Fri, Jul 3, 2020

U.S. Securities and Exchange Commission Update - Second Quarter 2020

The Compliance and Regulatory Consulting practice outlines the Security and Exchange Commission’s (SEC) recent updates, announcements, proposed amendments, observations and examination priorities from the second quarter of 2020.

COVID-19 Market Monitoring Group – Update and Current Efforts

“On April 24, 2020 the Securities and Exchange Commission announced the formation of an internal interdisciplinary COVID-19 Market Monitoring Group. This temporary, senior-level group will assist the Commission and its various divisions and offices in (1) Commission and staff actions and analysis related to the effects of COVID-19 on markets, issuers, and investors—including Main Street investors, and (2) responding to requests for information, analysis and assistance from fellow regulators and other public sector partners.

The COVID-19 Group will also assist and support the COVID-19-related efforts of other federal financial agencies and bodies, including the President’s Working Group on Financial Markets (PWG), the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB).” 1

Read more in the SEC’s press release here.

SEC Adopts Offering Reforms for Business Development Companies and Registered Closed-End Funds

On April 8, 2020 the SEC voted to adopt rule amendments to implement certain provisions of the Small Business Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Protection Act relating to business development companies (BDCs) and other closed-end funds.

The amendments allow BDCs and other closed-end funds to use the securities offering rules that are currently available to operating companies. The amendments are created to streamline the registration, offering and investor communications processes for BDCs and registered closed-end funds and will provide benefits to market participants and investors, including advancing capital formation and modernizing disclosures. As a result, eligible funds will be better able to respond to market opportunities.

The reforms include changes that supplement the specific amendments mandated by Congress. These changes are designed to better align the modern immediately effective or automatically effective offering process with the structures of the newly eligible funds. They also include disclosure and new structured data requirements that will make it easier for investors and others to analyze fund data.

Most of the amendments will become effective on Aug. 1, 2020.

Read more here.

Risk Alert: Examinations Focusing on Regulation Best Interest and Form CRS

On April 7, 2020 the Office of Compliance Inspections and Examinations (OCIE) published two risk alerts regarding examinations that focus on compliance with Regulation Best Interest (Reg BI) and examinations that focus on compliance with Form Client Relationship Summary (Form CRS).

The OCIE will likely begin examinations to assess the implementation of Reg BI during the first year after the compliance date. The risk alert includes information and documentation connected with each of the four component obligations that can be used to evaluate whether firms have established and implemented policies and procedures reasonably designed to achieve compliance with Reg BI.

For further information regarding Reg BI examinations, read the entire report here.

Form CRS and its related rules require firms to deliver to retail investors a brief customer or client relationship summary (relationship summary) that provides information about the firm. Firms must file an initial relationship summary with the SEC and post it to the firm’s public website (if the firm has one) by June 30, 2020. After filing the relationship summary, any new and prospective clients must promptly receive it. Additionally, all existing clients must receive the relationship summary within 30 days from the filing date. Should an adviser file the relationship summary on the June 30, 2020 filing due date, all existing clients must receive the relationship summary no later than July 30, 2020.

For further information regarding Form CRS examinations, read entire report here.

Read the Duff & Phelps summary here.

SEC Proposes Fund Valuation Practice Modernization

On April 21, 2020 the SEC proposed a new rule focused on fund valuation practices. If adopted, the rule will be applicable to all registered investment companies and BDCs. Existing SEC valuation rules date back to 1969 and 1970. SEC Chairman Jay Clayton stated, “Today’s proposal would improve valuation practices, including oversight, thereby protecting investors and improving market efficiency, integrity and fairness.”2

The new rule highlights that “to determine the fair value of fund investments in good faith requires a certain minimum, consistent framework for fair value and standard of baseline practices across funds.” The SEC states that “in addition to providing requirements for estimating fair value in good faith, the proposed rule is designed to provide boards and advisers with a consistent, modern approach, to the allocation of fair value functions” 2 while maintaining the oversight role and statutory duty boards are expected to fulfill.

Public market volatility and economic uncertainty resulting from the COVID-19 pandemic highlight the need for experienced, independent and informed judgement with estimating fair value. Alternative investment managers best serve their investors by providing relevant, reliable and transparent information. The SEC’s proposed rule to modernize the valuation framework should further assist investors by improving overall fair value policies and processes.

