What to worry about when the SEC is trying to regulate private money
The Securities and Exchange Commission (SEC) has been particularly busy in recent weeks, as evidenced by a series of rule proposals released as part of what appears to be an ambitious 2022 agenda. This includes addressing areas such as cybersecurity, risk management and more reporting under Form PF, environmental, social and governance (ESG) disclosures, proposed changes to beneficial ownership regulations and new reporting under short selling rules. The SEC also signaled a major change to the Investment Advisers Act of 1940 that could affect the day-to-day operations of almost all private fund advisers, as well as all other advisers (even those who are exempt from registration). Read more about the proposed rules.
SEC Division of Examinations announces exam priorities for 2022
On March 30, the SEC’s Auditing Division (the Division) announced its auditing priorities for 2022. The department annually publishes its audit priorities and identifies those areas that it believes pose potential risks to investors and the integrity of US capital markets. For this year, the department intends to focus on private funds, environmental, social and governance (ESG) investments, retail investor protection, information security, new technologies and cryptocurrency. Read a detailed description of the department’s 2022 exam priorities.
When does FINRA hold a CCO liable for regulatory failures?
On March 17, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 22-10: “FINRA reminds member firms of the scope of FINRA Rule 3110 as it addresses the potential liability of chief compliance officers for failure to perform designated oversight duties. ” Member firm Chief Compliance Officers (CCOs) are understandably concerned about being held accountable for any oversight and compliance failures at their firm. This regulatory notice aims to remind the industry of what falls within the scope of CCO liability and what does not. Read the full notice.
Beware of the SEC’s DeFi-ing!
The SEC’s regulatory scope regarding decentralized finance (DeFi) and cryptoassets could expand in the near future. The proposed SEC rulemaking, released Jan. 26 and currently awaiting public comment, would expand the scope of Regulation ATS, the regulatory system for alternative trading systems. While not specifically referencing DeFi or cryptoassets, the rulemaking would expand the definition of “exchange” under Section 3b-16 of the Securities Exchange Act of 1934 to include “communications protocol systems” that may cover specific DeFi and/or centralized finance ( CeFi) cryptoasset trading platforms and subjects them to registration requirements under the law.
More recently, on March 28, the SEC proposed expanding the definition of “dealer” in a way that could potentially be read to include automated market makers with more than $50 million in total assets under management. Dollar applies, potentially subjecting certain DeFi platforms to SEC registration requirements to the extent they are not already deemed to be subject to registration as a national securities exchange (unless specifically exempted). Read the January and March publications.
Notice of employee surveillance in New York
Effective May 7, all New York State employers are required to provide written notice to employees hiring them for electronic surveillance, including intercepting or monitoring telephone conversations or transmissions, email, or Internet use. The law does not apply to general maintenance or protection of computer systems. Read New York Senate Bill S2628.
CFTC Focus on Retail Markets: Three Areas to Consider
A growing number of people are involved with the financial markets and their involvement has expanded. These participants are looking not only for traditional stocks and mutual funds to generate returns, but also for more complex products regulated by the Commodity Futures Trading Commission (CFTC). The CFTC keeps pace with the expanding interests of retail market participants, which encompass complex products ranging from precious metals to digital assets. With changes to the composition of the CFTC under the new administration, there are three areas where the CFTC is attempting to balance its responsibilities to retail market participants: retail commodity transactions, social media, and binary options. Read the full article.
SEC proposes to expand the scope of merchant registration requirements
The SEC has proposed two new rules that, if passed, would dramatically expand who can be considered and register as a dealer or government securities dealer under the Securities Exchange Act of 1934, as amended (the Exchange Act). got to .
If adopted, these proposed new rules would largely eliminate decades of existing precedent that distinguished between “dealer” activities that require registration and “dealer” activities that do not. Specifically, under the proposed new rules, the following activities would require registration as a dealer and/or government securities dealer: (i) engaging in day trading on a routine basis; (ii) placing bids and offers on both sides of the market; and (iii) generating revenue “principally” from capturing bid-ask spreads or from capturing inducements offered by trading venues to provide liquidity. In addition, the proposed new rules include a fallback provision that would require registration of government securities dealers for any company that buys and sells more than $25 billion worth of government securities during any six calendar month period. Read the full recommendation.
Lance A. Zinman also contributed to this article.
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