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.
In this issue, we discuss key developments in Q2 and early Q3 2026, including recent SEC rule proposals, no-action letters and enforcement updates, as well as other key updates, including recent SEC requests for comment, SEC staff statements and announcements.
Recent Rulemakings and Guidance
SEC Proposes Rule to Allow Investment Advisers, Broker-Dealers, Issuers and Others to Use Electronic Delivery to Satisfy Information Delivery Requirements. On July 16, the SEC proposed Regulation E-Delivery, which would update the electronic-delivery framework for a broad range of covered entities, which include issuers, broker‑dealers, investment companies, investment advisers, transfer agents, and other third parties required to deliver certain information under the federal proxy and tender offer rules.
Currently, covered entities with information delivery requirements under federal securities laws must obtain affirmative consent before using e-delivery to satisfy those requirements. The proposed e-delivery approach includes requirements and conditions under which covered information could be delivered electronically without first obtaining affirmative consent. For investment companies and investment advisers, such information would include fund prospectuses, fund annual and semi-annual reports, custody rule account statement notices, Form ADV Part 2 Brochures and Part 3 Form CRSs.
Under the proposed rule, covered entities would be able to deliver covered information to covered recipients (including any current or prospective customer, client, investor, security holder, counterparty or similar recipient entitled to receive such information) by delivering that information to an electronic address that the covered recipient provides (or accepts to use) to receive covered information.
Companies must comply with heightened disclosure and procedural requirements to electronically deliver personal financial information, while other information may be delivered directly. The proposed rule also includes transition and compliance requirements and would rescind Rule 30e-3 under the Investment Company Act of 1940 (the “Investment Company Act”) and amend certain rules in Regulations 14A and 14C and Rule 14d-5 under the Securities Exchange Act of 1934.
In a statement on the Proposed Rule, Chairman Atkins said: “By proposing to permit electronic delivery to become the default method for issuers, market intermediaries, and others to communicate with investors, we are taking another stride toward a regulatory framework suitable for the modern era, a key pillar of my agenda.”
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
For more information on the proposal, including key takeaways and implications, please refer to our publication here.
SEC Releases its Regulatory Agenda for 2026. On July 7, the SEC published its 2026 Regulatory Flexibility Agenda, pursuant to the Regulatory Flexibility Act, listing the SEC’s current rulemaking initiatives and priorities. The agenda includes both new items and items from the SEC’s Spring 2025 Regulatory Flexibility Agenda (published in September 2025), including:
- Proposing amendments to the Pay-to-Play Rule (Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”)), which currently prohibits investment advisers from providing investment advisory services for compensation to certain state and local government entities for two years after the adviser or covered associate of the adviser makes a political contribution to certain public officials, to address identified compliance burdens.
- Proposing amendments to existing rules and/or new rules under the Investment Company Act and the Advisers Act to better facilitate retail investor exposure to private markets through registered investment companies and to allow investment advisers to charge performance fees to an expanded set of clients.
- Proposing amendments to the Investment Adviser Recordkeeping Rule (Rule 204-2 under the Advisers Act), which requires investment advisers to make and keep certain records, to address the appropriate scope of and identified compliance burdens related to electronic communication and to account for certain technological developments.
- Proposing amendments to the Custody Rule or new rules under the Advisers Act and Investment Company Act to modernize the regulation of custody of advisory client and fund assets, including in each case to address crypto assets.
- Proposing amendments to Rule 17a-7 under the Investment Company Act, which currently governs certain purchase and sale transactions between an investment company and its affiliates, to expand the availability of the exemption of certain purchase or sale transactions between an investment company and certain affiliates.
- Proposing rules relating to the offer and sale of crypto assets, potentially including certain exemptions and safe harbors to help clarify the regulatory framework for crypto assets.
SEC and CFTC Jointly Propose Amendments to Form PF to Streamline Reporting Requirements and Largely Roll Back the Agencies’ February 2024 Amendments to Form PF. As discussed in our Q1 2026 newsletter, on April 20, the SEC and CFTC jointly proposed amendments to Form PF that would reduce the number of private fund advisers subject to Form PF reporting requirements and streamline the form’s overall reporting framework.
If adopted, the proposed amendment would, among other things, change certain Form PF filing thresholds for all filers from $150 million in private fund assets under management to $1 billion and the reporting threshold for large hedge fund advisers from $1.5 billion in hedge fund assets under management to $10 billion. In addition, the proposed rule would (i) eliminate separate reporting requirements for feeder funds with de minimis holdings outside of a single master fund, (ii) narrow the categories of events that require current reporting and eliminate event reporting altogether, (iii) remove look-through requirements that currently require funds to report on their investments in other private funds and entities, and (iv) reduce reporting requirements for large hedge fund advisers.
