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SEC Moves Quickly On Its 55-Part Rulemaking Agenda

The US Securities and Exchange Commission (“SEC”) published two new rule proposals this week and has finalized two rulemakings this month, indicating that its aggressive rulemaking agenda is on track, if not ahead of schedule. Last month, the SEC set timelines for proposing 18 new rulemakings in the planning stage and finalizing 37 existing rulemaking proposals. Many rulemakings targeted a fall 2023 release date. Although it seems unlikely for the SEC to hit all its targets, we recommend that investment advisers and broker-dealers prepare now by developing a clear understanding of how each rulemaking could impact them and closely tracking new developments.

Key Rulemakings for Investment Advisers & Funds 

The SEC issued two proposed rulemakings on Wednesday. First, the “Predictive Data Proposal” would require advisers to eliminate or neutralize conflicts of interest associated with the use of “covered technologies” that prioritize an adviser’s interests over those of its clients or fund investors. “Covered technologies” would include analytical or computational methods that predict or guide investment-related behaviors, such as predictive data analytics, artificial intelligence, and machine learning.

The second proposal involves amendments to existing rules for internet advisers, aiming to prevent more small advisers from registering with the SEC instead of state regulators. The proposed amendments would require internet advisers to maintain an interactive website for providing advisory services and exclusively offer advice through this website. The amendments would also eliminate a de minimis exception for non-internet clients, which currently permits internet advisers to have fewer than 15 non-internet clients in a 12-month period. We will provide further detail on the proposals from this week in future alerts.

In addition, the SEC intends to propose changes to the definition of “accredited investor” in Regulation D and make adjustments to Form D thereunder. Any change to the “accredited investor” definition, or Regulation D more generally, may impact the ability of funds to raise capital.

New rules for registered private fund advisers are also on the SEC’s agenda for finalization. These rules would impose new financial reporting and other obligations on private fund advisers and limit their ability to enter into agreements that advantage certain investors over others (e.g., side letters). Other proposals include transforming the existing Custody Rule for registered advisers into a new Safeguarding Rule and imposing new diligence and monitoring requirements on advisers who outsource certain functions. Advisers may also have to contend with substantial new requirements for Environmental, Social, and Governance (“ESG”) disclosures, implement new or enhanced cybersecurity and incident response programs, and adjust their procedures to address new or amended Form PF reporting requirements.

For registered funds and their advisers specifically, rulemakings may cover ESG disclosures, misleading names, cybersecurity risk management, protection of customer data, and a fund fee disclosure reform proposal.

Key Rulemakings for Broker-Dealers

The Predictive Data Proposal discussed above would apply to both advisers and broker-dealers. Changes to Regulation ATS, which many broker-dealers rely on to avoid registering with the SEC as national securities exchanges despite matching and executing securities trades, are on the SEC’s rulemaking agenda as well. The pending changes aim to “modernize” the regulation’s exemptive conditions and promote pre-trade price transparency across all asset classes. These modernization proposals are in addition to an existing SEC proposal, which could extend the reach of Regulation ATS to “decentralized” crypto asset exchanges and other trading venues that meet the SEC’s new definition of “communication protocol systems.”  

The SEC also intends to finalize its first-ever rules-based “best execution” requirement for broker-dealers, marking a substantial shift from its prior principles-based approach to regulating best execution. Regulation Best Execution would require detailed best execution policies and procedures for all broker-dealers and mandate enhanced policies and procedures for broker-dealers engaging in certain conflicted transactions with retail customers.

The SEC is pushing to expand the definition of “dealer” under the Securities Exchange Act of 1934 as well. As proposed, the new definition would break from historical precedent by requiring certain hedge funds and other active “traders” to register with the SEC as “dealers.” In addition, the SEC agenda contemplates finalizing significant equity market structure proposals and enhanced broker-dealer cybersecurity requirements.

Final Thoughts

The SEC rules proposed this week align with prior remarks by SEC Chair Gensler about securities laws evolving in line with changes in technology, markets, and business models. Recent developments in generative artificial intelligence (e.g., ChatGPT) have pushed predictive data analytics, machine learning, and related technologies into the spotlight, and rapid advances in these technologies may help explain why the SEC moved so fast to propose rules. Broker-dealers and advisers should closely review the Predictive Data Proposal and the internet adviser proposal. For those who wish to help shape the final rulemakings, the SEC will accept comments on each proposal for 60 days after publication in the Federal Register.

Our team is monitoring the SEC’s progress on its rulemaking agenda and will provide insights on key developments.

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David G. Adams is a securities regulatory and enforcement attorney with 20 years of experience in the financial services industry. He partners with innovators around the world to help them capitalize on emerging US legal and regulatory trends at the intersection of financial technology and US financial regulation.
Steve Ganis is a government and private-sector lawyer at Mintz. His practice focuses on federal banking, securities, and derivatives laws, and he's recognized for his knowledge of anti-money laundering (AML) and sanctions regulations. Steve represents financial institutions and executives.

Kari K. Harris

Member / Chair, Investment Funds Practice

Kari K. Harris is the Chair of Mintz’s Investment Funds Practice. She draws on her extensive experience in private practice and as a former general counsel to represent private equity funds of funds, other investment advisers, and institutional investors in a broad range of matters involving investment funds and investments.

Pete S. Michaels

Member / Co-Chair, Financial Services Practice

Pete S. Michaels is a Mintz attorney who focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents financial services firms and insurance companies and their employees, directors, and officers.
Talia S. Primor is an attorney who practices general corporate and transactional matters at Mintz, with an emphasis on investment management, venture capital, and emerging companies. Talia counsels the advisers of private investment vehicles, including private equity and hedge fund managers.