The S&C Quarterly Investment Management Newsletter highlights key legal and regulatory developments relevant to the investment management industry. For more information on these and other developments, we encourage you to reach out to your regular Sullivan & Cromwell LLP contact.
Highlights
In this issue, we discuss key developments in Q4 2025 and early Q1 2026, including recent executive orders, legislation, guidance, enforcement and legal developments, speeches and announcements by SEC Commissioners and Division heads and other key updates affecting the investment management industry.
Recent Legislation, Executive Orders, Rulemakings, & Guidance
SEC Staff Publishes Additional FAQs on the Marketing Rule. On January 15, the SEC Division of Investment Management published an updated FAQ addressing questions related to the SEC’s 2020 amendments to the Marketing Rule under the Advisers Act. The first new FAQ addresses whether it is permissible for an advertisement of a portfolio’s net performance to be calculated by deducting actual fees paid by such portfolio when the anticipated audience is expected to pay higher fees than the actual fees charged. Although the adopting release for the Marketing Rule indicated that in such circumstances an adviser must use a model fee that reflects the anticipated higher fees the intended audience are expected to pay, the FAQ clarified that whether using actual fees would violate Rule 206(4)-1(b) depends on the specific facts and circumstances of the advertisement, including the relevant disclosures. The staff notes that an adviser may use various means to illustrate the effect of any differences between actual fees and anticipated fees on the portfolio’s performance.
The second new FAQ clarifies that despite Rule 206(4)-1(b), which prohibits an investment adviser from paying compensation for a testimonial or endorsement by a person that has been subject to a final order by a self-regulatory organization during the previous ten years, such adviser could pay a person that has been subject to such a final order as long as such order does not expel or suspend the person from membership, bar or suspend the person from associating with other members or prohibit that person from acting in any capacity under the federal securities laws, as long as certain additional criteria set forth in the FAQ are satisfied.
SEC Proposes Amendments to the Small Entity Definitions for Investment Companies and Investment Advisers for Purposes of the Regulatory Flexibility Act. On January 7, the SEC proposed amendments to the rules that define which registered investment companies, investment advisers and business development companies qualify as small entities for purposes of the Regulatory Flexibility Act. The proposed amendments would (i) increase the asset-based thresholds from $50 million to $10 billion for investment companies and from $25 million to $1 billion for investment advisers; (ii) update the way that related funds’ assets are aggregated for purposes of defining small entities; and (iii) provide for inflation adjustments to the asset-based thresholds every 10 years. SEC Chairman Paul Atkins remarked that the proposal “would help the Commission more appropriately promote the effectiveness and efficiency of its regulations[.]” The comment period on the proposed amendments will be until March 13, 2026.
President Trump Issues Executive Order on Proxy Advisors and Shareholder Proposals; Director Daly Gives Remarks on Proxy Voting. On December 11, President Trump issued an Executive Order titled “Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors” (the “Executive Order”). The Executive Order, which focuses on the influence of proxy advisory firms Institutional Shareholder Services, Inc. and Glass, Lewis & Co. LLC “to advance and prioritize radical politically-motivated agendas — like ‘diversity, equity, and inclusion’ [(“DEI”)] and ‘environmental, social, and governance’ [(“ESG”)],” directs the Chairman of the SEC to review and consider revising or rescinding all rules and regulations relating to proxy advisors and shareholder proposals, explore whether these firms have made material misstatements in their voting recommendations, assess whether they should be registered under the Investment Advisers Act of 1940 (the “Advisers Act”), and explore whether engaging proxy advisory firms to advise on non-pecuniary factors violates an adviser’s fiduciary duties.
The Executive Order also directs the Secretary of Labor to address concerns regarding proxy advisors through strengthening fiduciary standards under the Employee Retirement Income Security Act (ERISA). In addition, it instructs the Federal Trade Commission Chair, in consultation with the Attorney General, to review ongoing state antitrust investigations into proxy advisors for violations of federal antitrust law and investigate whether proxy advisors engage in unfair methods of competition. For more information on the Executive Order, including its implications, please refer to our publication here.
