On September 17, 2024, the Securities and Exchange Commission announced cease-and-desist proceedings against eleven institutional investment managers for failure to file reports required by the Securities Exchange Act of 1934. The SEC’s orders require all of the firms to file the reports that Section 13(f) requires from institutional investment managers holding investment discretionary authority over at least $100 million in specified securities, generally equity securities listed in the United States and related securities. Two of the firms were also charged with violating the Exchange Act’s reporting requirement under Section 13(h) for “large traders,” a term defined to include parties investing more than $20 million in National Market System securities in a single calendar day or $200 million in a single calendar month.

The SEC’s orders all require the firms to cease and desist from their Exchange Act violations. Nine of the firms were assessed penalties ranging from $175,000 to $725,000. Two of the respondents were not fined, the SEC said, because they had reported their Exchange Act failures and had otherwise cooperated with the Commission’s enforcement staff. For the same reason, one respondent was not assessed a penalty for its failure to file large trader reports.

The respondents included two foreign advisers, one from Canada and another from Poland. The SEC’s decision to bring action against these two parties necessarily implies that the Commission believes that Sections 13(f) and 13(h) apply to qualifying institutional investment managers and to large traders outside the U.S. The actions under Section 13(h) appear to be only the second and third prosecutions the SEC has made under the provision, the first having been taken in 2023.

The Commission’s announcement of its actions is available here.

The Securities and Exchange Commission’s accelerated Schedule 13G filing deadlines become effective September 30, 2024. On October 10, 2023, the SEC adopted changes to Schedules 13D and 13G relating to beneficial ownership reports (the “Final Rules”). The Final Rules are intended to modernize the rules governing beneficial ownership reporting and generally shorten the period for initial and amended filings, clarify requirements for derivative securities and criteria for determining when persons are acting as a group, and require that certain information be provided in a structured, machine-readable data format. 

Deadlines for Schedule 13G filings depend on a person’s filing status as a qualified institutional investor, a passive investor or an exempt investor under the rules. The Final Rules require that an initial Schedule 13G be filed within 45 days following the quarter-end in which the qualified institutional investor or exempt investor crosses the 5% threshold or for passive holders within five business days of crossing the threshold. There are shorter applicable deadlines for qualified institutional investors and passive investors whose interests exceed the 10% threshold. Under the Final Rules, Schedule 13G filings must be amended within 45 days following the end of the calendar quarter in which a material change occurred.

See our Legal Update on the Final Rules.

The Securities and Exchange Commission let pass the deadline to seek a review of the decision by the US Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) to vacate the SEC’s final rule relating to private fund advisers (the “Final Rule”). The SEC adopted the Final Rule on August 23, 2023. The Final Rule was designed to enhance the regulation of private fund advisers and protect investors who invest in private funds by preventing fraud, deception, or manipulation by the investment advisers to those funds. Read our Legal Update on the Final Rule. On June 5, 2024, a three-judge panel of the Fifth Circuit unanimously vacated the Final Rule after several industry and trade groups challenged the Final Rule, which would have caused a significant change to the regulation and operation of private funds. Read our Legal Update on the Fifth Circuit’s decision.

The SEC had until September 3, 2024, or 90 days from the Fifth Circuit’s final ruling, to file a petition for a writ of certiorari with the Supreme Court.

During the American Bar Association’s Business Law Section Fall Meeting, the International Securities Matter Subcommittee of the Federal Regulation of Securities Committee discussed recent market trends affecting foreign private issuers (FPIs) from Latin America and other emerging markets, including the below:

Increase in Initial Public Offerings (IPOs).  There is a notable increase in the number of foreign (non-U.S. domiciled) companies interested in conducting initial public offerings in the United States as opposed to Rule 144A offerings.

Different Jurisdictions for IPOs.  Companies are increasingly using entities domiciled in jurisdictions different from those in which they are headquartered in connection with undertaking their IPOs.  This strategy often serves to (i) mitigate political risk by reducing the stigma and political risks that may be associated with their home countries and (ii) permit issuers to adopt new corporate governance practices without the baggage associated with their home country’s regulatory environment.

Dual-Class Voting Mechanisms.  Dual-class voting structures are becoming more common.  This mechanism helps founding families maintain control over their businesses while monetizing their investments.  A dual-class structure may allow founders to maintain control and leverage the founders’ reputation.  For a highly leverage company, a dual class structure also might allow the issuer to avoid triggering a change of control in connection with the IPO or thereafter.  However, dual-share class companies often are not included in broad-based indices and some institutional investors perceive the entrenchment of control as a negative.   This might be addressed by implementing a sunset provision.

