Conduct of business – Global Investment Law Watch

Europe: Research Cost Re-Bundling – Is the UK Going Back to the Future?

Apr 23 2024

By: Andrew Massey, Philip Morgan, and Omega Modi

The UK’s FCA has published consultation paper 24/7: Payment optionality for investment research. It proposes a new, more flexible, way to charge third-party investment research to clients.

The new payment option would sit alongside the two existing options under which research costs are either paid by firms from their own resources or charged to clients through a research payment account. The latter approach has not been popular because of its operational complexities, so research has been an out-of-pocket expense for many UK asset managers.

The FCA proposes to allow firms to pay jointly for research and trade execution – so-called ‘bundled’ payments – and for bundled payments to be charged to clients. This would be subject to significant ‘guardrails’ to mitigate against potential negative impacts, including research overconsumption and price increases.

The proposed ‘guardrails’ include (i) compliance with best execution, (ii) separate identification of payments for research, (iii) a mandatory formal policy covering matters such as decision making on third-party research procurement, (iv) a structure for allocating payments between different research providers, (v) a firm budget for research spend, (vi) fair allocation of that spend between clients, (vii) regular monitoring of research spend and usage, and (iv) detailed disclosure to clients. Arguably, these conditions make the new option more of a hybrid approach – not full re-bundling – and it remains to be seen whether it will, as intended, be operationally more straightforward than research payment accounts.

The consultation takes forward a key recommendation of the Investment Research Review (IRR), which observed that unbundling had adversely impacted the provision of investment research. The IRR was commissioned as part of the UK Government’s current initiative to drive growth and international competitiveness in UK financial services, known as the “Edinburgh Reforms”. The consultation closes on 5 June 2024 with final rules due before 30 June 2024.

Kicked Out of the Club: NFA Orders Commodity Pool Operator Not to Reapply for NFA Membership

Apr 18 2024

By: Matthew J. Rogers and Benjamin C. Skillin

On 10 April 2024, the National Futures Association’s (NFA) Business Conduct Committee (BCC) issued an order against 50.ai Investments LLC, a former NFA Member commodity pool operator and forex firm. The order stipulates that 50.ai Investments may not reapply for NFA membership or act as a principal of an NFA Member at any time in the future due to violating a suite of NFA compliance rules.

SEC Risk Alert Offers Initial Observations on Compliance

Apr 18 2024

By: Michael S. Caccese and Lance C. Dial

On 17 April 2024, the Securities and Exchange Commission (SEC) Division of Examinations issued a risk alert entitled “Initial Observations Regarding Marketing Rule Compliance” (the Alert). The Alert reflected the SEC examination staff’s preliminary observations coming from its examination program and noted that compliance with Rule 206(4)-1 (the Marketing Rule) continues to be a priority for the SEC staff.

Marketing Rule Enforcement Remains Priority: SEC Charges Five Advisers for Marketing Rule Violations

Apr 15 2024

By: Lance C. Dial, Pablo J. Man, Pamela A. Grossetti, and Bradley D. Bostwick

On 12 April 2024, the SEC announced the settlement of charges against five registered investment advisers for violations of Rule 206(4)-1 under the Advisers Act (Marketing Rule). The allegations in these settlements will be familiar: the SEC determined that the five firms advertised hypothetical performance to the general public on their websites. As noted in prior settlements, the SEC takes the view that hypothetical performance should not be included on a firm’s public website, because public website disclosure does not allow firms to ensure that (through the adoption and implementation of policies and procedures) the hypothetical performance is “relevant to the likely situation and investment objectives of each advertisement’s intended audience”, as required under the Marketing Rule.

SEC Fines Adviser for Off-Channel Communications

Apr 05 2024

By: Lance C. Dial and Pablo J. Man

On 3 April 2024 the SEC announced the first off-channel communications settlement with a registered investment adviser who was not otherwise affiliated with a broker-dealer. This settlement provides new insight into how the SEC views adviser’s recordkeeping obligations, which are narrower than broker-dealer regulatory requirements.

Out of the Shadows: SEC Shines a Light on Insider Trading

Apr 01 2024

By: Neil T. Smith, Hayley Trahan-Liptak, and Sophia A. Khan

The traditional understanding of how the government charges insider trading is evolving, as the Securities and Exchange Commission (SEC) pushes to expand the scope of what constitutes misappropriation of material non-public information (MNPI) under Rule 10b-5.

The SEC Narrows the Internet Adviser Exemption

Mar 28 2024

By: Jennifer L. Klass, Matthew J. Rogers, and Bradley D. Bostwick

On 27 March 2024, the US Securities and Exchange Commission (SEC) adopted amendments (the Amendments) to Rule 203A-2(e) under the Investment Advisers Act of 1940, known as the “Internet Adviser Exemption.” The Internet Adviser Exemption allows certain advisers that provide investment advice through an interactive website (Internet Advisers) to register with the SEC, even if they do not have enough assets under management to otherwise qualify for federal registration.

SEC’s Increased Focus on “AI Washing:” Charges Announced Against Two Investment Advisers for Violations of the Marketing Rule

Mar 27 2024

By: Matthew Rogers and Annabelle North

Following up on its previously-issued Investor Alert warning investors on the use of so-called “AI washing” by advisers in their marketing materials, the Securities and Exchange Commission (SEC) announced on 18 March 2024 the settlements of charges against two investment advisers for “making false and misleading statements about their purported use of artificial intelligence (AI).”

NAPFM, AIMA, and MFA File Complaint Against SEC’s New Dealer Rule

Mar 20 2024

By: Richard F. Kerr, Eden L. Rohrer, Jessica D. Cohn, and Raymond F. Jensen

On 18 March 2024, the National Association of Private Fund Managers, Alternative Investment Management Association, Limited and Managed Funds Association (together, Plaintiffs) jointly filed a complaint (Complaint) against the US Securities and Exchange Commission (SEC) alleging that the SEC’s newly adopted final rule (Dealer Rule) vastly overstepped and expanded the SEC’s authority. The Complaint, which was filed in federal court in Texas, details how the Dealer Rule, expanding those industry participants who would be “dealers” under the Securities Exchange Act of 1934, is overbroad and was adopted in violation of the Administrative Procedures Act.

CFTC Requests Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets

Jan 30 2024

By: Cheryl L. Isaac, Matthew J. Rogers, and Benjamin C. Skillin

On 25 January, 2024, multiple Divisions of the Commodity Futures Trading Commission (CFTC) issued a Request for Comment (RFC) on the use of Artificial Intelligence (AI) in CFTC-regulated derivatives markets. The RFC seeks information on the current and potential uses of AI as well as the risks associated with using it. The RFC is intended to complement the Biden Administration’s Executive Order urging federal agencies to promote the safe, secure, and trustworthy development of AI. The CFTC staff views the RFC as an opportunity to “identify the highest priorities and return-on-investment projects with AI use cases” and enhance the CFTC’s data-driven approach to policy, surveillance, and enforcement.

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