Regulatory Update and Recent SEC Actions – October 2024
October 2024 has seen the Securities and Exchange Commission (SEC) continue its aggressive enforcement actions and regulatory updates, targeting a wide range of issues from improper record-keeping to non-compliance with new marketing rules. This month also saw key personnel changes within the SEC, the disbandment of the Climate and ESG Task Force, and the adoption of rules affecting venture capital funds and registered investment companies. Below are the highlights of recent SEC actions and regulatory developments.
Key Personnel Changes
Keith E. Cassidy Named Interim Acting Director of SEC Examinations Division
Following the medical leave of Richard Best, Director of the Division of Examinations, Keith E. Cassidy has been named Interim Acting Director of the Division. Richard Best is expected to return as a Senior Adviser once his medical leave concludes.
Departure of Enforcement Director Gurbir S. Grewal
Gurbir S. Grewal, the SEC’s Enforcement Director, will step down on October 11, 2024. His departure comes at a pivotal time for the Enforcement Division, which remains at the forefront of cracking down on regulatory violations. Sanjay Wadhwa, the Deputy Director, will serve as Acting Director.
Significant SEC Enforcement Actions
$390 Million in Fines for Off-Channel Communications Violations
The SEC has fined 26 broker-dealers, investment advisers, and dual registrants a total of $390 million for widespread failures to retain electronic communications. The violations involved employees using unapproved communication methods like text messaging, WhatsApp, and iMessage to conduct business. Firms were penalized for failing to maintain records and supervise their employees effectively, even though most had policies prohibiting off-channel communications.
Hypothetical Performance Violations: SEC Targets Misleading Marketing Practices
In one of its more high-profile marketing rule enforcement actions, the SEC fined an investment adviser $430,000 for using hypothetical performance data on its public website without implementing required policies to ensure that the data was relevant to the audience's financial objectives. This enforcement action is part of a broader sweep targeting advisers who fail to comply with Rule 206(4)-1 under the Advisers Act.
Pay-to-Play Rule Enforcement Amid Election Season
As the 2024 election season ramps up, the SEC fined an adviser $95,000 for violating the Pay-to-Play Rule (Advisers Act Rule 206(4)-5). The adviser hired a covered associate who had made a $7,150 campaign contribution to a Michigan official six months before joining the firm. Despite requesting a refund of the contribution, the firm violated the two-year "look-back" provision, triggering the penalty. The SEC’s Pay-to-Play Rule restricts advisers from receiving compensation from government clients after making contributions to officials who can influence investment decisions.
SEC Charges Former CEO for Misleading Investors about Compliance Program
On July 1, 2024, the SEC charged a former CEO and CRO for misleading investors about their company’s anti-money laundering compliance. The complaint alleges that the company failed to monitor over $1 trillion in transactions by its crypto customers. The SEC continues to aggressively pursue enforcement in the crypto space, holding executives accountable for compliance failures.
Off-Channel Communications Sweep Continues
In August and September 2024, the SEC announced a new wave of enforcement actions against firms that failed to maintain proper records of off-channel communications. Among these actions was a notable $392.75 million settlement with 26 firms for widespread failures to preserve electronic communications such as texts and instant messages, despite policies prohibiting these practices. The SEC has made it clear that firms need to adapt their communication policies to capture modern communication channels and retain proper records.
Regulatory Updates
ESG Task Force Disbanded
After three and a half years of focusing on environmental, social, and governance (ESG) issues, the SEC announced that its Climate and ESG Task Force has achieved its objectives and will be disbanded. The task force had been instrumental in overseeing ESG-related disclosures and enforcement actions, such as the $25 million settlement with an adviser concerning misstatements in ESG investment processes in 2023.
New Rule for Qualifying Venture Capital Funds
The SEC has updated the dollar threshold for funds to qualify as “qualifying venture capital funds” under the Investment Company Act of 1940. The threshold was increased from $10 million to $12 million, effective September 30, 2024. This inflation-adjusted threshold aligns with the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
Reporting Enhancements for Registered Investment Companies
The SEC has also adopted amendments requiring registered investment companies to file more frequent and detailed reports under Form N-PORT. These amendments, effective in 2025 and 2026, will improve transparency for investors and enhance the SEC's oversight of asset management firms.
Audit Standards for Technology-Assisted Analysis
In August 2024, the SEC approved new PCAOB standards for audits, particularly focusing on the use of technology-assisted analysis. These updates require auditors to exercise professional judgment and comply with independent ethics rules, strengthening the framework for auditing firms that handle technology-heavy sectors like crypto and fintech.
Conclusion
As the SEC continues its strong enforcement push, firms should pay close attention to evolving regulatory requirements and take steps to ensure compliance with marketing rules, record-keeping obligations, and Pay-to-Play restrictions. The personnel changes within the SEC signal continuity in leadership, while recent rules and enforcement actions emphasize the need for firms to stay ahead of regulatory developments in the investment and financial sectors.
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