The SEC is seeking comments on the proposal by July 21, 2020.

Read more here.

SEC Adopts Amendments to Financial Disclosures about Acquired and Disposed Businesses

The SEC voted on May 21, 2020 to adopt amendments to the rules that govern Regulation S-X for financial disclosures concerning the acquisition and disposition of certain businesses.

The amendments will make the following changes, among others:

  • Update the significance tests;
  • Expand the use of pro forma financial information in measuring significance;
  • Conform the significance threshold and tests for a disposed business to those used for an acquired business;
  • Shorten the required look-back period for the financial statements of the acquired business to cover no more than the two most recent fiscal years;
  • No longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition audited annual financial statements for either nine months or a complete fiscal year, depending on significance; and
  • Permit the use of, or reconciliation to, International Financial Reporting Standards (IFRS) in certain circumstances.

Read more here.

SEC Adopts Temporary Amendments to Regulation Crowdfunding

Given the current environment, the SEC announced on May 4, 2020 that it is providing temporary relief for smaller companies affected by COVID-19 by relaxing Regulation Crowdfunding requirements. This will follow suggestions made by members of the SEC's Small Business Capital Formation Advisory Committee and, according to the SEC, “will expedite the offering process for eligible companies by providing relief from certain rules with respect to the timing of a company's offering and the financial statements required. To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between the effective date of the temporary rules and Aug. 31, 2020.” 3

The temporary relief enables issuers to meet Regulation Crowdfunding requirements to close an offering sooner than expected. The SEC states, “the temporary rules are the latest in a series of steps the Commission has taken to assist financial market participants in addressing the impacts of the COVID-19.” 3

Read more here.

Risk Alert: Examination Initiative: LIBOR Transition Preparedness

On June 18, 2020 the OCIE said that registrant preparedness for the transition away from LIBOR will be an examination program priority for FY 2020. LIBOR, formerly the London Interbank Offered Rate, is used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives.

The OCIE intends to examine registrants to assess their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate. This OCIE risk alert provides registrants with additional information about the scope and content of these examinations.

Read more here.

SEC Extends Relief for Fund Board Virtual Meetings

The SEC announced on June 19, 2020 that it is extending conditional relief from the in-person voting requirements for fund boards through December 31, 2020 at the earliest. The extension is designed to provide flexibility to boards of registered funds and BDCs that may continue to face challenges meeting in-person. 

The SEC initially waived in-person board meeting requirements in March as part of broader exemptive orders providing temporary relief from several requirements of the Investment Company Act and Investment Advisers Act. Based on staff outreach to fund and adviser representatives, the SEC will not to extend the other relief provided in those orders. The SEC and its staff continue to assess COVID-19’s impact on investors and market participants. Firms and financial professionals affected by COVID-19 are encouraged to contact SEC staff with questions and concerns.

Read more here.

Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds

On June 23, 2020 the OCIE published a risk alert identifying common compliance deficiencies in examinations of private fund advisers. The risk alert addresses three areas where deficiencies were found: conflicts of interest, fees and expenses and policies and procedures relating to material nonpublic information.

Under Section 206, OCIE staff identified deficiencies surrounding the disclosure of certain conflicts of interest for conflicts related to:

  • Allocation of investments;
  • Multiple clients investing in the same portfolio;
  • Financial relations between investors or clients and the adviser;
  • Preferential liquidity rights;
  • Private fund adviser interests in recommended investments;
  • Co-investments;
  • Service providers;
  • Fund restructurings; and
  • Cross-transactions.

Under Section 206, OCIE staff identified the following deficiencies concerning fees and expenses:

  • Allocation of fees and expenses;
  • Disclosure regarding the role and compensation of operating partners;
  • Valuation; and
  • Monitoring/board/deal fees and fee offsets.

Under Section 204A, or the Code of Ethics Rule, OCIE staff noted the following deficiencies:

  • Failure to establish, maintain and enforce written policies and procedures to prevent the use of MNPI.

Read more here.


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With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.

Retained Compliance Support and Managed Services

With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.

Retained Compliance Support and Managed Services

With expertise in diverse regulatory frameworks, including the FCA, the SEC, AMF, SFC, MAS and more, Kroll offers practical support, from initial authorization to ongoing compliance support.