Compliance Matters Q2 2023

Oct 20, 2023

A compendium of regulatory matters for Q2 2023


Money Market Fund Reforms

On July 12, 2023, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to certain rules, including Rule 2a-7, that govern money market funds under the Investment Company Act of 1940, as amended (“1940 Act”). The amendments increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress.

The SEC stated that the purpose of the amendments is to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders. Specifically, the amendments:

  • Require certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors.
  • Specify how money market funds must calculate weighted average maturity and weighted average life
  • Increase the daily liquid asset and weekly liquid asset minimum requirements to 25% and 50%, respectively.
  • Require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets unless the fund’s liquidity costs are de minimis.
  • Require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund.
  • Amended certain reporting requirements on Form N-MFP and Form N-CR and made certain conforming changes to Form N-1A to reflect amendments to the regulatory framework for money market funds.

In addition, the SEC is addressing how money market funds with stable net asset values may handle a negative interest rate environment, including by adopting amendments that will permit these funds to use share cancellation, subject to certain conditions.

The amendments to various forms are effective June 11, 2024. The compliance date for the mandatory liquidity fee framework is twelve months after the effective date of the final amendments to Rule 2a-7. There is a six-month compliance date for non-government money market funds to comply with the amended discretionary liquidity fee framework. There compliance date for the following amendments is six months after the effective date of the amendments to rule 2a-7.

Amendments to Modernize Share Repurchase Disclosure

On May 3, 2023, the SEC adopted amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The amendments require additional detail regarding the structure of an issuer’s repurchase program and its share repurchases, require the filing of daily quantitative repurchase data either quarterly or semi-annually, and eliminate the requirement to file monthly repurchase data in an issuer’s periodic reports. The amendments also revise and expand the existing periodic disclosure requirements about these repurchases. Finally, the amendments add new quarterly disclosure in certain periodic reports related to an issuer’s adoption and termination of certain trading arrangements. The rule is effective on July 31, 2023.

34-97424-fact-sheet.pdf (

Amendments to Enhance Private Fund Reporting (Form PF)

On May 3, 2023, the SEC adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds to require event reporting upon the occurrence of key events. The amendments also require large private equity fund advisers to provide additional information to the SEC about the private equity funds they advise. The reporting requirements are designed to enhance the Financial Stability Oversight Council’s (“FSOC”) ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts. The rule is effective on June 11, 2024, except for the amendments to Form PF sections 6 and 6 which are effective on December 11, 2023.

ia-6297-fact-sheet.pdf (


Comment Period Reopened for Proposed Changes to Beneficial Ownership Reporting Requirements

Section 13(d) of the Exchange Act requires any person or group of persons that owns or acquires beneficial ownership of more than 5% of any class of equity securities that are registered under the Exchange Act to file reports with the SEC on Schedule 13D. Alternatively, Section 13(g) of the Exchange Act requires any person or group that has the same 5% or more beneficial ownership, but who falls within an exemption or exclusion from section 13(d) or not otherwise required to file Schedule 13D, to file short-form ownership reports with the SEC on a Schedule 13G instead.

The SEC has proposed changes to the rules and regulations related to Sections 13(d) and 13(g) of the Exchange Act. These changes include;

  • Accelerating filing deadlines- reducing the deadline to report changes to 5% beneficial ownership from 10 days to 5 days for Schedule 13D and generally accelerating the filing deadlines for Schedule 13G.
  • Include cash-settled derivative securities- expanding the rules and regulations to apply to certain derivative securities that are acquired with control intent and count these derivatives toward the 5% beneficial ownership threshold.
  • Clarify the meaning of a “group”- clarify the circumstances under which two or more persons have formed a “group” subject to beneficial ownership reporting obligations.
  • Provide new exemptions from the term “group”- provide new exemptions to permit certain persons to communicate and consult with each other, jointly engage issuers, and execute certain transactions without being subject to regulation as a “group.”
  • Require the use of iXBRL- require Schedule 13D and 13G be filed using a structured, machine-readable data language.