SEC Regulatory Philosophy.  In his remarks at the 2024 U.S.-China Symposium hosted by Harvard Law School, SEC Commissioner Mark T. Uyeda highlighted that SEC appears to be diverging from its historical view of providing certain accommodations to FPIs.  Recent regulations have increased compliance burdens for FPIs.

Auditor Concerns.  The subcommittee also discussed auditors’ concerns regarding hyperinflationary accounting, which poses significant challenges for companies operating in high-inflation environments.  Under the new Form 20-F rules, companies in hyperinflationary economies must include one year of financial statements and Management’s Discussion and Analysis.  However, this has raised some issues with respect to comfort letters and that has led issuers towards Rule 144A issuances.

The Securities and Exchange Commission recently announced that its Investor Advisory Committee will be meeting on September 19, 2024.  The meeting will consist of two panels.

The first panel will consider investment advice and the fiduciary duty obligation.  The agenda notes that in light of the July 2024 Federal District Court stay of the Department of Labor’s fiduciary rule, there is investor confusion regarding the duties of financial professionals.  The panel participants will discuss the different definitions of “fiduciary” under the SEC rules, ERISA and state law, and the obligations of financial professionals to their clients.  The second panel will discuss the framework relating to shareholder proposals, as well as tracing issues arising under Securities Act Section 11. See the press release and the full agenda.

The Investor Advisory Committee recently announced the appointment of six new members. The new members will serve four-year terms and join 17 current committee members. The Investor Advisory Committee was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, advises the SEC on regulatory priorities and initiatives to protect investors and promote the integrity of the US securities markets.  See the press release on new committee members.

The Securities and Exchange Commission recently announced that the fees that registrants pay to register their securities with the SEC will increase from $147.60 per million dollars to $153.10 per million dollars, effective October 1. The new fee rate will be applicable to the registration of securities under Section 6(b) of the Securities Act of 1933, the repurchase of securities under Section 13(e) of the Securities Exchange Act of 1934, and proxy solicitations and specified tender offers under Section 14(g) of the Securities Exchange Act of 1934. See the Fee Rate Advisory.

On August 14, 2024, FINRA published an update (the “Update”) on its ongoing efforts to engage with its members related to crypto asset activities. The Update describes “crypto assets” as assets that are issued or transferred using distributed ledger or blockchain technology. They include, but are not limited to, so-called virtual currencies, coins, and tokens. A particular crypto asset may or may not meet the definition of a “security” under the federal securities laws.

As noted by FINRA, member firms’ crypto asset-related activities raise “challenges with various FINRA rules,” resulting in a host of potential rule violations. The following summarizes the Update.

For several years, FINRA has engaged with member firms in an effort to understand the extent to which they and their associated persons as well as their affiliates are involved in crypto asset-related activities. This includes the issuance of Regulatory Notices, repeatedly encouraging member firms to inform FINRA if they or their associated persons, or their affiliates, engage in, or intend to engage in, activities related to crypto assets (seeFINRA Regulatory Notices 18-20, 19-24, 20-23, and 21-25). FINRA’s most recent effort was the issuance in 2023 of a crypto asset questionnaire to approximately 600 member firms.

According to FINRA, among the member firms with crypto asset activities and touch points, more than one third are involved in retail brokerage (36%). The next largest groupings are member firms involved in trading and execution (21%), followed by capital markets (20%). The following activities are performed by member firms: acting as placement agents, wholesalers, or distributors of private placements of crypto assets or companies involved in crypto asset activities; operating alternative trading systems to facilitate trading in crypto asset securities; facilitating customer crypto asset trading and custody services through affiliates or third parties; engaging in distributed ledger technology initiatives or test cases to enable transactions executed or executed and settled on permissioned blockchains; and introducing institutional customers to third-party crypto asset custodians as well as crypto asset-related investment banking and advisory services for companies in crypto asset-related activities.

FINRA also identified member firms (or their parent companies or affiliates) with strategic partnerships or arrangements with companies engaged in crypto asset-related activities, including with respect to providing access to crypto asset trading and custodial services, creating training and educational materials, and utilizing distributed ledger technology for certain types of transactions (e.g., repurchase and reverse repurchase transactions). Parent or affiliate companies of member firms are engaged in a broad variety of activities across multiple disciplines as outlined in the Update.