On January 8, Brian Daly, Director of the SEC Investment Management Division, gave a speech entitled “(Re)Empowering Fiduciaries in Proxy Voting,” which noted that the Executive Order was “a seismic shift” and “big assignment” for the SEC. Director Daly remarked that proxy voting should not be a “rote box checking exercise” and that advisers that determine proxy voting is not required or inconsistent with their investment program should not be afraid to abstain from voting. In addition, he stated that advisers that do vote should be empowered to utilize their best judgment and the resources they deem appropriate to exercise such vote. He encouraged advisers assessing proposed voting to make a “reasonable inquiry into the client objectives,” citing the SEC’s fiduciary duties interpretation. Director Daly finished his speech by mentioning that AI could be a valuable tool to enhance advisers’ judgment and better serve their clients.
INVEST Act (H.R. 3383) Passes the U.S. House of Representatives. On December 11, the U.S. House of Representatives passed the “Incentivizing New Ventures and Economic Strength Through Capital Formation Act,” or “INVEST Act,” by a vote of 302 to 123. The bill now proceeds to the U.S. Senate, and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. The aim of the INVEST Act is to increase investor access to private capital markets and support small businesses.
Some of the proposed changes with critical implications for the investment management industry include:
- increasing the registration exemption threshold for private fund advisers under the Advisers Act from $150 million in AUM to $175 million, as adjusted for inflation every five years;
- broadening the venture capital fund adviser exemption under the Advisers Act by expanding the definition of “qualifying investment” to include investments in secondaries transactions and other venture capital funds as long as such investments do not exceed 49% of the investing fund’s aggregate capital contributions and uncalled capital commitments;
- expanding the Section 3(c)(1)(C) exemptions in the Investment Company Act of 1940 (the “Investment Company Act”) by increasing the beneficial owner limit for “qualifying venture capital funds” from 250 to 500 persons and increasing the capital limit from $12 million (as adjusted for inflation) to $50 million;
- directing the SEC to clarify that company presentations at sponsored events (including those sponsored by the federal or state governments, non-profits, and venture forums) do not, by themselves, constitute general solicitation under the Securities Act of 1933; and
- increasing the threshold for the exemption from independent accountant review of a securities offering under Regulation Crowdfunding from $124,000 (as adjusted for inflation) to $250,000 over a 12-month period and providing the SEC with the discretion to raise the threshold to $400,000.
The INVEST Act would also direct the SEC to create new categories of “Accredited Investors” under Regulation D for individuals who qualify by passing a free exam or certification established by the SEC and administered by a registered national securities association and amend the Investment Company Act and the Securities Exchange Act of 1934 to allow 403(b) retirement plans to invest in collective investment trusts, more closely aligning their treatment with that afforded to 401(k) plans.
SEC Division of Corporation Finance (“Corp. Fin.”) Releases Statement Regarding the Rule 14a-8 Process for the Current Proxy Season. On November 17, Corp. Fin. announced that, for the 2025–2026 proxy season (October 1, 2025 through September 30, 2026), it will not respond to no-action requests for, or express any views on, companies’ intended reliance on Rule 14a-8 for exclusion of shareholder proposals. Corp. Fin. cited as reasons for its decision resource and timing constraints following the government shutdown, the volume of registration statements and other filings requiring staff attention and the extensive existing guidance available to companies and proponents. This announcement applies to pending no-action requests received before October 1, 2025, for which Corp. Fin. has not yet issued a response.
Corp. Fin. advised that companies that intend to exclude a shareholder proposal from their proxy materials must still comply with Rule 14a-8(j) by notifying the SEC and the proponents at least 80 calendar days before filing a definitive proxy statement. Such notice requirement is informational only and companies are not required to seek, or receive, staff views on proposed exclusions. A company that would like to receive a form of response to its notice must include an unqualified representation that it has a reasonable basis to exclude the proposal, and the Division will respond without evaluating the adequacy of the company’s representation.