SEC Chair Gary Gensler said, “these amendments would update our reporting requirements for modern markets, reduce information asymmetries, and address the timeliness of Schedule 13D and 13G filings.” Mr. Gensler also discussed that the current 10-day window in which to file Schedule 13D withholds potentially market moving information from other shareholders, thus creating an asymmetry of information between the investors required to file and other shareholders. He explained that the rule proposals address this potential market moving information asymmetry and its potential material impact on share price.

On April 28, 2023, the SEC reopened its comment period on the proposed amendments to the rules governing beneficial ownership reporting. The reopening of the comment period was accompanied by a memo from the staff of the SEC’s Division of Economic and Risk Analysis that details the current economic impact of the existing rule and the impact of the proposed rule changes. The intention of this SEC staff memo was to support the proposed accelerated five-day filing deadline for Schedule 13D. | SEC Reopens Comment Period for Proposed Rule Amendments to Modernize Beneficial Ownership Reporting | SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting


SEC Issues Risk Alert Concerning LIBOR-Transition Preparedness

On May 11, 2023, the SEC Division of Examinations (“DOE”) published a Risk Alert focused on exams of registered investment advisers and investment companies to assess firms’ preparedness for the cessation of U.S. Dollar LIBOR. The Risk Alert was intended to remind firms of the June 30, 2023, cessation date and summarize some observations from the DOE staff based upon recent firm examinations.

SEC Releases Spring 2023 Regulatory Agenda

On June 13, 2023, the SEC’s Office of Information and Regulatory Affairs released the Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions. “Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” said Chair Gary Gensler.

Agency Rule List – Spring 2023 (

Safeguarding Customer Records and Information at Branch Offices

On April 26, 2023, the DOE published a Risk Alert to highlight the importance of establishing written policies and procedures for safeguarding customer records and information at branch offices. While many broker-dealers and investment advisers have implemented safeguarding policies and procedures at their main office, DOE found that some firms did not adopt or implement written policies and procedures that address safeguards for their branch offices despite the existence of the same or similar risks. In some cases, this failure has resulted in firms falling victim to cybersecurity and data breaches. The Safeguards Rule of Regulation S-P (the “Safeguards Rule”) requires firms to adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information.

DOE staff also observed similar weaknesses where branch offices did not implement policies and procedures for safeguarding customer records and information that had been implemented for their main office, specifically in the areas of vendor management, email configuration, data classification (to identify where customer records and information were stored electronically), access management, and technology risk policies and procedures for inventory management, patch management, and vulnerability management.


SEC Brings Suit Against Independent Trustees, Adviser and Registered Fund Officers with respect to Violations of the Liquidity Rule

On May 5, 2023, the SEC announced charges against an investment adviser for aiding and abetting Liquidity Rule violations by a mutual fund it advised and whose Liquidity Risk Management Program it administered. The SEC also charged the fund’s two independent trustees and two officers of both the adviser and of the fund it advised, with aiding and abetting Liquidity Rule violations by the fund. A third trustee agreed to settle charges that he caused and willfully counseled the fund’s violations.

The action is the first-ever case enforcing the Liquidity Rule, which prohibits mutual funds from investing more than 15% of their net assets in illiquid investments, requires funds to take certain prompt remedial steps if they hold illiquid investments above this percentage limit, and requires funds to adopt a liquidity risk management program to assess their liquidity risk.

The SEC’s complaint alleges that, from June 2019 to June 2020, the fund held approximately 21 to 26 percent of its net assets in illiquid investments. According to the complaint, the adviser its officers classified the fund’s largest illiquid investment as a “less liquid” investment, ignoring restrictions, transfer limitations, and the absence of any market for the shares, and disregarding the advice of fund counsel and auditors. The SEC alleges that the adviser and its officers did not present the fund’s board with a plan to reduce the fund’s illiquid investments to 15% or lower or make required filings with the SEC, as required by the Liquidity Rule. The complaint also states that the officers and an interested trustee misled the SEC’s Division of Investment Management about the basis for the fund’s liquidity classifications. According to the complaint, the fund’s board had oversight responsibilities regarding the fund’s Liquidity Risk Management Program, and the independent trustees, who knew that the shares were restricted and illiquid, aided and abetted the fund’s violation by recklessly failing to exercise reasonable oversight of the fund’s program.

