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    Apr. 18, 2024

FinCEN AML/CFT Rule Proposal: Parameters of the Rules and the Types of Managers Affected (Part One of Two)

The Financial Crimes Enforcement Network (FinCEN) recently issued a notice of proposed rulemaking (Proposal) that would establish anti-money laundering/countering the financing of terrorism (AML/CFT) requirements for SEC-registered investment advisers (RIAs), exempt reporting advisers (ERAs) and certain non‑U.S. advisers. FinCEN also proposes to delegate its examination authority to the SEC, broadening the scope of information available to the SEC and the ever-growing list of issues that the regulator may choose to focus on in examinations of RIAs and ERAs. Although most fund managers have cursory AML/CFT programs, those likely pale in comparison to what the Proposal would mandate. This first article in a two-part series describes the requirements set forth in the Proposal and FinCEN’s justification for extending the scope to RIAs, ERAs and non‑U.S. advisers. The second article will identify elements of the Proposal that will be challenging for fund managers to satisfy, how it could impact future SEC examination efforts, which components are unlikely to be included in the final rules and tips for how managers can prepare. See “Thomson Reuters Survey Reveals Concerns About and Shortcomings With AML Compliance” (Nov. 16, 2017).

Efficiently Navigating Performance Reporting Requirements Under the SEC’s Private Fund Rules, Marketing Rule and FINRA Guidance

Although closed-end fund performance metrics – especially the internal rate of return and multiples of invested capital – are often headlined in marketing materials and investor reporting, how they are calculated can vary widely from firm to firm and even from fund to fund. Fund managers use a broad range of complex techniques and assumptions, often developing historical, hypothetical track records used to fundraise for new funds and strategies. In recent years, the SEC and FINRA have both taken measures to standardize the performance metrics used in fund advertising and reporting. Although the organizations have taken different approaches to developing methodologies for calculating the “minimum floor” of performance information, the requirements for each of the rules are now very closely aligned. In addition, many of the reasons cited for those changes – e.g., increased transparency and concerns around investor protection, particularly for retail and high net worth investors – echo across the regulatory organizations. In a guest article, ACA Group director Tanner Beverly discusses the commonalities between the performance methodology requirements of the SEC’s Marketing Rule, the quarterly statement requirement in Rule 211(h)(1)‑2 of the SEC’s private fund adviser rules and FINRA’s Regulatory Notice 20‑21. Among other topics, the article includes guidance for how fund managers can streamline their reporting efforts and compliance practices to efficiently meet these new regulatory requirements. See “PE Industry in 2024: Navigating an Uncertain Examination and Regulatory Environment (Part One of Two)” (Jan. 11, 2024).

SEC’s Final Climate Risk Disclosure Rules: Analysis of the Three Main Types of Disclosure Requirements (Part One of Two)

On March 6, 2024, the SEC adopted final rules for climate-related disclosures for U.S. public companies and private issuers (Rules). Although the Rules are narrower and less onerous than the SEC’s original proposed requirements (Proposal), they are still expansive and will require a considerable uplift in companies’ procedures. The future of the Rules is uncertain, however, given that the SEC recently issued a stay order “pending the completion of judicial review” of petitions filed in six different circuit courts challenging the Rules. To address the key requirements of the Rules and provide practical tips to facilitate compliance, Sullivan & Cromwell recently gathered a panel of its partners, including June M. Hu, Catherine M. Clarkin, Robert W. Downes and John Horsfield‑Bradbury. This first article in a two-part series offers an overview of the Rules and analysis of the three main categories of disclosures required therein. The second article will highlight practical considerations for companies attempting to comply with the Rules, as well as the array of judicial and statutory challenges to their legality. See our two-part series on the Proposal: “Five Key Elements” (Jul. 19, 2022); and “Implications, Challenges, Timing and Pushback” (Jul. 26, 2022).

FCA Review Assesses Fund Managers’ Implementation of ESG Goals

In July 2021, the U.K. Financial Conduct Authority (FCA) issued a set of guiding principles (Guiding Principles) for authorized fund managers (AFMs) with funds that pursue a responsible or sustainable investment strategy and claim to pursue sustainability or environmental, social or governance (collectively, ESG) characteristics, themes or outcomes (ESG funds). The FCA recently conducted a review of how AFMs were applying the Guiding Principles to the design and operation of their ESG funds. This article discusses the FCA’s findings. See “FCA Identifies Regulatory Priorities for Alternative Investment Managers” (Jan. 26, 2023).

SEC’s Grewal Discusses Enforcement’s Focus on Preventing False and Misleading ESG Claims

The SEC’s oft-repeated mission is to protect investors; maintain orderly and fair markets; and facilitate capital formation. The Commission has additional motives, however, including using the SEC Division of Enforcement’s (Division) robust enforcement efforts to restore declining public trust in the financial markets and foster a culture of compliance. The Division has recently directed its efforts at environmental, social and governance (ESG) matters, primarily by applying longstanding antifraud and investor protection provisions to allegedly false or misleading claims concerning ESG, according to Gurbir S. Grewal, Director of the Division, in remarks at the recent Ohio State Law Journal Symposium. The Division’s stance toward ESG is a bit nuanced, however, as he stressed that “[t]he Commission is not an environmental regulator.” This article synthesizes his observations. See “SEC Commissioner Uyeda and Enforcement Director Grewal Discuss Compliance Challenges and CCO Liability” (Jan. 25, 2024).

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