FINRA provided a non-exhaustive list of certain potential violations involving crypto asset-related activities that FINRA has observed in its regulatory programs, including the following examples:

  • Misrepresentations of the extent to which the federal securities laws or FINRA rules apply to crypto asset-related activities (FINRA Rule 2210);
  • Failures to complete reasonable due diligence on crypto asset private placements and failures to engage in effective supervision designed to monitor crypto asset activities (FINRA Rule 3110);
  • Failures related to the disclosure of crypto asset outside business activities (“OBAs”) and the approval and supervision of private securities transactions (“PSTs”) (FINRA Rules 3270, 3280 and 3110);
  • Failures to establish AML programs reasonably designed to detect and cause the reporting of suspicious transactions in crypto assets conducted or attempted by, at or through the broker-dealer (FINRA Rule 3310);
  • Failures by associated persons to provide records on crypto asset-related OBAs and PSTs (FINRA Rule 8210); and
  • Findings of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) violations related to, for example, a member firm and associated person negligently causing the dissemination of promotional materials that the member firm or associated person should have known contained material misstatements and omitting material facts related to the member firm’s crypto asset business.

With respect to market surveillance, FINRA has identified potential situations in which individuals seek to take advantage of investor interest in crypto assets and blockchain technology to perpetrate pump-and-dump schemes and other forms of market abuse in the equity markets. FINRA has also noted potential market abuse involving crypto asset securities traded on registered ATSs.

Additional compliance risks and considerations were identified by FINRA in the Crypto Asset Developments section of the 2024 FINRA Annual Regulatory Oversight Report.

FINRA member firms should monitor and assess the extent of their (and their associated persons’ and affiliates’) crypto asset activities, and review the reasonableness of their compliance policies and supervisory procedures in relevant areas. Firms also should expect continued scrutiny and updates from FINRA in response to developments related to crypto assets.

Earlier this month, the Southern District of New York issued its final ruling and remedies order in Securities and Exchange Commission v. Ripple Labs, Inc. Judge Analisa Torres found that the SEC failed to show that any investor was harmed by Ripple’s sales of the crypto asset XRP, rejecting the SEC’s disgorgement theory.

The court assessed a civil monetary penalty of approximately $125 million against Ripple, which the court calculated by applying a transaction-by-transaction approach, resulting in a penalty that is significantly lower than the SEC’s approximate $876 million fine.

The court issued an injunction barring Ripple from future violations of Section 5 of the Securities Act. The SEC had alleged that Ripple’s sales of XRP constituted the unlawful offer and sale of securities in violation of Section 5. The SEC also alleged that certain Ripple executives aided and abetted Ripple’s Section 5 violations. This part of the judgment relates to the institutional sales of XRP to hedge funds and other institutional buyers (as opposed to Ripple’s sales of XRP on digital asset exchanges, which were not found to be “investment contracts” and therefore also not “securities”). As a result, this prohibition applies to Ripple’s institutional sales unless such offers and sales are made pursuant to a valid exemption or are registered pursuant to the Securities Act. The retail sales on secondary markets were determined not to constitute securities transactions.

The court also rejected Ripple’s request to waive the “bad actor disqualification,” which prevents Ripple from relying on the Regulation D exemption for its securities offerings for a period of five years.

We expect the ruling to be appealed, maybe before the U.S. Court of Appeals for the Second Circuit.

The Securities and Exchange Commission adopted Rule 3c-7, which adjusts for inflation the dollar threshold used in defining a “qualifying venture capital fund” under the Investment Company Act, as required pursuant to Section 504 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”).  The final rule allows the SEC to adjust the threshold for inflation by order every five years and sets out how to determine these adjustments.

Section 3(a) of the Investment Company Act defines the term “investment company” for purposes of the Investment Company Act.  Section 3(c)(1) provides certain exclusions from that definition.  Section 504 of the EGRRCPA amended Section 3(c)(1) by excluding qualifying venture capital funds from the investment company definition and adds Section 3(c)(1)(C) defining a “qualifying venture capital fund,” as a “venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital.”  The statutory definition requires this dollar threshold to be indexed for inflation once every five years by the SEC beginning from a measurement made by the SEC on a date selected by the SEC.  In February 2024, the SEC proposed a new rule to implement these requirements and adjust the threshold.

The final rule uses December 2023 as the current measurement date, adjusts the dollar threshold to $12 million or, following November 2029 (five years from the rule’s effective date), the dollar amount specified in the most recent order issued by the SEC in accordance with the final rule.  The SEC will use the Personal Consumption Expenditures Chain-Type Price Index, or PCE Index, as the indicator of inflation going forward.  The final rule will become effective 30 days after publication in the Federal Register.

See the press release, and the final rule.

September 4, 2024
9:00am – 5:00pm ET

Practising Law Insitutue (PLI) will host the 10th Annual Alternative Finance Summit: Fintech, Blockchain, and Crowdfunding program.

Mayer Brown partner Anna Pinedo will participate in a discussion on the “Securities Offering and Private Placement Developments” panel.  

See the event webpage for information on the program and the session.