over which it had custody, in violation of Section 206(4) of the Advisers Act and the Custody Rule. The SEC found that between 2018 and 2024, the adviser had custody over client funds and securities with the adviser’s president acting as a co-trustee, an account signatory, and an authorized agent with power of attorney for multiple client accounts, but failed to arrange for surprise examinations required by the Custody Rule. The adviser consented to the issuance of a cease-and-desist order and agreed to pay a $50,000 penalty.
SEC Charges Investment Adviser with Marketing, Books and Records, and Compliance Rule Violations. On September 4, the SEC announced charges against a registered investment adviser for failing to comply with various provisions of the Advisers Act. The SEC charged the adviser with failing to have a reasonable basis to substantiate its website advertisement claim that it “refused all conflicts of interest,” a claim at odds with the various conflicts of interest inherent in the adviser’s role as an investment adviser, including conflicts of interest disclosed in its Form ADV brochure. The SEC also alleges that the adviser further failed to maintain copies of its advertisements for the periods required, including for advertisements on its website. In addition, the order found that the adviser (i) violated Rule 206(4)-7 under the Advisers Act (the “Compliance Rule”) for failing to implement required policies and procedures concerning the reliance on third parties for recordkeeping and conducting of annual compliance reviews, and (ii) violated the Advisers Act for failing to conduct an annual review of its compliance policies and procedures.
SEC Charges Former Investment Adviser for Failing to Disclose Conflicts of Interest, Producing Backdated Compliance Documents, and Overbilling. On July 11, the SEC announced settled charges against a former registered investment adviser for failing to adequately disclose conflicts of interest, overbilling its clients, and, through its former chief compliance officer and its former president, creating backdated documents and providing them to SEC staff during a compliance examination. The SEC alleged that the firm did not disclose a conflict of interest with its affiliated broker-dealer charging fee markups and account service fees; instead, the firm misleadingly indicated that the unaffiliated clearing broker determined the fees billed to clients. Further, the SEC alleged that (i) the firm erroneously collected advisory fees on alternative investment positions, despite the fact that no fees were supposed to be assessed on those positions, and (ii) the firm failed to refund a pro rata portion of prepaid quarterly advisory fees when clients terminated their accounts, as provided in client agreements. The SEC also alleged that through its former executives, the firm created false backdated documents for three calendar years and provided these documents to SEC staff during a compliance examination.
Other Recent Key Updates
SEC Issues Notice of Intent to Grant ETF Share Class Relief. On September 29, the SEC issued a notice that it intends to approve the application filed by Dimensional Fund Advisors LP (“DFA”) for exemptive relief that would allow offering mutual fund and ETF classes of the same fund. On September 26, DFA filed its third amended application, which is substantially similar to its prior application discussed in our Q2 2025 newsletter. The notable difference in the amended application is the added discussion of the declaration of dividends on a daily basis for certain mutual fund class shares and on a monthly basis for the ETF class shares of those funds, along with a discussion of the methodology for allocating income and expenses. An order granting the requested relief will be issued unless the SEC orders a hearing upon receiving hearing requests by October 16, 2025, although the timeline may be impacted by the government shutdown. However, there remain open questions regarding, among other things, operations and distribution with respect to launching an ETF share class within an existing mutual fund portfolio. For more information on ETF share class operational considerations, please refer to the Investment Company Institute’s publication here.
Fifth Circuit Remands Short-Selling Rules. On August 25, the Fifth Circuit Court of Appeals remanded Rule 10c-1a under the Exchange Act (the “Securities Lending Rule”) and Rule 13f-2 (the “Short Sale Rule,” and together, the “Rules”) to the SEC to permit the SEC to further consider their cumulative economic impact. The court said that because the Rules are related, the SEC should have considered the combined costs of complying with both at once.
The Rules were both adopted on October 13, 2023. The Securities Lending Rule requires the reporting of securities loan information to a registered national securities association (“RNSA”) and the subsequent public disclosure by the RNSA of most of that information. The Short Sale Rule requires institutional investment managers to report specified short position and short activity data for equity securities, which would be publicly disclosed on an aggregated and delayed basis by the SEC.
In December 2023, multiple industry groups, including the Managed Funds Association, challenged the Rules under the Administrative Procedure Act and the Exchange Act, arguing that both Rules should be vacated because the Rules are irreconcilably contradictory and because the SEC failed to consider the Rules’ collective impact.