SEC Staff Issues No-Action Letter Permitting Business Development Companies (“BDCs”) and Registered Closed-End Funds (“CEFs”) to Issue Sponsor-Affiliated Seed Shares Without Violating Investment Company Act Capital Structure Rules. On April 16, the staff of the SEC Division of Investment Management granted no-action relief to Third Point Private Capital Income Fund (the “Fund”), a closed-end management investment company that intends to elect to be regulated as a BDC. The relief provides assurance that the staff would not recommend enforcement action under Sections 18(a)(2)(A), (B) and (E) of the Investment Company Act, as modified by Section 61(a) for BDCs, if the Fund were to issue a class of preferred shares (“Seed Shares”) to one or more affiliates of the Fund adviser and subsequently repurchase those Seed Shares according to their terms, subject to specified conditions. The staff also confirmed that the no-action position applies equally to registered CEFs subject to Section 18(a).
The requested relief provides a potential avenue for BDCs and CEFs to obtain seed funding from affiliated sponsors for their initial portfolios before raising third-party capital. The relief is subject to a number of conditions, including that seed investors purchase Seed Shares solely for cash and that the Seed Shares generally have the same terms (including price) as the Fund’s common shares, except as described in the letter. The Seed Shares would have no liquidation preference relative to the common shares and, upon liquidation, would be entitled to receive the lesser of their original purchase price and the per-share amount distributed on each common share. The Seed Shares would have the same voting rights as the common shares, except that, as required by the Investment Company Act, holders of Seed Shares would have the exclusive right to elect two trustees on the Fund’s five-member board and that the Fund would be required to use at least 50% of the net proceeds from subsequent cash subscriptions for common shares to repurchase outstanding Seed Shares. The Fund also represented that it would not seek an exchange listing before the 24-month anniversary of the initial issuance of any Seed Shares or while any Seed Shares remain outstanding, would not acquire assets from specified affiliates until the Seed Shares have been fully repurchased, except for purchases permitted by Rule 17a-7 or Section 57(f), and would cease offering new common shares and wind down its portfolio if any Seed Shares remain outstanding after 36 months.
Enforcement and Litigation
SCOTUS Holds No Implied Private Right of Action under Section 47(b) of the Investment Company Act. On June 11, 2026, the Supreme Court of the United States decided FS Credit Opportunities Corp. v. Saba Capital Master Fund, Ltd. (“Saba”), holding that Section 47(b) of the Investment Company Act—which provides that contracts that violate the Investment Company Act are unenforceable by the parties—does not impliedly empower shareholders of registered investment companies to bring claims to rescind fund contracts that allegedly violate the Investment Company Act. In an opinion delivered by Justice Barrett for a six-justice majority, the Court emphasized that Congress, not the judiciary, decides who may enforce federal law, and reasoned that, as Section 47(b) does not include express private right-creating language, it is best read as a directive to courts regarding their remedial authority in cases already before them, not as a provision creating a private right of action.
As described in our Q2 2025 Newsletter, the Third, Fourth, and Ninth Circuits have previously held that there is no private right of action under Section 47(b), while the Second Circuit, in the 2019 case Oxford University Bank v. Lansuppe Feeder, LLC, recognized an implied private right for parties seeking to rescind contracts that violate the Investment Company Act. The Court’s decision in Saba resolves the split in favor of the Third, Fourth, and Ninth Circuits, and eliminates a pathway that activist investors increasingly used to challenge fund governance matters.
SEC Division of Examinations (“EXAMS”) Issues Risk Alert on Investment Adviser Obligations Related to Economic Conflicts of Interest. On June 9, 2026, the staff of EXAMS issued a Risk Alert summarizing observations from its examinations of SEC-registered investment advisers on economic conflicts of interest. The Risk Alert reiterates that investment advisers, as fiduciaries, have an obligation to eliminate, or at least fully and fairly disclose, all conflicts of interest that might lead them to render advice that is not disinterested, including economic incentives to recommend particular products, services, or account types. The Risk Alert cites examples of undisclosed or inadequately disclosed conflicts, practices that are inconsistent with client agreements or disclosures, and compliance programs that did not adequately address economic conflicts of interest and related risks.
In particular, the Risk Alert highlights the following areas of concern:
- Cash Management Programs: EXAMS highlighted that economic conflicts of interest exist where investment advisers receive revenue for recommending programs that automatically move clients’ uninvested cash into interest bearing accounts. Noting that these economic conflicts of interest should have been fully and fairly disclosed to clients, EXAMS staff observed examples where fees were inconsistent with investment advisory agreements and/or disclosures, compliance programs did not fully address economic conflicts of interest, and disclosures were misleading or omitted material information. In particular, the staff flagged as misleading disclosures stating that an investment adviser “may” receive revenue where the investment adviser was already receiving such revenue. Other deficient disclosures related to investment advisers’ failure to fully and fairly disclose fees, expenses and conflicts of interest associated with cash management programs.
