Certain Principal Trading Firms, Private Funds, Investment Advisers and Other Market Participants May Become Subject to Registration

On February 5, 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules – SEC Rules 3a5-4 and 3a44-2 (collectively, the “Final Rules”) – to further define the phrase “as part of a regular business” used in the statutory definitions of “dealer” and “government securities dealer” under Sections 3(a)(5) and 3(a)(44) of the Securities Exchange Act of 1934 (the “Exchange Act”). The Final Rules set forth two qualitative factors that subject market participants taking on significant liquidity-providing roles, which the SEC construes to be de facto market makers, to registration under the Exchange Act as dealers or government securities dealers. The Final Rules apply to the buying and selling of any “security” or “government security,” defined in Sections 3(a)(10) and 3(a)(42) of the Exchange Act, including crypto assets that are securities or government securities. The Final Rules will become effective 60 days after their publication in the Federal Register. The compliance date for the Final Rules will be one year after their effective date.

In this Legal Update, we provide an overview of the Final Rules and certain key SEC guidance in the adopting release thereto.

Continue reading this Legal Update.

March 6, 2024 Webinar
10:00 a.m. – 11:00 a.m. EST
Register here.

Following a remarkable U-turn, discussions continue to take place on the adoption of the EU Corporate Sustainability Due Diligence Directive (“CS3D”), which would introduce mandatory human rights and environment due diligence requirements for both EU and non-EU companies. But what would CS3D really imply and would those requirements be entirely novel?  To anticipate the requirements of CS3D, companies can usefully look at how those requirements are addressed in existing national legislation, notably in France, Germany and the US. 

Join us for a webinar on March 6 to learn more about:

  • What the CS3D is about and how it compares to existing legislation in France, Germany and the U.S.
  • How the CS3D may impact the current human rights and environment due diligence enforcement landscape 
  • Which steps companies, inside or outside the EU, should consider to proactively prepare for the CS3D era

In recent wide-ranging remarks punctuated with a number of movie references and analogies (some that I confess were lost on me), Securities and Exchange Commission Chair Gensler spoke about various aspects of Artificial Intelligence (“AI”).  The Chair noted, as he has consistently, that AI may pose systemic risk or aggravate risks—Chair Gensler discussed herding and network interconnectedness.  To the extent, for example, that there is overreliance on a single or on a few AI models or data aggregators, risks may be magnified.  AI may therefore pose challenges to financial stability.  Chair Gensler also cautioned against the risks associated with AI models which may take into account compliance with current rules and regulations, but may fail to update for changes in regulations, market conditions and disclosures.  Also, Gensler raised the possibility that AI models are learning, changing and adapting on their own—making it harder to implement appropriate guardrails relating to regulatory compliance.

The Chair touched on “AI washing,” which raises many of the same concerns raised by “greenwashing” — that is, are public companies making false claims and trying to profit from the allure of AI related technologies?  Presumably an enforcement warning.  Chair Gensler reminded companies the “basics of good securities lawyering still apply.”  Claims regarding future prospects should be grounded in a reasonable basis and this should be explained to investors.  Material risks should be disclosed and should be tailored to be specific to the issuer.  In the case of investment advisers and broker-dealers, these regulated entities also should be clear as to when they are using an AI model and the manner in which they are using the model.  He raised the prospect that if an investment adviser or a broker-dealer is using an AI model it may hallucinate an unsuitable or a conflicted investment recommendation.  In this regard, he noted that to the extent an investment adviser or a broker-dealer use AI models to render advice or make recommendations they need to take steps to ensure that these are not based on a hallucination or on inaccurate information.  Of course, Gensler commented on, and ended with, the use of predictive data analytics—suggesting once again that the proposed rule is intended to address potential or actual conflicts of interest across a range of interactions. 

See Chair Gensler’s full text of his remarks here.

