The Securities and Exchange Commission (SEC) has a very ambitious rulemaking agenda for 2023 when it comes to enhancing the regulation of private fund advisers.
The SEC plans to finalize dozens of new rules and amendments that are aimed at strengthening compliance requirements, improving disclosures, mitigating conflicts of interest, and enhancing investor protections.
This article will provide an overview of the key proposals, explain why further oversight of private funds is needed, and summarize the likely impact of the changes.
Final Rule Requiring Clawback of Erroneously Awarded Executive Compensation
In October 2022, the SEC adopted a final rule requiring public companies to claw back executive compensation that was awarded based on inaccurate financial reporting.
This rule mandates that public companies recoup incentive-based compensation from current or former executives if the company has to restate its financials due to a material error.
The clawback applies to compensation received in the 3 years prior to the restatement. It covers all executive officers, not just the CEO and CFO. Companies will have 1 year from the final rule’s publication to implement compliant clawback policies.
This rule intends to hold executives accountable and deter fraudulent financial reporting. It will likely lead to more rigorous internal controls and processes around awarding executive compensation. Boards should review current clawback provisions and make necessary updates to ensure compliance when the final rule takes effect.
Enhanced Private Fund Reporting
In February 2022, the SEC proposed rules to increase reporting requirements for large hedge fund advisers, private equity advisers, and liquidity fund advisers. The proposed amendments would require these advisers to file current reports regarding certain significant events, provide additional information on Form PF, and allow the SEC to obtain more fund information confidentially.
The additional reporting aims to monitor systemic risks, enforce investor protections, and identify compliance issues in the private funds sector. If finalized, the rules would mandate more disclosures around fees, expenses, leverage, and portfolio company information. Advisers to large private funds can expect more frequent filings and should prepare for expanded and more detailed reporting.
New Cybersecurity Risk Management Rules
Cybersecurity risks have become a major concern for the SEC. In March 2022, the agency proposed rules to combat cyber threats and enhance disclosure around cybersecurity policies and incidents. If adopted, companies would have to report cybersecurity incidents within 4 business days if determined to be material.
The proposals also cover cyber-related risk oversight by boards and disclosure around oversight processes. With cyber-attacks on the rise, these rules intend to keep investors informed on cyber risks and preparedness. Public companies will likely need to reevaluate cyber incident response plans and disclosures to align with the final requirements.
Shortened Timeframe for Beneficial Ownership Reports
In August 2022, the SEC issued a final rule curtailing the reporting window for beneficial ownership on Schedule 13D and 13G filings. The amendment shortens the filing deadline from 10 days to 5 days after crossing the 5% beneficial ownership threshold.
This change provides investors with more timely insight into the accumulation of significant stakes in public companies. Investors who cross the 5% mark will have less time to prepare the necessary disclosures. Companies should also watch for these filings closely to stay current on major shareholders.
Regulation of Security-Based Swap Execution Facilities
In November 2022, the SEC adopted new rules governing the registration and regulation of security-based swap execution facilities (SEFs). These platforms execute transactions in security-based swaps. The rules establish recordkeeping, monitoring, and oversight requirements for SEFs.
Enhanced regulation of SEFs intends to bring more transparency to security-based swap transactions. Entities that operate or participate on SEFs will need to ensure SEC compliance with the new requirements. The rules also provide clarity around the trade execution mandate for security-based swaps.
New Protections for Brokerage Customers
A 2022 SEC proposal aims to require broker-dealers to disclose material conflicts of interest to retail investors. It prohibits certain aggressive sales practices and monetary incentives that could bias recommendations. If finalized, the broker-dealer customer protection rule would also make recommendations subject to a “best interest” standard.
This rule addresses issues highlighted in the GameStop trading saga. It looks to instill greater trust in brokerages by curbing conflicts of interest and sales tactics that could disadvantage retail investors. Broker-dealers will likely need to critically evaluate compensation structures and disclosures around proprietary products if this proposal is adopted.
Shorter Holding Period for Rule 144 Public Resales
In December 2022, the SEC shortened the holding period for restricted securities to be eligible for resale under Rule 144 from 1 year to 6 months. Reducing the holding period provides more liquidity for privately issued securities. Investors may also gain quicker exposure to private growth companies going public.
However, the SEC cautioned that the shortened holding period heightens risks around unlawful distributions of unregistered securities. Companies should ensure sound transfer agent policies and procedures to prevent illegal trading of restricted stock.
Let A Compliance Lawyer Guide You Through Regulatory Changes
The SEC’s rulemaking agenda for 2023 aims to increase transparency, enhance disclosures, curb conflicts of interest, and mitigate systemic risks. Key areas impacted include executive compensation, private funds, cybersecurity, beneficial ownership reporting, security-based swaps, broker-dealers, and public resale of restricted securities.
Staying abreast of the latest compliance obligations and risk factors will be crucial. The final published rules may contain key differences from initial proposals, so closely monitor for finalization. Evaluate your readiness and identify any policy or process changes needed to satisfy new SEC regulations.
As a top RIA compliance law firm, My RIA Lawyer has the knowledge to guide you through ongoing changes to SEC rules. Their team provides legal services tailored to RIAs and financial services firms. They track regulatory developments to make sure your business remains compliant.
Contact their team today to discuss how to navigate the shifting compliance landscape.
