SEC

SEC Modernizes the Accredited Investor Definition

 

The Securities and Exchange Commission (SEC) amended the definition of “accredited investor” to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in private capital markets. The amendments allow individuals to qualify as accredited investors based on measures of financial sophistication, including professional knowledge, experience or certification, as well as existing tests for income or net worth. The updates to the definition also expand the entities that may qualify as accredited investors. Release.

Regulatory Agencies Finalize Changes to Covered Fund Provisions of the Volcker Rule

 

On July 31, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the U.S. CFTC, the Federal Deposit Insurance Corporation (FDIC), and the U.S. Securities and Exchange Commission (SEC) published a final rule amending the regulations that implement Section 13 of the Bank Holding Company Act (the “BHC Act”), commonly known as the Volcker Rule. The final rule, which goes into effect on October 1, is intended to improve and streamline the covered fund provisions of Section 13 of the BHC Act. The final rule aims to accomplish this by, among other things, permitting the following activities: qualifying foreign excluded funds; revising the exclusions from the definition of “covered fund” for foreign public funds, loan securitizations, public welfare investments, and small business investment companies; creating new exclusions from the definition of covered fund for credit funds, qualifying venture capital funds, family wealth management vehicles, and customer facilitation vehicles; modifying the definition of “ownership interest”; and providing that certain investments made in parallel with a covered fund, as well as certain restricted profit interests held by an employee or director, need not be included in a banking entity’s calculation of its ownership interest in the covered fund. OCC Bulletin. Federal Register Final Rule.

SEC Adopts Rule Amendments to Applications for Exemption Under the Investment Company Act

 

On July 6, the Securities and Exchange Commission (SEC) announced that it had voted to adopt rule amendments to establish an expedited review process for applications for exemption for funds under the Investment Company Act. The new process is intended to make the process of applying for more routine exemptions quicker and less expensive for applicants. Release.

SEC Adopts Final Rule Amending Required Financial Disclosures Regarding Acquisition and Disposal of Businesses

 

On May 20, the Securities and Exchange Commission (SEC) adopted a final rule amending the existing rules for registrants that determine whether a subsidiary or an acquired or disposed business is significant and the relevant disclosure requirements for the related financial statements. The changes will become effective on January 1. Rule.

SEC Announces Temporary Relief and Assistance to Market Participants

 

On March 26, the SEC announced temporary measures to assist market participants in response to COVID-19. The actions include i) temporary relief from Form ID notarization requirements through July 1, ii) extended filing deadlines for certain reports and forms required under Regulation A and Regulation Crowdfunding issuers, and iii) a temporary exemption, subject to certain conditions, for required filings for municipal advisors through June 30. Release

SEC Announces Relief for Public Company Disclosure Report Filing Deadlines and Filing and Meeting Requirements under Investment Advisers Act

 

On March 25, the SEC announced a 45-day filing extension for certain public company disclosure reports due between March 1 and July 1. The SEC also announced certain filing and delivery requirement exemptions under the Investment Advisers Act of 1940 as well as additional time to hold in-person board meetings. Release.

Securities and Exchange Commission Proposes to Modernize Key Market Infrastructure Responsible for Collecting, Consolidating, and Disseminating Securities Market Data

 

On February 14, the SEC proposed to modernize the infrastructure for the collection, consolidation, and dissemination of market data for exchange-listed national market system (NMS) stocks. Comments on the proposed SEC Rule are due 60 days after publication in the Federal Register. Release.

SEC Office of Compliance Inspections and Examinations Publishes Observations on Cybersecurity and Resiliency Practices

 

On January 27, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued observations gleaned from its examinations related to cybersecurity and operational resiliency practices taken by market participants (the “Observations”). The Observations impact the entire securities industry because OCIE conducts examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, transfer agents, and others. It uses a risk-based approach to examinations to fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.

The Observations cover a broad range of operations in the areas of governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness. They highlight specific examples of cybersecurity and operational resiliency practices and controls that organizations have taken to safeguard against threats and respond in the event of an incident.

Organizations subject to examination by OCIE should expect that the primary elements highlighted will be a focus of routine, as well as targeted examinations. The Observations are best regarded as a set of “best practices” that should be considered by regulated organizations in developing, implementing and monitoring the effectiveness of their own compliance programs.

The following are selected excerpts from the Observations that we believe are the most significant. A complete copy of the Observations can be found here.