The Securities and Exchange Commission announced that on February 27, 2023, the Small Business Capital Formation Advisory Committee will hold a meeting, which will be webcast. The SEC Office of the Advocate for Small Business Capital Formation will provide an overview of its 2023 report, about which we previously blogged. The Committee will then consider possible recommendations to the SEC regarding changes to the accredited investor definition. In its afternoon session, the Committee will consider and discuss the state of the IPO market, particularly the decline in the number of smaller public companies seeking to undertake IPOs and the changes in the IPO market. See the SEC press release here

See the agenda here.

On February 9, 2024, the Securities and Exchange Commission (“SEC”) announced charges against several broker-dealers and investment advisers for failures by the firms and their employees to maintain and preserve electronic communications. The firms’ penalties ranged from $8 to 16 million, with one notable exception—one firm received a significantly lower penalty of $1.25 million, which the SEC says reflects the firm’s voluntary self-reporting and cooperation. In this Legal Update, we examine the charges the SEC announced. 

April 11, 2024 Webinar
11:30am – 12:30pm ET
Register here.

Although Form 13F filing requirements have been in existence for decades, the SEC and its staff have recently turned up the heat on compliance in this area, and 13F filers also must prepare for new Form N-PX filing obligations. Join Mayer Brown panelists, Jennifer Carlson, Leslie Cruz, and Adam Kanter for an in-depth discussion about these requirements, including:

  • What are the basic requirements?
  • Where are the potential pitfalls?
  • How should managers navigate these requirements within complex organizations, or when other managers are also involved in providing advice to an account (e.g., sub-advisory relationships; multi-manager arrangements; and model managers)?
  • What should managers be doing in light of the SEC’s heightened regulatory focus on Form 13F filings?

The year already began with a stir—a divided SEC adopted final rules addressing the treatment of special purpose acquisition companies (SPACs). The SEC took into account only a number of the issues raised by market participants during the comment period (see our Legal Update here). But there’s much more to come. Despite some recent litigation and other challenges facing the agency, the SEC’s rulemaking agenda remains ambitious. From climate change disclosure rules to private company transparency measures, this year promises to be a busy one for securities lawyers.

Read our modest predictions here.

On January 24, 2024, as we previously posted, the Securities and Exchange Commission (SEC) finalized the rules for special purpose acquisition companies (SPACs). Anna Pinedo, joined Yelena Dunaevsky, Senior Vice President, Transactional Insurance at Woodruff Sawyer, and founder of Women in SPACs, for a discussion.

Watch on Yelena’s podcast discussion.

February 14, 2024, PLI Webinar

3:00pm – 4:00pm ET

Register here.

In 2022, the SEC proposed significant amendments to the rules and forms addressing the treatment of special purpose acquisition companies (“SPACs”) in connection with their initial public offerings (“IPOs”) and subsequent de-SPAC transactions. The proposed amendments were quite controversial and had a chilling effect on the SPAC market and resulted in changes to market practice. On January 24, 2024, the SEC met to consider the adoption of final rules, which, market participants hope will take into account concerns raised by commenters.

During this session hosted by PLI, Mayer Brown partners, John Ablan, Eddie Best, and Anna Pinedo, will discuss:

  • The key differences between the proposed rules and final rules
  • Conflicts of interest, dilution, and fairness disclosures in connection with SPAC transactions
  • Alignment of disclosures for de-SPAC transactions with those for traditional IPOs
  • Projections disclosures
  • Financial statement and other disclosure matters
  • Underwriter liability
  • Key takeaways and practical considerations

For more information, visit the event website.

The Financial Industry Regulatory Authority, Inc. (“FINRA”) announced via Regulatory Notice 24-02 the effective dates and other important timeframes for new FINRA Rules 3110.18 (Remote Inspections Pilot Program) and 3110.19 (Residential Supervisory Location). Moreover, FINRA announced the end date of the COVID-19-related regulatory relief set forth in FINRA Regulatory Notice 20-08 with respect to the obligation of firms to maintain current information for employment addresses on Form U4 and branch offices on Form BR. In this Legal Update, we discuss these changes and highlight the key dates and timeframes relating to their implementation.

Continue reading this Legal Update.