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The Friday List: My 2019 Predictions

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic. 

As reported last week, I went 8-2 on my 2018 regulatory predictions, bringing my mark to 22-15-3 over the last four years.  For the upcoming year, I want to take a few more chances and swing for the fences on a couple of predictions. While this may lower my percentage, I hope my readers and our clients will reward the boldness (perhaps by reading my new book: The Compliance Advantage: Ten Must-Know Trends to Protect Your Investment Firm (available on Amazon). 

Predictions for the 2019 Regulatory Year

  1. The SEC will propose a comprehensive adviser marketing/advertising rule.  Last year, we accurately predicted that the Enforcement Division would focus on marketing and advertising cases.  We predict that the Division of Investment Management will use these cases as the justification to propose a new rule addressing adviser marketing practices.
  2. The SEC will re-propose the broker best interest standard.  Responding to industry comments, the SEC will re-propose the rule and make it closer to an adviser fiduciary standard but stopping just short of reconciling the two standards. 
  3. The Enforcement Division will bring several significant cases alleging violations of the solicitor rule.  OCIE has already cited widespread noncompliance with the solicitation rule (206(4)-3), which limits how advisers can pay solicitors for recommending their services.  We expect that the Enforcement Division will follow up with significant litigation. 
  4. The SEC will liberalize the private offering rules.  Look for the SEC to raise the accredited investor definition, change offering exemptions, or seek new private offering categories. 
  5. OCIE will examine at least 20% of advisers.  Chairman Clayton committed to increasing adviser reviews to respond to media and Congressional criticism that the SEC needs to enhance industry supervision.  The SEC reviewed 15% of advisers last year.  This will be the year that the SEC hits the 20% mark. 
  6. The SEC will bring significant cases against independent fund directors.  Both OCIE and the Enforcement Division have increased scrutiny of registered funds and their management.  I foresee that the Enforcement Division will go beyond the fund sponsors and look to hold independent directors accountable for regulatory failures. 
  7. The SEC will allege securities fraud in secondary market private equity transactions.  Both private equity sponsors and third parties have expanded the secondary market for private equity investments.  Because of the information imbalance between buyers and sellers, we expect that the SEC will seek to even the playing field by bringing securities fraud cases.   
  8. The SEC will approve a registered crypto fund.  I won’t try to predict which fund, or the conditions imposed, but I believe the SEC will green-light at least one crypto-based registered fund.  I suspect it will be sponsored by a (very) large firm. 
  9. The Supreme Court will decide that digital tokens are not securities and that an ICO is not a securities offering.  This issue is roiling the lower courts and the industry.  Eventually, the Supremes will have to end the uncertainty.  Although I think there are good arguments on both sides, I think this Supreme Court will rule against SEC regulation. 
  10. The SEC will expand the whistleblower program.  The SEC will expand the program to include criminal actions prosecuted by the Department of Justice as well as state enforcement actions. 

SEC Issues FAQs on Liquidity Risk Management Rule

The staff of the SEC’s Division of Investment Management has released FAQs for the new Liquidity Risk Management Rule for open-end funds and ETFs (Rule 22e-4).  Most significantly, the staff will allow funds to delegate liquidity program responsibilities to a sub-adviser either in whole or in part “subject to appropriate oversight” including relevant policies and procedures.  The staff also clarifies that the same investment may carry different liquidity classifications by different advisers or funds, provided the liquidity program properly supports the classification.  The FAQs address several technical issues for in-kind ETFs.

OUR TAKE: Many industry participants acknowledged the broad policy goals of the liquidity rule but questioned the rule’s practical implementation.  The FAQs help that process by addressing some of the outstanding questions.

https://www.sec.gov/investment/investment-company-liquidity-risk-management-programs-faq