“The Liquidity Rule provides substantive protections to shareholders of open-end funds,” said Sheldon L. Pollock, Associate Regional Director in the SEC’s New York Regional Office. “Trustees must exercise oversight on behalf of shareholder interests, and the Commission will hold trustees accountable when they fail to fulfill the most basic requirements under the applicable rules.”

The SEC’s complaint seeks permanent injunctions and civil money penalties. The fund is now a liquidating trust and is not separately charged.

Without admitting or denying the SEC’s findings, the interested trustee consented to an order requiring him to cease and desist from violations of the Liquidity Rule and pay a civil penalty of $20,000, and suspending him from association with any investment adviser, registered investment company, and others for six months.

The SEC also announced charges against an affiliate of the adviser for making false and misleading statements in its Form ADV brochure regarding reviews of advisory client accounts and failing to disclose certain conflicts of interests, adopt and implement related policies and procedures, and deliver to clients required information about advisory personnel. Without admitting or denying the SEC’s findings, the affiliate consented to an order requiring it to cease and desist from violations of the antifraud and other provisions of the Investment Advisers Act of 1940, as amended, a censure, and disgorgement and a civil penalty totaling approximately $476,000.

Pinnacle Advisors, LLC, Robert F. Cuculich, Benjamin Quilty, Mark E. Wadach and Lawton A. Williamson (

SEC Charges Adviser for Valuation Compliance Failures

In May 2023, the SEC settled charges against Sciens Diversified Managers, LLC and its predecessor (advisers to private funds), for compliance failures concerning the valuation of fund investments. Sciens had investments in certain companies or assets for which there often was no readily available market pricing information or significant observable inputs. The order found that, for several years, Sciens’s written policies and procedures were not reasonably designed and provided insufficient guidance to value these investments in accordance with Generally Accepted Accounting Principles and other standards set forth in the funds’ offering documents. Sciens was found to have violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder and consented to a cease-and-desist order, censure and the payment of a civil penalty of $275,000 and agreed to retain an independent compliance consultant. With the SEC’s recent adoption of Rule 2a-5 under the Investment Company Act of 1940, a greater burden has been placed on investment advisers to button up their valuation policies, procedures and processes. We can expect to see more of these types of cases going forward. Ultimus has been very proactive with clients to assist in establishing and implementing fair valuation policies, procedures and reporting requirements for their funds, and welcomes any adviser inquiries in this regard.

SEC Charges Binance Entities and Founder Changpeng Zhao with Operating as Unregistered Securities Exchange, Broker and Clearing Agency

On June 5, 2023, the SEC charged Binance Holdings Ltd. (“Binance”), which operates the largest crypto asset trading platform in the world,; U.S.-based affiliate, BAM Trading Services Inc. (“BAM Trading”), which, together with Binance, operates the crypto asset trading platform, Binance.US; and their founder, Changpeng Zhao, with a variety of securities law violations.

Among other things, the SEC alleges that, while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the platform. Further, the SEC alleges that, while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for U.S. investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes.

The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain. The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, Inc. (“BAM Management”) misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume. Further, the Complaint alleges that the defendants concealed the fact that it was commingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Zhao.

The Complaint also charges violations of critical registration-related provisions of the federal securities laws:

  • Binance and BAM Trading with operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
  • Binance and BAM Trading with the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program; and
  • Zhao as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.

SEC Charges Coinbase for Operating as Unregistered Securities Exchange, Broker and Clearing Agency

On June 6, 2023, the SEC charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.

According to the SEC’s complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law. Through these unregistered services, Coinbase allegedly:

  • Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
  • Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and
  • Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.

As alleged in the SEC’s complaint, Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.

The SEC’s complaint also alleges that Coinbase’s holding company, Coinbase Global Inc. (CGI), is a control person of Coinbase and is thus also liable for certain of Coinbase’s violations.

SEC Charges Adviser for Disclosure and Policies and Procedures Failures

On June 16, 2023, the SEC announced that a registered investment adviser will pay $9 million to settle two enforcement actions relating to disclosure and policies and procedures violations involving two funds it advises.

