Client Alert

2019 SEC Regulatory Summary – Advisers and Funds

31 Dec 2019

Before closing the books on 2019, registered investment advisers and funds should take a look back at the activity undertaken by the SEC and its staff in the past year and carefully consider steps to be taken to implement new and amended regulations adopted by the SEC throughout the year. The start of a new year is also a good time to evaluate what remains on the SEC’s regulatory agenda.

Regulatory Activity 2019

2019 was a busy year for the SEC staff across several Divisions.  Set forth below is a summary of key regulatory activity that will affect advisers and funds.


Rule 6c-11 – Exchange Traded Funds

December 23, 2019.

The release also addresses conforming amendments to Forms N-1A, N-8B-2 and N-CEN; filings made after December 22, 2020 must utilize the amended Forms.

ETFs that are registered as open-end funds (other than leveraged/inverse funds, “share class ETFs” or non-transparent ETFs) will be able to operate without obtaining exemptive relief. Effective December 23, 2020, the SEC will rescind existing exemptive relief, requiring existing ETFs organized as open-end funds to update their operations and compliance infrastructure to reflect the requirements of the Rule rather than individual exemptive orders. The SEC recently proposed to amend Rule 6c-11 to include leveraged/inverse ETFs (see below). 

Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships

October 3, 2019.

The SEC amended its auditor independence rules related to auditors that have a lending relationship with shareholders of an audit client at any time during an audit or professional engagement. Among other things, the amendments replace the existing 10% bright-line shareholder ownership test with a “significant influence” test and exclude from the definition of “audit client,” for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client as a result of such lending relationships.

Form CRS Relationship Summary

September 10, 2019.

RIAs may file their initial Form CRS with the SEC between May 1, 2020 and June 30, 2020.  Initial Form ADVs filed after June 30, 2020 must include the Form CRS. Firms must deliver the Form CRS to new and prospective clients as of June 30, 2020 and to existing clients no later than July 31, 2020.

RIAs and broker-dealers will be required to provide retail investors with a client relationship summary[1] (that must also be filed by RIAs as Part 3 of Form ADV). The summary should inform retail investors about (i) the types of client relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) any reportable legal or disciplinary history related to the firm or its financial professionals; and (iv) how to obtain additional information about the firm. The final rule imposes significant length, formatting and content restrictions on Form CRS and encourages the use of electronic “layering” of information when delivering the Form CRS electronically. The Form also requires firms to address required items in the order listed (similar to the existing Part 2A brochure) and imposes certain design elements.  

Standard of Conduct for Investment Advisers

July 12, 2019. 

This interpretive release set forth the SEC’s expectations with respect to the fiduciary duty owed by an investment adviser to its clients. The release reaffirms that such fiduciary duty is comprised of a duty of care and a duty of loyalty and applies to the entire adviser-client relationship. An adviser may set forth the scope of a client relationship in an agreement after full and fair disclosure and informed consent, but the fiduciary duty may not be waived.





Amendments to Auditor Independence Rules

Comments due 60 days after publication in the Federal Register.

The proposed amendments would focus the analysis of an auditor’s independence on relationships that pose threats to an auditor’s objectivity. Among other things, the proposed rules would amend the definition of an affiliate of an audit client to address certain affiliate relationships in common control scenarios and the definition of investment company complex. The proposed rules would also replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence.

Amendments to the Accredited Investor Standard

Comments due 60 days after publication in the Federal Register.

The proposed amendments could meaningfully expand potential investors in private offerings (including private funds) by (i) allowing natural persons to qualify as accredited investors based on such person holding, in good standing, certain professional certifications, designations, or credentials, or being a “knowledgeable employee,” (ii) adding LLCs to the list of entities that may qualify, and (iii) adding a “catch-all” category for unspecified entities.   

Use of Derivatives by Registered Investment Companies

Comments due 60 days after publication in the Federal Register.

The SEC re-proposed Rule 18f-4, which would impose requirements on the use of derivatives by registered investment companies (other than money market funds and UITs). The Rule would require a fund using more than a de minimis amount of derivatives to adopt a derivative risk management program and appoint a derivative risk manager. Such funds would limit leverage based on a fund’s value at risk (“VaR”) relative to a designated reference index. Certain leveraged/inverse investment vehicles would be excluded from the leverage risk limits in the Rule would impose specific sales practices with respect to the use of such leveraged/inverse funds in retail accounts. The proposal would also amend Rule 6c-11 to apply to leveraged/inverse ETFs. 

Investment Adviser Advertisements and Solicitation Agreements

Comments due
February 10, 2020.