- Fund Share Class Selection: EXAMS staff identified conflicts arising from money market fund and other mutual fund share class selection where a lower-cost share class of the same fund was available to a client and the investment adviser did not make full and fair disclosures regarding the economic benefits received by it in connection with recommending the higher-cost share class, including 12b-1 fees, where applicable.
- Form ADV Part 2A Disclosures: EXAMS staff observed that some investment advisers omitted material conflicts arising from compensation arrangements with affiliates in their Form ADV Part 2A disclosures. Examples include investment advisers failing to disclose in Item 10 material conflicts arising from compensation arrangements with affiliates, including where an affiliated broker-dealer was likely to benefit indirectly from revenue generated by clearing firms’ services for advisory clients, and investment advisers with revenue sharing arrangements involving clearing firms or custodians failing to disclose all material facts regarding those relationships in Item 12.
- Fee Calculations: EXAMS staff observed some investment advisers assessing fees inconsistently with their investment advisory agreements or disclosures in Form ADV, including by prorating investment advisory fees in circumstances not addressed by client agreements or disclosures, charging fees on holdings excluded from fee billing calculations, failing to apply breakpoints or rebates where appropriate, engaging in duplicative billing, and charging fees for services not actually provided. EXAMS staff also observed situations where investment advisers failed to issue refunds to clients billed in advance where investment advisory agreements had been terminated prior to the end of the billing period.
- Compliance Programs: The staff identified deficiencies under Rule 206(4)-7 of the Advisers Act, including inadequate written policies covering billing arrangements, inconsistent fee descriptions across policies and procedures, disclosures and client agreements, and insufficient controls to monitor fee accuracy and validate refunds to terminated accounts.
Given the staff’s continued focus on conflicts of interest and fee billing practices, investment advisers should review and revise, as appropriate, their disclosures and policies and procedures regarding fees and economic conflicts of interest.
SEC Rescinds No-Deny Settlement Policy in Enforcement Actions. On May 18, the SEC announced that it rescinded Rule 202.5(e) of its informal rules of procedure, effective immediately. Since its adoption in 1972, Rule 202.5(e) required defendants or respondents settling enforcement actions to agree not to publicly deny the SEC’s allegations. The rescission does not affect the SEC’s existing discretion to negotiate admissions in settlements, including its discretion to settle with defendants who decline to admit facts or liability or to negotiate for admissions as part of a settlement.
The SEC also stated that it will not enforce no-deny provisions in existing settlements, and in the event of a breach, will not ask the relevant court to vacate or reopen proceedings.
For more information on the rescission, including key takeaways and implications, please refer to our publication here.
SEC Announces Enforcement Results for Fiscal Year 2025. On April 7, the SEC announced its enforcement results for the fiscal year ending September 30, 2025 (“FY 2025”). During FY 2025, the SEC filed 456 enforcement actions, including 303 standalone actions, and obtained orders for monetary relief totaling $17.9 billion. The SEC also returned approximately $262 million to harmed investors, awarded approximately $60 million to whistleblowers and received a record 53,753 tips, complaints and referrals.
The SEC described FY 2025 as a unique period of transition for the Division of Enforcement (the “Division”). Chairman Atkins noted that under his direction, the SEC had “put a stop to regulation by enforcement,” and “redirected resources toward the types of misconduct that inflict the greatest harm—particularly fraud, market manipulation, and abuses of trust.” The SEC specifically identified off-channel communications book-and-records cases, crypto firm registration-related cases and “definition of a dealer” cases brought under the prior administration’s SEC as examples of cases that, in the Chairman’s view, “produced no investor benefit or protection” and “demonstrate[d] what the current [SEC] views as a misinterpretation of the federal securities laws and a misallocation of [SEC] resources.”
The SEC emphasized its priority of protecting retail investors from securities fraud and a renewed focus on individual accountability. Further, the SEC highlighted a “course correction” on crypto assets and emphasized that the Division remains committed to pursuing actors who misuse new technologies, pointing to its February 2025 launch of the Cyber and Emerging Technologies Unit, which targets securities-related misconduct involving blockchain technology, AI, account takeovers and cybersecurity. The SEC stated that, going forward, enforcement priorities will be measured against the Division’s core mandate of addressing fraud, remediating misconduct and repaying investor losses. Sam Woodcock, Director of the Division of Enforcement, similarly reiterated these themes, including with respect to private funds, in his remarks at the MFA Legal & Compliance Conference on May 13.
Other Recent Key Updates
SEC Requests Public Comment Regarding Novel Exchange-Traded Funds. On June 30, the SEC issued a request for public comment on exchange-traded funds (“ETFs”) that seek to invest in innovative asset classes or engage in novel investment strategies (“Novel ETFs”), including crypto assets, commodity-focused instruments, single-stock strategies, heightened leverage, blockchain-enabled opportunities, private assets and event contracts. The SEC seeks comment on ways to facilitate innovation in the ETF space while protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation.