In the first action, the SEC found that, from September 2014 to August 2016, the adviser failed to disclose material information to investors concerning the use by a fund of interest rate swaps and the material impact of the swaps on the fund’s dividend.

In the second action, the SEC found that, from April 2011 to November 2017, the adviser failed to waive approximately $27 million of advisory fees as required by its agreement with a fund. Additionally, until at least 2018, the adviser did not have adequate written policies and procedures concerning its oversight of advisory fee calculations and related fee waivers. The adviser has since disbursed to investors the $27 million in fees that should have been waived, plus interest and a performance adjustment.

“These cases highlight our continued focus on ensuring that firms adequately disclose material information and implement reasonably designed policies and procedures,” said Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit.

In the first action, the SEC’s order finds that the adviser violated Section 206(4) of the Advisers Act and Rule 206(4)-8 and Section 34(b) of the Investment Company Act of 1940. In the second action, the SEC’s order finds that the adviser violated Section 206(4) of the Advisers Act and Rule 206(4)-7. Without admitting or denying the SEC’s findings, the adviser agreed to a cease-and-desist order and a censure in each action and to pay a combined $9 million penalty.

SEC Charges Private Equity Fund Adviser for Overcharging Fees and Failing to Disclose Fee Calculation Conflict

On June 20, 2023, the SEC charged an investment adviser with charging excess management fees and failing to disclose a conflict of interest to investors relating to its fee calculations. To settle the SEC’s charges, the adviser agreed to pay a $1.5 million penalty and $864,958 in disgorgement and prejudgment interest, which has already been paid back to the impacted funds.

According to the SEC’s order, the adviser’s limited partnership agreements for certain funds it advised allowed it to charge management fees based on the funds’ invested capital in individual portfolio investments and required it to reduce the basis for these fees if the adviser determined that one of these portfolio investments had suffered a permanent impairment. The order finds that, from August 2017 through April 2021, the adviser charged excess management fees by inaccurately calculating management fees based on aggregated invested capital at the portfolio company level instead of at the individual portfolio investment security level, as required by the applicable limited partnership agreements. Further, the SEC’s order finds that the adviser failed to disclose to investors a conflict of interest in connection with its permanent impairment criteria. Because the adviser did not disclose its permanent impairment criteria, investors were unaware that the criteria the adviser used were narrow and subjective, making them difficult to satisfy. Therefore, the order finds that the adviser’s investors were unaware that the adviser’s permanent impairment criteria granted it significant latitude to determine whether an asset would be considered permanently impaired so as to reduce the basis used to calculate the adviser’s management fees.

“Investment advisers must accurately calculate their fees in accordance with the fund documents,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Moreover, when advisers employ fee calculation policies that create conflicts of interest, including permanent impairment policies, they must disclose those conflicts just like all other material conflicts.”

The adviser consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder. Without admitting or denying the SEC’s findings, the adviser agreed to a cease-and-desist order and censure and to pay the previously mentioned penalty, disgorgement, and prejudgment interest. The SEC’s order deems the disgorgement and prejudgment interest satisfied by the adviser’s payment back to the impacted funds last month.

SEC Charges Advisory Firm and Part-Owner for Breach of Fiduciary Duty in Connection with Use of leveraged ETFs.

A North Dakota-based registered investment adviser and its partial owner agreed to pay $933,341 in disgorgement, prejudgment interest, and civil penalties as a result of a settlement with the U.S. Securities and Exchange Commission (the “SEC”) arising out of alleged breaches of fiduciary duty relating to investments in leveraged ETFs. The prospectuses of these leveraged ETFs included warnings that these products carried unique risks, required frequent monitoring, and were designed to be held for no more than a single trading day. According to the SEC, rather than adhering to these parameters, the adviser invested clients’ assets in these instruments for extended periods of time and in significant concentrations, and the accounts experienced substantial losses as a result. It was the SEC’s view that investing in these ETFs in this manner demonstrated that the adviser and its owner did not properly understand the nature of these investments and, consequently, breached their fiduciary duty.

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