In a unanimous opinion of a three-judge panel, the Fifth Circuit remanded the Rules to the SEC without vacatur (i.e., permitting agency orders or rules to remain in effect after they are remanded). The Fifth Circuit found that the SEC erred by failing to consider the economic impact the Short Sale Rule would have on the Securities Lending Rule when the Rules were promulgated in tandem, noting that the SEC should have considered the collective economic impact of the Rules in light of their significant interplay and nearly concurrent promulgation.
The Rules are still technically in effect and the SEC has not indicated how it will proceed in light of the Fifth Circuit’s decision. The Spring 2025 Regulatory Agenda does not include any actions related to the Rules.
SEC to Return to Simultaneously Considering Settlement Offers and Related Waiver Requests. On September 26, Chairman Paul Atkins announced in a statement that the SEC will restore its prior practice of simultaneously considering an offer of settlement that addresses both the SEC enforcement action and any related requests for waivers from automatic disqualifications and other collateral consequences that result from the underlying SEC enforcement action. Such disqualifications and consequences include the inability to act or serve in certain capacities pursuant to Section 9(a) of the 1940 Act, including as investment adviser, officer, director or principal underwriter of a fund. The approach of simultaneously considering settlement offers and waiver requests does not obligate the SEC to accept a settlement offer, and the SEC may still determine to consider the settlement offer and waiver request independently. However, this approach is expected to reduce uncertainty for a settling party of entering into a settlement without knowing whether the SEC will grant waiver relief from a regulatory disqualification. The SEC had previously considered settlement offers and waiver requests simultaneously under a process implemented by SEC former Chairman Jay Clayton in 2019 but the practice was discontinued under former Chair Gensler.
SEC Investor Advisory Committee Makes Recommendations on Retail Investor Access to Private Market Assets. On September 18, the SEC Investor Advisory Committee (“IAC”) released a report that sets forth recommendations concerning the regulatory framework for retail investors’ access to private market assets. In the report, the IAC recommends that the optimal way for retail investors to access private market assets is through registered funds. The report also makes five recommendations to enhance the ability of registered funds to invest in private market assets: (i) provide clarity and transparency on valuations throughout the lifecycle of a fund; (ii) consider changes to staff Interpretations and/or rules under the 1940 Act to allow registered funds to better facilitate investing in private market assets; (iii) enhance and make liquidity disclosures more prominent; (iv) provide for additional investor protections specifically addressing greater participation of retail investors; and (v) open a request for comments process to solicit additional views and perspectives on these and other critical issues.
The IAC was established by the Dodd-Frank Act and advises the SEC on regulatory priorities, initiatives to protect investors, and initiatives to promote investor confidence and the integrity of the securities marketplace.
SEC and CFTC Issue Joint Statement on Regulatory Harmonization. On September 5, Chairman Atkins and Acting CFTC Chairman Caroline Pham issued a joint statement calling for regulatory harmonization between the two agencies. The statement indicates that the agencies may consider harmonizing product and venue definitions; streamlining reporting and data standards; aligning capital and margin frameworks; and developing coordinated innovative exemptions using each agency’s existing exemptive authority. The September 5 joint statement builds on an earlier joint statement issued by the staffs of the SEC and CFTC on September 2, which clarified the staffs’ views that SEC- and CFTC-registered exchanges are not prohibited from facilitating the trading of certain spot commodity products.
SEC Names Judge Margaret Ryan as Director of Enforcement. On August 21, the SEC announced the appointment of Judge Margaret “Meg” Ryan as Director of the Division of Enforcement, effective September 2. Judge Ryan is a senior judge on the U.S. Court of Appeals for the Armed Forces and is currently a lecturer on military law and justice at Harvard Law School. Meanwhile, Acting Director Sam Waldon will return to his role as Chief Counsel.
SEC Names Jon Kroeper as Deputy Director of the Division of Trading and Markets. On September 24, the SEC announced the appointment of Jon Kroeper as the Deputy Director of the Division of Trading and Markets, effective September 29. Mr. Kroeper twice served at the SEC (1994 to 2000 and 2005 to 2007) before joining FINRA, where he worked from 2007 to 2024 as executive vice president in the market regulation department. Prior to his appointment, Mr. Kroeper was most recently a senior consultant at Patomak Global Partners, where he provided consulting and advisory services for the financial services industry.