Corp. Fin. stated that it will continue to review and respond to no-action requests under Rule 14a-8(i)(1), which permits exclusion from a company’s proxy materials of a proposal that is not a proper subject for action by shareholders under state law, citing an insufficient body of existing guidance in this area.
Prior to this announcement, on October 9, SEC Chairman Paul Atkins delivered remarks in which he questioned whether a company is obligated to include precatory shareholder proposals in its proxy materials and encouraged the SEC to “re-evaluate [Rule 14a-8]’s fundamental premise that shareholders should be able to force companies to solicit for their proposals … at little or no expense to the shareholder.”
Enforcement and Litigation
SEC Division of Examinations (“EXAMS”) Releases Its 2026 Examination Priorities. On November 17, EXAMS released its 2026 examination priorities (the “Examination Priorities”), outlining its areas of focus for the upcoming fiscal year. While the Examination Priorities are largely consistent with prior years, the framing of the Examination Priorities signals a change in approach from the previous administration. As Chairman Atkins notes in the accompanying press release, “Examinations are an important component to accomplishing the agency’s mission, but they should not be a 'gotcha' exercise.”
As described below, the Examinations Priorities include a number of longstanding areas of focus, such as registered investment advisers and registered investment companies, as well as a number of emerging areas of risk, such as information security, data protection and operational resiliency. In addition, the Examination Priorities highlight emerging financial technology, including the use of automated tools and AI, and indicate that EXAMS will examine firms that engage in activities such as automated investment advisory services, recommendations, and related tools and methods. The Examination Priorities notably removed the standalone discussion of crypto assets or digital asset markets, representing a departure from prior years in which crypto-related activities were an express focus.
As in prior years, the Examination Priorities emphasize core focuses for examinations of investment advisers, namely: (i) adherence to fiduciary duties and standards of conduct and (ii) effectiveness of advisers’ compliance programs — including a continued focus on core areas of marketing, valuation, trading, portfolio management, disclosure and filings, and custody and on whether policies and procedures address compliance with the Advisers Act and are reasonably designed to address conflicts of interest. Notably, the report adds that EXAMS’ focus may shift “depending on an adviser’s practices or products, such as for advisers with activist engagement practices.”
The Examination Priorities similarly emphasize continuing areas of focus for registered investment companies, including: (i) areas of general focus, such as compliance programs, disclosures, filings, and governance practices; (ii) operations of particular focus, such as (A) fund fees and expenses and associated waivers and reimbursements and (B) portfolio management practices and disclosures, for consistency with statements about investment strategies or approaches, with fund filings and marketing materials, and the amended Names Rule (after the compliance date); and (iii) developing areas of interest, including: registered investment companies that participate in merger or similar transactions, have complex strategies and/or significant illiquid investments (e.g., closed-end funds) or engage in novel strategies (such as those with leverage vulnerabilities).
EXAMS Issues Risk Alert Regarding Observed Compliance with Marketing Rule. On December 16, EXAMS issued a risk alert titled Additional Observations Regarding Advisers’ Compliance with the Advisers Act Marketing Rule. The Risk Alert includes EXAMS staff observations regarding investment advisers’ compliance with the disclosure requirements and oversight and compliance practices under the Marketing Rule’s testimonials and endorsements provisions (Rule 206(4)-1(b)) and due diligence and disclosure requirements under the Marketing Rule’s third-party ratings provisions (Rule 206(4)-1(c)).
