In order to harmonize the regulatory framework governing the European fund market, the European Commission has revised the existing Alternative Investment Fund Manager Directive – Directive 2011/61/EU (the “AIFMD”), with the introduction of the Alternative Investment Fund Manager Directive II (“AIFMD II”).  

The European Commission sees a particular need for change in the areas of delegation agreements, liquidity risk management, regulatory reporting, the provision of custody and depositary services and lending by alternative investment funds (“AIFs”), whilst the definitions of AIFs and also of managers of AIFs (“AIFMs”) do not change.

In the following, we will summarize these changes with a particular focus on the key points for non-EU fund managers, non-EU-fund marketing requirements and the national private placement regime (“NPPR”).

Continue reading.

The Fifth Circuit restored the SEC’s climate disclosure regulations today after an administrative stay (see the alert on the stay here).

The Fifth Circuit decision to lift the stay follows after yesterday’s announcement that the US Court of Appeals for the Eighth Circuit will hear a case consolidating nine of the lawsuits across the country filed against the SEC.

On March 18, 2024, FINRA announced that it has fined a broker-dealer $850,000 in connection with the firm’s program to pay individuals with followings on social media sites (i.e., “influencers”) to promote the firm in social media communications.  This matter represents FINRA’s first disciplinary action involving a firm’s supervision of social media influencers.

FINRA found that the broker-dealer’s influencers posted on the firm’s behalf communications that were not fair or balanced, or made claims that were exaggerated, unwarranted, promissory, or misleading, in violation of FINRA Rules 2210(d)(1) and 2010.  For example, the firm’s influencers posted communications claiming that the firm’s services were completely free without disclosing that certain fees may apply.

Additionally, the firm did not have a registered principal review or approve the content in the influencers’ communications prior to their posting on social media platforms, did not maintain records of these communications, and failed to establish, maintain, and enforce a reasonably designed supervisory system (including written supervisory procedures) for communications disseminated on the firm’s behalf by such influencers.  In this connection, the firm violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(b)(4) thereunder, and FINRA Rules 2210(b), 4511, 3110, and 2010.

In the press release announcing this disciplinary action, FINRA’s Executive Vice President and Head of Enforcement, Bill St. Louis, stated that “FINRA will continue to consider whether firms are using practices and maintaining supervisory systems that are reasonably designed to address the risks related to social media influencer programs.”  The press release also noted that this action stems from FINRA’s targeted exam of broker-dealer practices related to the acquisition of customers through social media channels, including firms’ use of social media influencer and referral programs, which was initially announced in September 2021 and was the subject of an update by FINRA in February 2023.  In light of these statements from FINRA and its ongoing targeted exam, more disciplinary actions involving broker-dealers’ social media influencer programs seem likely.

It appears that the Securities and Exchange Commission’s (“SEC”) enforcement program is becoming active with regards to the use of social media influencer programs in the securities industry, beyond the context of broker-dealers.  For example, in February 2023, the SEC announced that a registered investment adviser agreed to pay a $1.75 million civil penalty to settle charges that it failed to disclose a social media influencer’s role in the launch of its new exchange-traded fund.  Given the intensifying regulatory focus of the SEC and FINRA on the use of social media influencers in the securities industry, broker-dealers and other market participants should closely review their social media influencer programs and assess compliance with applicable regulatory requirements and expectations.

On March 7, 2024, the Securities and Exchange Commission (the “SEC”) announced that Skechers U.S.A. Inc. (“Skechers”) agreed to a cease-and-desist order for failing to disclose payments for the benefit of its executives and their immediate family members.

The SEC found that, from 2019 to 2022, Skechers’ annual reports on Form 10-K and proxy statements on Schedule 14A did not comply with the related party transaction disclosure requirements in violation of the Securities Exchange Act of 1934 (the “Exchange Act”).  Skechers failed to report several transactions including compensation to a family member of an executive officer and director for serving as an independent consultant, compensation to a sibling-in-law of an executive officer and director as a non-executive employee and outstanding loans to one or more executive officers or directors in excess of $120,000 with respect to personal expenses paid for by Sketchers.  The SEC order identifies violation of Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1 and 14a-3 under the Exchange Act. See the order here

The SEC has been increasingly focused on registrant compliance (or non-compliance) with the requirement to disclosure related party transactions.  In September 2023, the SEC brought an action against a registrant for failing to disclose a director’s role in a stockholder’s private sale of a substantial amount of shares prior to that company’s IPO.   Also in September 2023, the SEC brought an action against another company for failing to disclose the employment of a sibling of an executive officer.  These cases serve as a good reminder to review disclosure controls and procedures that address related party transactions, revisit D&O questionnaires to ensure that these are soliciting all of the relevant information, and remind directors and officers of the importance of vetting transactions with related parties and reporting transactions with related parties.