Brian Daly, Director of the SEC’s Division of Investment Management, stated that “as ETFs continue to grow and novel strategies emerge, public engagement is essential to answering key questions to make the next years of development a success.” The SEC organized its questions around three principal topics: (i) whether Novel ETFs, including those whose principal investment strategy is to invest in assets that may not be securities, may register as investment companies and whether Novel ETFs should be regulated as such under the Investment Company Act; (ii) whether Novel ETFs’ assets and strategies present questions regarding the ETF arbitrage mechanism, related secondary trading activity, investor protection, market surveillance or other structural or operational issues, and whether Rule 6c-11 should be amended to address these questions; and (iii) whether the registration process for Novel ETFs under Rule 485 of the Securities Act should be modified, including by extending the 75- and 60-day automatic effectiveness windows for Novel ETF filings.
The public comment period will remain open until August 31, 2026.
SEC Staff Issues Statement Regarding Pooled Employer Plans. On May 4, the staff of the SEC’s Division of Investment Management issued a statement addressing the treatment of pooled employer plans (“PEPs”) under the federal securities laws. PEPs permit multiple, unrelated employers to join a single retirement plan and offer retirement benefits to their employees through that plan. PEPs were created by Congress in 2019 under the Setting Every Community Up for Retirement Enhancement Act of 2019. The staff’s statement sets forth the staff’s views on the applicability of (i) the “single trust exclusion” in Section 3(c)(11) of the Investment Company Act and (ii) Rule 180 under the Securities Act to interests in collective investment trusts (“CITs”) maintained by a bank and issued to certain PEPs.
First, the staff stated that it would not object if a PEP treats itself as a single-employer plan for purposes of the Investment Company Act and relies on the single trust exclusion in section 3(c)(11) to avoid registration as an investment company, provided that the PEP is subject to ERISA, and meets all requirements of the relevant section of the Code referenced in section 3(c)(11). Second, the staff stated that it would not object if a CIT issues interests to a PEP that covers self-employed individuals without registering the offer and sale of the CIT’s interests under Section 5 of the Securities Act in reliance on Rule 180; provided that the PEP is subject to ERISA; and the issuance meets all requirements in Rule 180(a)(1) and (a)(3). Notably, however, the staff’s statement is limited to PEPs specifically, meaning that the statement does not apply to multiple employer plans generally or address similar interpretative questions affecting those plans.
Financial Stability Board Issues Report on Vulnerabilities in Private Credit. On May 6, the Financial Stability Board (“FSB”) published its Report on Vulnerabilities in Private Credit (the “Report”), focusing on potential vulnerabilities in the global private credit market (defined as nonbank direct lending to medium-sized companies negotiated on a bilateral basis), which the FSB estimates to be between $1.5 trillion and $2 trillion in size. The Report observes that private credit is increasingly used by larger borrowers and becoming more accessible to retail investors through various private credit fund structures.
The Report cautions that, at its current scale, the asset class remains untested by a prolonged economic downturn and highlights several potential vulnerabilities, including the three principal areas discussed below:
- Interlinkages with Banks: The FSB identifies a growing set of interlinkages between banks and the private credit ecosystem. These include direct bank lending to private credit funds, fund portfolio financing arrangements, banks extending revolving credit facilities to companies that are simultaneously borrowing from private credit funds and the proliferation of private credit-focused partnerships between banks and asset managers.
- Borrower Credit Profiles: The Report discusses potential credit quality concerns at the borrower level, noting that private credit borrowers are often highly-leveraged and often rated around single B-.
- Valuation Difficulties: The Report flags challenges associated with the valuation of private credit assets, including less frequent valuations, reliance on discretionary or opaque methodologies, limited data transparency and the use of private ratings.
SEC and NFA Enter Memorandum of Understanding to Enhance Regulatory Coordination. On May 21, the SEC and the National Futures Association (“NFA”) announced that they had entered into a nonbinding Memorandum of Understanding (“MOU”) to enhance cooperation, coordination and information sharing in areas of common regulatory interest for entities and markets within their respective areas of oversight. Under the MOU, SEC and NFA staff may share information regarding examinations of entities of mutual regulatory interest, as well as information about the other party’s supervised persons and about securities and derivatives market conditions that may materially affect the operations or financial condition of the other party’s supervised persons. SEC and NFA staff also agreed to meet periodically to “discuss matters of mutual interest, such as risk assessment, examination planning, examination findings, supervisory priorities, and observed trends and emerging risks.”
The MOU reflects a broader push by the SEC to formalize coordination with other oversight bodies and follows a separate MOU that the SEC entered into with the CFTC in March 2026.