The U.S. Securities and Exchange Commission (“SEC”) has been very busy over the last couple of years issuing new regulations that apply to investment advisers. For several of these, it is apparent in the name that it applies to investment advisers. For example:
- Performance Based Investment Advisory Fees (issued November 4, 2021)[1]
- Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting (issued May 3, 2023)[2]
- Private Fund Advisers: Documentation of Registered Investment Adviser Compliance Reviews (issued August 23, 2023)[3]
- Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers (issued February 8, 2024)[4]
- Exemption for Certain Investment Advisers Operating Through the Internet (issued March 27. 2024)[5]
However, there are a few where it is not so readily apparent that investment advisers must comply. In this risk management update, we will discuss three such regulations, each of which carry 2024 compliance deadlines, and include information on how these regulations affect investment advisers.
Shortening the Securities Transaction Settlement Cycle [1]
On February 15, 2023, the SEC adopted final amendments to Rule 15c6-1 under the Securities Exchange Act of 1934 (“Exchange Act”), and implemented two new Exchange Act rules, including Rule 15c6-2, which change the settlement period of most U.S. securities transactions to one business day after trade date (“T+1”) and require broker-dealers and clearing agencies to implement certain applicable policies and procedures.
As a result of these changes, the SEC also amended Rule 204-2 under the Investment Advisers Act of 1940 (“Advisers Act”), requiring investment advisers to maintain books and records pertaining to transactions subject to new Exchange Act Rule 15c6-2. These include copies of each trade confirmation received, and any allocation and each affirmation sent or received, with a date and time stamp for each that shows when the allocation and affirmation was sent or received.
The compliance deadline is May 28, 2024.
Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers[2]
On November 2, 2022, the SEC adopted amendments to Form N-PX under the Investment Company Act of 1940 (“Investment Company Act”) to expand the information that is reported by registered investment companies regarding their proxy voting activities. At the same time, the SEC implemented new Rule 14Ad-1 of the Exchange Act, which requires investment advisers that make Form 13F filings[3], to file Form N-PX.
Specifically, investment advisers that file Form 13F and have a policy to vote proxies for clients are now required to annually file Form N-PX outlining the proxy votes they made regarding executive compensation during the preceding 12 months. Notably, investment advisers that file Form 13F and have a policy of not voting proxies for clients are also required to annually file Form N-PX, stating as much.
The first annual Form N-PX filing must be made on or before August 31, 2024.
Modernization of Beneficial Ownership Reporting[4]
On October 10, 2023, the SEC adopted amendments to Sections 13(d) and 13(g) of the Exchange Act to shorten the deadlines for filing initial and amended Schedules 13D and 13G, clarify disclosure requirements about derivative securities on Schedule 13D, and expand the timeframe within a business day that a Schedule 13D and 13G can be filed.
Generally, investment advisers are required to file a Schedule 13D, or 13G when applicable, if their clients, control persons, and/or proprietary accounts own (in aggregate) 5% or more of the outstanding shares of a class of equity securities. Below is an outline of the filing deadline changes that affect investment advisers:
- Initial Schedule 13D – from 10 calendar days after hitting the threshold to 5 business days.
- Amendments to Schedule 13D – from 10 calendar days after change requiring an amendment to 2 business days.
- Initial Schedule 13G – from 45 days after end of calendar year where threshold was hit to 45 days after end of the calendar quarter.
- Amendments to Schedule 13G – from 45 days after end of calendar year wherein a change occurred to 45 days after end of the calendar quarter.
Importantly, if any one client, control person, or proprietary account individually owns 5% or more, then a separate filing will also be required and if deemed a “passive investor” eligible for Schedule 13G filings, the deadline for initial filing is the same as the initial filing of Schedule 13D. The SEC also extended the “cut off” time for making a Schedule 13D and 13G filing via the EDGAR system from 5:30 pm to 10:00 pm ET.
In addition, Item 6 of Schedule 13D has been revised and filers are required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the equity security as a reference security.
The compliance deadline for Schedule 13G filings is September 30, 2024, which means an adviser will need to file an amendment to Schedule13G by November 14, 2024, if, as of September 30th, any material information in the last Schedule 13G has become inaccurate. For example, the percentage of ownership changed.
Lastly, the SEC also adopted a “structured data” requirement for Schedule 13D and 13G, which mandates that these forms to be filed in 13D/G-specific XML format. The use of this filing format will be required for any Schedule 13D and 13G filings made after December 18, 2024.
Conclusion
A rule by any other name can still be a rule that applies to investment advisers, so it’s important for compliance personnel to perform detailed reviews of the regulations being proposed and adopted by the SEC to ensure all applicable requirements are met.
The Core Compliance consulting team is very experienced and can assist firms with the required filing referenced in this RMU, along with other regulatory filings. We also offer compliance technology solutions, which are crucial for ensuring adherence to the voluminous amount of regulations that are applicable to investment advisers. For more information, please contact us at info@corecls.com, at (619) 278- 0020 or visit us at www.corecls.com.
Author: Tina Mitchell, Managing Director, Consultation Services; Editor: Matthew Rothchild, Sr. Compliance Consultant, Core Compliance & Legal Services (“Core Compliance”). Core Compliance works extensively with investment advisers, broker-dealers, investment companies, and private fund managers on regulatory compliance issues.
This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon regarding any particular facts or circumstances without first consulting with a lawyer and/or tax professional.
[1] See SEC.gov | Shortening the Securities Transaction Settlement Cycle
[2] See SEC.gov | Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers
[3] Required when an investment adviser has discretionary authority over $100 million in aggregate of 13F securities (i.e., equities, options, ETFs).
[4] See SEC.gov | Modernization of Beneficial Ownership Reporting
[1] See SEC.gov | Performance-Based Investment Advisory Fees
[2] See SEC.gov | Conformed: Form PF; Event Reporting for Large Hedge Fund Advisers and Private Equity Fund Advisers; Requirements for Large Private Equity Fund Adviser Reporting
[3] See SEC.gov | Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews
[4] See SEC.gov | Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers
[5] See SEC.gov | Exemption for Certain Investment Advisers Operating Through the Internet
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