U.S. Supreme Court Hears Oral Arguments for FS Credit Opportunities Corp. On December 10, the Supreme Court heard oral arguments in FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd., a case that will resolve a circuit split on whether Section 47(b) of the Investment Company Act, which states that contracts that violate the Investment Company Act are unenforceable by the parties, creates an implied private right of action for shareholders of registered investment companies. As described in our Q2 2025 Newsletter, the Third, Ninth and Fourth Circuits have held that there is no private right of action under Section 47(b), but in 2019, the Second Circuit, in Oxford University Bank v. Lansuppe Feeder, LLC, recognized an implied private right for parties seeking to rescind contracts that violate the Investment Company Act. Following that decision, closed-end fund sponsors have seen a rise in lawsuits under Section 47(b) by activist investors, several of which have been successful. At issue in FS Credit Opportunities is a Saba fund’s use of Section 47(b) to challenge the adoption of bylaws provisions by the registered investment company board that make it harder for shareholders to buy a controlling stake in a fund. Most of the justices appeared receptive to arguments that the Investment Company Act authorized a private right of action for parties seeking to invalidate contracts that violate the statute, although Justice Gorsuch was unconvinced, noting that judicial recognition of causes of action not otherwise written into statutes is “pretty disastrous for our system of government[.]”
Investor-Led Challenge in Sale by EMG Highlights Risk in Continuation Fund Transactions. On December 3, sovereign wealth fund Abu Dhabi Investment Council (“ADIC”) filed a complaint in the Delaware Court of Chancery against private equity firm The Energy & Minerals Group LP (“EMG”), of which ADIC is a limited partner, relating to the fund’s proposed asset sale to an EMG-sponsored continuation fund (the “CV Transaction”). ADIC alleged that EMG’s planned asset sale was subject to conflicts of interest and below market and sought to enjoin the transaction until the parties resolved ADIC’s claims in arbitration, as required by the fund documents. On December 4, EMG consented to delay closing of the CV Transaction, and ADIC and EMG agreed to request a final decision from the arbitrator on or before February 27, 2026.
The complaint alleges that the CV Transaction would violate EMG’s fiduciary duties to its investors. More specifically, ADIC alleges that the Fund: (i) provided insufficient notice and information to the limited partner advisory committee (“LPAC”) voting on the transaction; (ii) failed to address requests for additional time, information and an in-camera session from certain LPAC members; (iii) had contact with individual LPAC members and made asymmetric disclosures to solicit votes on an individual basis; (iv) made misrepresentations and partial disclosures to LPAC members, including regarding fees and returns expected on the sale; and (v) failed to conduct a process to explore alternative transactions. EMG had engaged a financial advisor to run a competitive process and sought LPAC approval for the sale, in line with industry practice.
The dispute is a visible example of the risk present in continuation fund transactions where fund sponsors could be seen as acting as both seller and buyer.
SEC Charges Six Investment Advisers over Misstatements in Form ADV Filings. On November 17, the SEC announced charges against six purported investment advisers for violations of Sections 204(a) and 207 of the Advisers Act for making misrepresentations in their Forms ADV. The six advisers all filed as exempt reporting advisers by claiming that they had solely advised private funds and had fewer than $150 million in assets under management.
The SEC complaints allege that the advisers made material misrepresentations and unsubstantiated statements in their Forms ADV regarding the location of their operations, their assets under management and their advisory relationships with private funds, in violation of Section 207 of the Advisers Act. The SEC’s complaints further allege that the advisers failed to respond to SEC requests for records substantiating their filings, in violation of Section 204(a) of the Advisers Act, which requires advisers to make and keep records that are subject to SEC examination.
Other Recent Key Updates
SEC Grants ETF Share Class Relief for Open-End Funds to Offer Both Mutual Fund and ETF Share Classes. On November 17, the SEC issued an order granting a third amended application filed by Dimensional Fund Advisors LP and certain of its affiliates (“DFA”) requesting relief from certain provisions of the Investment Company Act and rules promulgated thereunder to allow registered open-end management investment companies (or series thereof) advised by DFA to offer one ETF share class and one or more mutual fund share classes (the structure, a “Multi-Class ETF Fund”).
