No RegNews will be published on August 28th because of the UK public holiday
SEC’s private fund adviser reforms
The Securities and Exchange Commission (SEC) has announced the adoption of new rules and rule amendments aimed at bolstering the oversight of private fund advisers and modernizing the existing compliance framework for investment advisers. The changes are geared towards fortifying safeguards for private fund investors, fostering competition, and enhancing efficiency within the private funds market.
Private fund advisers registered with the SEC will now be required to furnish investors with quarterly statements, offering detailed information regarding fund fees, expenses, and performance. Additionally, the regulations mandate that registered private fund advisers provide investors with an annual financial statement audit for each private fund they oversee. Furthermore, in cases involving adviser-led secondary transactions, the advisers must provide a fairness opinion or a valuation opinion.
In a bid to enhance investor protection, the regulations set forth a prohibition on private fund advisers from granting preferential treatment to specific investors concerning redemptions and information sharing, if such preferential treatment could adversely impact other investors in a material manner. While certain exceptions to this prohibition are established based on disclosures, the SEC necessitates specific prescribed disclosures regarding preferential terms for all existing and potential investors.
The final rules also curb certain activities by private fund advisers that conflict with public interest and investor protection. While the rules do not categorically forbid advisers from engaging in these restricted activities, they mandate appropriate and specified disclosures, along with potential investor consent in certain instances. Notably, the regulations preclude advisers from passing on investigation costs to the private fund in cases where violations of the Investment Advisers Act of 1940 or its associated regulations result in sanctions.
In a strategic move to circumvent the need for advisers and investors to renegotiate existing governing agreements for funds, the SEC has introduced legacy status provisions. These provisions pertain to specific restricted activities and preferential treatment aspects. Legacy status will be applicable to agreements that were documented in writing before the compliance date and for funds that were operational as of that same date.
Overall, the new rules reflect the SEC’s commitment to bolstering transparency, integrity, and investor protection within the private funds market. By enhancing reporting requirements, preventing preferential treatment, and setting clear standards for disclosure, the regulations aim to create a more equitable and efficient environment for both investors and private fund advisers.
Read more analysis here.
Russian nationals charged in money laundering scheme involving Tornado mixer service
The US Department of Justice has filed charges against two individuals, Roman Storm and Roman Semenov, for their alleged involvement in a sophisticated money laundering operation utilizing the cryptocurrency mixer service Tornado Cash. The charges include conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business.
According to the indictment, Storm and Semenov are accused of founding and operating Tornado Cash. This cryptocurrency mixer service is alleged to have facilitated more than $1 billion in money laundering transactions and laundered substantial amounts of money for the Lazarus Group, a North Korean cybercrime organization that is subject to US sanctions.
Pensions Regulator updates guidance to aid compliance with defined contribution changes
The UK Pensions Regulator (TPR) has unveiled revised guidance aimed at assisting defined contribution (DC) schemes in adhering to recently introduced regulations designed to ensure comprehensive consideration of investment opportunities to secure the best value for savers.
Effective from 1st October 2023, trustees are required to explicitly state their investment policy regarding illiquid assets (those that cannot be swiftly converted into cash, including such assets within collective investment schemes) in the statement of investment principles (SIP) for their scheme’s default arrangements.
Louise Davey, TPR’s Interim Director of Regulatory Policy, Analysis, and Advice, emphasized the fiduciary duty of trustees to act in the best interests of savers, which entails diligently exploring investment options to achieve expected retirement income. She explained that the updated guidance is designed to aid trustees in navigating these often intricate decisions.
Key highlights of the new regulations include:
- Disclosure of illiquid investments: Trustees must incorporate their policy on investing in illiquid assets within the default SIP. This mandate becomes effective for the first default SIP generated after 1st October 2023, with the policy requirement to be included by 1st October 2024. Trustees must elaborate on various aspects, including the profile of members for whom investments in illiquid assets are intended, the manner of investment, types of illiquid assets, rationale for this approach, and any future expansion plans.
- Asset class breakdown in chair’s statement: As of the scheme year ending after 1st October 2023, the annual chair’s statement must reveal the asset class distribution for each default arrangement. This disclosure includes percentages allocated to diverse asset categories such as cash, corporate bonds, equities, private equity, infrastructure, property, and others.
- Performance-based fees clarification: Regulatory barriers inhibiting investment in funds with performance-based fees have been removed since 6th April 6 2023. Trustees can now exclude specified performance-based fees from the regulatory charge cap limit of 0.75% per annum.
TPR is the regulator of workplace trust-based pension schemes in the UK, their statutory objectives are as follows:
- to protect members’ benefits
- to reduce the risk of calls on the Pension Protection Fund
- to promote, and to improve understanding of, the good administration of work-based pension schemes
- to maximize employer compliance with automatic enrollment duties
- to minimize any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).
ASIC brings further greenwashing case
The Australian Securities and Investments Commission (ASIC) has commenced civil penalty proceedings against LGSS Pty Limited (Active Super) alleging misleading or deceptive conduct and misrepresentations to the market.
Active Super is a superannuation fund that markets itself as an ethical and responsible investment fund. However, ASIC alleges that Active Super made false and misleading representations to the market about its investment strategy and exclusions.
Specifically, ASIC alleges that Active Super:
- Represented that it had eliminated investments in certain industries, such as tobacco, gambling, and oil tar sands.
- Represented that it had excluded Russia from its investment universe following the invasion of Ukraine.
However, ASIC alleges that Active Super held investments in these industries and countries during the relevant period. For example, as of 30th June 2023, Active Super held investments in 28 companies that were involved in tobacco, gambling, oil tar sands, or coal mining. Active Super also held investments in Russian companies.
ASIC Deputy Chair Sarah Court said, “ASIC is committed to ensuring that superannuation funds are held to account for making misleading or deceptive representations to the market. Superannuation funds must be transparent about their investment strategies and exclusions, and they must not make promises that they cannot keep.”
ASIC is seeking declarations, pecuniary penalties, corrective advertising, and an injunction against Active Super from making further misleading or deceptive representations.
BoE quarterly bulletin
The latest quarterly bulletin from the Bank of England focuses on innovation with regard to the digital pound as a potential central bank digital currency and includes a number of case studies looking at innovations in other sectors to draw some parallels.
A selected summary of key developments for regulated financial institutions
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