The Securities and Exchange Commission (SEC) has recently released new or updated rules related to three key areas for asset managers: short positions, securities lending, and beneficial ownership. All three final rules were issued in October of this year with effective dates of early 2024.
On August 23rd, the Securities and Exchange Commission (SEC) approved new rules aimed at improving the operations of private fund advisers and updating compliance regulations for investment advisers. Despite facing some resistance from firms, the SEC has asserted that these rules offer several benefits to investors when implemented.
On June 16th the SEC published a press release detailing the charges against the Pacific Investment Management Company LLC (PIMCO). PIMCO is one of the largest global asset managers in the world with nearly 3,500 employees worldwide and >$1.8 trillion in Assets Under Management (AUM) as of March 2023.
In February 2023, the SEC proposed expansive changes concerning Safeguarding Advisory Client Assets (Safeguarding Proposed Rule), which would amend rules around the custody of client funds or securities. Under Rule 206(4)-2, investment advisers must safeguard client funds and securities in their possession or where they have the authority to obtain control of them. The proposed rules would make broad and significant changes to the current custody rule, enhancing the role of custodians and increasing compliance burdens on advisory firms.
When investment professionals use their considerable expertise to perpetuate a fraud, they usually rely on that same expertise to cover it up. The more complex the financial instrument or approach, the better, since most people are uncomfortable questioning things they may not understand.
The SEC releases its examination priorities every year to provide insight into potential risk areas that might impact investors. Along with the usual focus on compliance with policies and procedures, client suitability standards, etc., the SEC also highlights specific industry concerns related to the current landscape and new or updated regulation.
Investing in Your Compliance Culture
For nearly four years between April 2017 and October 2021, Wells Fargo Advisors went unnoticed in a financially threatening scandal involving its failure to file 34 suspicious activity reports. Risky wire transfers facilitating "money laundering, terrorist financing, and other illegal money transactions to and from foreign countries"1 were swept under the rug due to the faulty implementation of Wells Fargo's 2019 update to its internal anti-money laundering, or AML, monitoring and alert system.
The August 19, 2022 compliance date of rule 18f-4 of the Investment Company Act of 1940 is approaching. The new rule is described by the Securities and Exchange Commission as an effort “to provide an updated, comprehensive approach to the regulation of funds’ “use of derivatives and certain other transactions”. It imposes derivatives management duties on mutual funds (other than money market funds), exchange traded funds, registered closed-end funds, and business development companies. An example of a necessary step in adhering to the new policy is a written derivatives risk management program, relying upon stress testing, led by a Derivatives Risk Manager. In addition, there are Value at Risk (VaR) measurements of leverage risk and Board derivatives oversight and reporting.