The SEC proposed amendments to the investment adviser advertising rules by (i) amending the definition of “advertisement” to reflect changes in technology and industry practices, (ii) expanding the general prohibitions applicable to investment adviser advertisements, (iii) permitting testimonials, endorsements and third-party ratings subject to certain conditions, (iv) clarifying the use of gross versus net performance in retail and non-retail advertisements, (v) clarifying the use of certain performance information, including hypothetical and back-tested performance, as well as performance results of a subset of portfolio holdings, and (vi) requiring review and written approval of advertisements. Among other things, the proposed changes to the solicitation rule would expand the Rule to cover all types of compensation (i.e., not only cash) and the solicitation of current and prospective investors in private funds. 

Amendments to Procedures with Respect to Applications under the Investment Company Act

Comments were due
November 29, 2019.

The SEC proposed changes to Rule 0-5 under the Investment Company Act to establish expedited review procedures for obtaining exemptive relief that is substantially identical to exemptive relief that the SEC has recently provided (a “routine application”). The proposal would also establish an informal 90-day time frame for the SEC staff to act on non-routine applications for exemptive relief and would require the public release of staff comments on applications and related responses.

Securities Offering Reform for Closed-End Investment Companies

Comments were due
June 10, 2019.

As proposed, the new rules would streamline the registration process for closed-end funds (“CEFs”) and business development companies (“BDCs”) to sell securities off the shelf more quickly. BDCs and CEFs with at least $700 million in public float would qualify as well-known seasoned issuers under the Securities Act of 1933, which would allow automatic effectiveness of such funds’ registration statements and related amendments. The proposed rule would remove the requirement for BDCs and CEFs to deliver a final prospectus with or prior to each sale of shares if the final prospectus is filed with the SEC and would allow BDCs and CEFs to rely on exemptions for communicating with investors without violating “gun-jumping” rules. Finally, CEFs would be required to provide information regarding, among other things, fees and expenses in annual shareholder reports and would be required to report material developments on Form 8-K under the Securities Exchange Act of 1934.

Reopening of Comment Period for Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts

Comments were due
March 15, 2019.

The proposal (originally published in October 2018) would enable life insurance companies issuing variable annuity contracts and variable life insurance contracts to provide offerees a brief disclosure document backed by electronic access to a full statutory prospectus on the company’s website. The proposal would also allow electronic delivery of underlying fund prospectuses and the use of a summary updating prospectus.


What may be on the regulatory agenda in 2020?

The SEC staff has identified certain proposed regulations in the SEC’s most recent regulatory flexibility agenda.  Members of the SEC staff have also identified areas of focus that could result in additional regulatory refinements during 2020.  

  • Transfer agents: The SEC staff is considering a proposal to update the current transfer agent regulatory regime. The SEC published advance notice of this rulemaking and a related concept release in December 2015, noting that the transfer agent regulations have remained essentially unchanged since adoption in 1977. Comments on the advance notice were due in April 2016, but the staff continued to receive comments until at least April 2018. 
  • Investment company shareholder reports: The Division of Investment Management is actively working on a proposal to streamline shareholder reports for registered investment companies. 
  • Custody rule: Rule 206(4)-2 under the Investment Advisers Act (the “Custody Rule”) was last amended in 2009 and, since then, has been the subject of on-going staff guidance and numerous enforcement actions. The staff of the Division of Investment Management is considering amendments to the Custody Rule that would improve, streamline and modernize the regulations governing custody of client funds or securities by investment advisers.
  • Rule 13F thresholds: The SEC staff is considering amendments to the thresholds for Form 13F filers.
  • Valuation guidance for funds: Valuation guidance under the Investment Company Act is dated. The last time the SEC provided significant guidance in this area was in an accounting release in 1970, but the use of more complex instruments and technological advances in the intervening years, together with interpretations of existing guidance by SEC staff in enforcement and regulatory releases, makes valuation compliance challenging. The staff should consider a proposal to streamline and refine the existing regulatory guidance.  
  • Affiliated securities lending: The Division of Investment Management has established a team to consider the ability of registered funds to use affiliated securities lending agents and the resulting conflicts of interest. Among other things, the staff has asked for input on whether a fund should be limited in its ability to use an affiliated securities lending agent and whether additional disclosure regarding these programs would be useful for fund investors.


The compliance staff of investment advisers and funds are busy ensuring that their firms are prepared for new rules and forms that will be effective in 2020, but the SEC staff does not seem to be slowing down. Compliance officers (as well as operational teams and service providers) are in store for another busy year in 2020 and should ensure they are well staffed to address the changes ahead.   

[1] Registered broker-dealers must also comply with Regulation Best Interest (“Reg BI”) which sets forth a standard of conduct for broker-dealers and natural persons who are associated with a broker-dealer.  Reg BI was effective September 10, 2019 and broker-dealers must be in compliance by June 30, 2020.



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