On January 13, the SEC issued orders that granted relief substantially identical to that provided by the DFA Order in response to applications submitted by a number of other asset managers, including J.P. Morgan and Lord, Abbett, which are represented by S&C, as well as BlackRock, Morgan Stanley, Baron Investment Funds Trust, F/m Investments, PIMCO and State Street. All relief is effective as of the applicable SEC order and is subject to conditions set forth in each application, as amended.
Chairman Atkins Delivers a Statement Regarding Potential Revisions to FSOC’s Non-Bank Designation Guidance. In connection with a briefing from Department of the Treasury staff regarding potential revisions to the Financial Stability Oversight Council’s (“FSOC”) interpretive guidance regarding non-bank financial company designations, SEC Chairman Paul Atkins delivered a statement on December 11 before FSOC addressing the existing non-bank designation guidance. Chairman Atkins stated that he was encouraged to see a discussion regarding the designation on the agenda. He explained that the risk of designation may discourage non-bank financial companies from pursuing growth and strategic initiatives, emphasizing that companies view designation as a systemically important financial institution as “an existential threat.” The Chairman noted that this rulemaking could draw on and improve upon FSOC’s 2019 guidance.
SEC Commissioner Mark Uyeda Delivers Remarks at the ICI Retail Alternatives and Closed-End Funds Conference. On November 20, SEC Commissioner Mark T. Uyeda delivered remarks at the ICI Retail Alternatives and Closed-End Funds Conference addressing the future use of private investments in defined contribution plans, including 401(k) plans.
Commissioner Uyeda’s speech celebrated the Trump administration’s August 7 Executive Order on democratizing access to alternative investments for 401(k) plans and highlighted numerous studies on the value of private equity exposure in long-term retirement portfolios. He cited plan fiduciaries’ duty of prudence as an appropriate guardrail for many of the risks inherent to private fund investing, such as illiquidity, valuation opacity, or fee structures. In addition, Commissioner Uyeda noted that litigation reform to address the permissive pleading standards for lawsuits related to fiduciary decision-making was necessary for plan fiduciaries to include private funds in their portfolios without fear of frivolous litigation. Commissioner Uyeda concluded his remarks by noting the importance of regulatory alignment between the SEC and the Department of Labor in order to build infrastructure to ensure that diversification and innovation coexist with investor protection.
Director Daly Delivers Remarks to the ABA’s Federal Regulation of Securities Committee’s Private Funds and Investment Advisers and Investment Companies Subcommittees. On December 2, Brian Daly, Director of the SEC Investment Management Division (the “Division”), delivered remarks to the American Bar Association’s Federal Regulation of Securities Committee’s Private Funds Subcommittee and Investment Advisers and Investment Companies Subcommittee, addressing the Division’s priorities.
Director Daly announced the Division is prioritizing removing investment restrictions that “do not serve the common good,” noting that the Division would be receptive to suggestions on how thoughtful changes to existing rules could facilitate innovation. The Division is also focused on modernizing rules, including the Custody and Record Keeping Rules, to be technology neutral and platform independent. Director Daly touted the Division’s ongoing efforts to expand access to alternative asset investments while eschewing prescriptive regulatory regimes. He noted that as retail investors gain access to more investment options, including to alternative investments, the SEC would not issue prescriptive rules, but would instead aim to provide the market space to innovate until it becomes time for the Division to engage in “targeted actions” as needed.
Director Daly concluded his remarks with a discussion of the potential of AI to transform disclosure and investor experience, noting that use of AI interfaces raises important questions about when AI output should be considered marketing materials, investment advice or require registration with the SEC, and who bears liability for bad advice.
SEC Commissioner Caroline Crenshaw Departs. On January 2, Commissioner Caroline Crenshaw left her role as commissioner, leaving the SEC with three Republican commissioners. President Trump has yet to nominate replacements for the two vacancies at the SEC.