In recent remarks, Commissioner Uyeda addressing the Council of Institutional Investors outlined his concerns regarding several SEC rulemakings.  The members of the Council of Institutional Investors are responsible for combined assets under management of nearly $5 trillion and include state and local government pension plans, among others.  The Commissioner addressed the many rules that have recently been adopted that impact private funds and their advisers, referred to collectively as the private fund adviser rules.  The private fund adviser rules are now the subject of a litigation challenge.  The Commissioner outlined the SEC’s reliance in promulgating the rules on Section 211(h)(2) of the Investment Advisers Act, which was added by Section 913(g) of the Dodd-Frank Act, which amended the Securities Exchange Act and the Advisers Act to authorize the Commission to impose a fiduciary standard of care for brokers, dealers, and investment advisers.  The same section also directed the SEC to “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.”  Yet, Title IX of the Dodd-Frank Act did not address private funds; funds were addressed in Title IV of the Dodd-Frank Act.  The Commissioner argues that the SEC’s broad reading of the provisions as the basis for authority is perhaps too significant an extension for a section that focuses on broker-dealers and advisers, not on funds at all.  The Commissioner questions whether this interpretative approach to Section 211(h) may in essence represent a bit of a slippery slope—if there is no distinction to be made between retail investors and institutional investors, then, should other distinctions also be ignored?  Carrying through this analysis, in his comments, the Commissioner noted that Section 211(h) does not differentiate among SEC-registered investment advisers, state-registered investment advisers and exempt advisers. The National Securities Market Improvement Act of 1996 provides that states cannot impose substantive regulations on SEC-registered investment advisers, but is silent on the SEC’s ability to impose regulations on state-registered investment advisers—so does Section 211(h) give the SEC authority to regulate state-registered investment advisers?  The Commissioner notes that, in his opinion, the SEC’s interpretation of the reach of Section 211(h) extends beyond what Congress may have intended in light of the context of Dodd-Frank Act Section 913.  The Commissioner takes issue, for somewhat similar reasons, with the SEC’s rule regarding the definition of a “dealer” as well as its approach to what constitutes a “security” for purposes of the investment contract test in Howey.  The lack of certainty, predictability or a “limiting principle,” which would circumscribe rulemaking to areas specifically authorized by statute, can lead to regulatory creep as it were or to a slippery slope. 

See the full text of his comments here.

In this MB microtalk video, Mayer Brown’s Jen Carlson discusses practical considerations for companies implementing the SEC’s new climate-change disclosure rules, such as conducting gap analyses, reviewing disclosure controls and ICFR considerations.

Visit our Free Writings & Perspectives Blog for more topics and talks.

In this MB Microtalk video, discussing the SEC’s final climate-change disclosure rules, Mayer Brown’s Matt Bisanz provides an overview of the changes made by the final rules to Regulation S-X, which require a company to include certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements.

Visit our Free Writings & Perspectives Blog for more topics and talks.

April 3, 2024 Webinar
1:00 p.m. – 2:00 p.m. EST
Register here.

After much anticipation, on March 6, 2024, the US Securities and Exchange Commission voted to adopt final rules that require reporting by public companies of climate change-related disclosure. While the final rules differ from the SEC’s controversial proposed rules in significant ways, the final rules are prescriptive, and require substantial new, additional disclosures.

The SEC also remains focused on other ESG-related disclosures, including potentially misleading disclosures made by public companies and by funds, and these have been the focus of enforcement actions. Finally, there are a number of additional ESG-related proposed rules pending, which may be closer to being finalized now the climate-change disclosure rules have been adopted.

Read our alert on the new rules, here.

On March 8, 2024, the House of Representatives passed the Expanding Access to Capital Act, H.R. 2799, which we had previously posted on the blog.

There were several amendments to the Act, including the following:

  • An amendment that clarifies the definition of “general solicitation” and “angel investor” for purposes of the federal securities laws to address “demo day” communications;
  • An amendment that directs the Securities and Exchange Commission to promulgate rules with respect to the electronic delivery of certain required disclosures to investors;
  • An amendment that would amend federal securities laws to allow 403(b) plans to invest in collective investment trusts (CITs) and insurance contracts that currently may be invested in by comparable retirement plans, such as 401(k)s; and
  • An amendment that allows a closed-end investment company to invest its assets in securities issued by private funds.

While the chances of passage in the Senate may be low, there may be important and significant components that could garner bipartisan support as they would promote capital formation in the public and the private markets, help small business, and benefit investors.  The final text of the bill is not yet available.  See the House press release

The Securities and Exchange Commission (the “SEC”) has adopted new rules that require public companies to disclose substantial information about the material impacts of climate-related risks on their business, financial condition, and governance (the “Final Rules”).  The SEC says that “climate-related risks, their impacts, and a public company’s response to those risks can significantly affect the company’s financial performance and position.”  

The Final Rules require disclosure of a range of climate-related matters, including:

  • Any material climate-related risks and their impacts on the registrant’s business strategy, results of operations, and financial condition, as well as on the registrant’s outlook and business model.
  • Any activities, plans, or processes to mitigate, adapt to, or manage material climate-related risks, including the use of transition plans, scenario analyses, or internal carbon prices. 
  • Any board oversight and management role in assessing and managing material climate-related risks.
  • Any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
  • Scope 1 and/or Scope 2 greenhouse gas emissions (“GHG”) by certain larger registrants when those emissions are material, and the filing of an attestation report covering the required disclosure of such emissions, in each case, on a phased-in basis. 
  • The financial statement effects of severe weather events and other natural conditions, including costs and losses.

We discuss the Final Rules in our Legal Update.

We also include a table with the text of Subpart 1500 of Regulation S-K and a table with the text of the revisions to Regulation S-X.