Governance and Risk Management

OCIE emphasized that effective compliance programs “start with the right tone at the top.” As a top priority of any examination, senior leaders should be committed to improving their organization’s cyber posture through working with others to understand, prioritize, communicate, and mitigate cybersecurity risks.

OCIE observes that a key element is the incorporation of a governance and risk management program that generally includes, among other things: (i) a risk assessment to identify, analyze, and prioritize cybersecurity risks to the organization; (ii) written cybersecurity policies and procedures to address those risks; and (iii) the effective implementation and enforcement of those policies and procedures.

Access Rights and Controls

OCIE observes that “access rights and controls” are used to identify and determine who are the appropriate users within an organization who should have access to organization systems based on job responsibilities. Access controls generally include: (i) understanding the location of data, including client information, throughout an organization; (ii) restricting access to systems and data to authorized users; and (iii) establishing appropriate controls to prevent and monitor for unauthorized access.

Data Loss Prevention

“Data loss prevention,” as conceived by OCIE, typically includes a set of tools and processes an organization uses to ensure that sensitive data, including client information, is not lost, misused, or accessed by unauthorized users.

Mobile Security

Mobile devices and applications may create additional and unique vulnerabilities. Examples of the mobile security measures OCIE has observed include the following elements: (i) establishing specific policies and procedures for the use of mobile devices, including managing the use of mobile devices., e.g., the compliance program addresses the special concerns that are presented when employees are permitted to use their own mobile devices in performing business functions; (ii) implementing security measures; (iii) training employees, including training employees on mobile device policies; and (iv) effective practices to protect mobile devices.

Incident Response and Resiliency

OCIE notes the importance of a compliance program including the following elements: (i) the timely detection and appropriate disclosure of material information regarding incidents; and (ii) assessing the appropriateness of corrective actions taken in response to incidents. OCIE emphasized that an important component of an incident response plan is a business continuity plan and resiliency plan that addresses how quickly the organization could recover and again safely serve clients if the operations of the organization were materially disrupted.

Vendor Management

OCIE found that practices and controls related to vendor management generally include policies and procedures related to: (i) conducting due diligence for vendor selection; (ii) monitoring and overseeing vendors, and contract terms; (iii) assessing how vendor relationships are considered as part of the organization’s ongoing risk assessment process as well as how the organization determines the appropriate level of due diligence to conduct on a vendor; and (iv) assessing how vendors protect any accessible client information.

Training and Awareness

Training and awareness are key components of cybersecurity programs. Training provides employees with information concerning cyber risks and responsibilities and heightens awareness of cyber threats.

OCIE has observed the following practices used by organizations in the area of cybersecurity training and awareness: (i) training staff to implement the organization’s cybersecurity policies and procedures and engaging the workforce to build a culture of cybersecurity readiness and operational resiliency; (ii) providing specific cybersecurity and resiliency training, including preventive measures in training, such as identifying and responding to indicators of breaches, and obtaining customer confirmation if behavior appears suspicious; (iii) monitoring to ensure employees attend training and assessing the effectiveness of training; and (iv) continuously re-evaluating and updating training programs based on cyber-threat intelligence.

SEC Proposes Amending the Definition of “Accredited Investor”

 

On December 18, the Securities and Exchange Commission by a three to two vote, voted to propose amendments to the definition of “accredited investor,” one of the principal tests applied under the federal securities laws for determining who is eligible to participate in transactions that are not required to be registered with the SEC. Such transactions are commonly referred to as “private capital markets” transactions. In the words of the SEC, the proposal “seeks to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets.”

In announcing the proposal, Jay Clayton, Chairman of the SEC, asserted that: “The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth. . . The proposal would add other means for natural persons to qualify to participate in our private capital markets based on established, clear measures of financial sophistication . . . .” For example, natural persons could qualify as accredited investors based on their professional knowledge and experience, as evidenced by them having obtained professional certifications. Another welcomed aspect of the proposal highlighted by the Chairman is that it “specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in private capital markets” transactions if they meet certain investment thresholds. Proposed Rule.

Posted in SEC

SEC Office of Compliance Inspections and Examinations Announces 2020 Examination Priorities

 

On January 7, the SEC Office of Compliance Inspections and Examinations announced its 2020 examination priorities, which include a focus on risks related to retail investors (including seniors and those saving for retirement), market infrastructure, information security, anti-money laundering programs and financial technology (including digital assets and electronic investment advice), among others. The SEC publishes its examination priorities annually to enhance the transparency of its examination program and to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets. SEC Release.