A compendium of regulatory matters for Q3 2024.

PCAOB Proposes Expansion of Auditor Responsibilities

On May 13, 2024, the Public Company Accounting Oversight Board (the “PCAOB”) announced that it is adopting a new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit, and amending other related PCAOB standards.

The new auditing standard addresses the general responsibilities of the auditor, such as due professional care and professional skepticism, when conducting an audit in accordance with the standards of the PCAOB. AS 1000 and the related amendments modernize, clarify, and streamline the general principles and responsibilities of the auditor and provide a more logical presentation, which should enhance the useability of the standards by making them easier to read, understand, and apply. AS 1000 clarifies the auditor’s responsibility to evaluate whether the financial statements are “presented fairly” and clarifies the engagement partner’s due professional care responsibilities.

In addition, the U.S. Securities and Exchange Commission’s (the “SEC”) approved the PCAOB’s amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Response to the Risks of Material Misstatement, and conforming amendments, to address the use of technology-assisted data analysis in audit procedures. The amendments specify and clarify auditors’ responsibilities when the auditor uses such analytical tools in conducting audits.

The SEC also approved the PCAOB’s amendment to Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, governing the liability of an associated person of a registered public accounting firm who directly and substantially contributes to that firm’s violations of the laws, rules, and standards that the PCAOB enforces. The amendments to Rule 3502 revise from recklessness to negligence the standard for an associated person’s contributory liability, while maintaining the requirement that to be held liable, an associated person must have contributed to the firm’s violation “directly and substantially.”

The new standard and related amendments will apply to all audits conducted under PCAOB standards. Subject to approval by the SEC, the new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024, except that, for registered public accounting firms (“firms”) that provide audit opinions for 100 or fewer issuers (i.e., smaller firms) while the amendment relating to the documentation completion date will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.

SEC.gov | SEC Approves New and Updated PCAOB Audit Standards and an Amendment to the PCAOB’s Contributory Liability Rule

2024-004-AS1000

Amendments Related to Aspects of Designing and Performing Audit Procedures that Involve Technology-Assisted of Information in Electronic Form Marked Rule Text

SEC Announces Spring 2024 Regulatory Agenda

On July 8, 2024, SEC Chair Gary Gensler announced the release of the SEC’s Spring 2024 Regulatory Agenda. The agenda includes regulatory actions that the SEC expects to take between now and April 2025. While the agenda is largely similar to the Fall 2023 Rulemaking Agenda, the Spring 2024 Rulemaking Agenda includes the following items of note:

• Outsourcing by Investment Advisers (To be finalized by Oct. 2024);
• Cybersecurity Risk Management for Investment Advisers and Registered Investment Companies (To be finalized by Oct. 2024);
• Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices (To be finalized by Oct. 2024);
• Fund Fee Disclosure and Reform (To be proposed by April 2025);
• Re-proposals of the following:
  • Safeguarding Advisory Client Assets (To be reproposed by Oct. 2024);
  • Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker- Dealers and Investment Advisers (To be reproposed by Oct. 2024); and
  • Open-End Fund Liquidity Rule Risk Management Programs and Mandatory Swing Pricing; Form N-PORT Reporting (To be reproposed by April 2025).

The Congressional Review Act (the “CRA”) may impact the SEC’s timing of these proposals, as the CRA allows Congress to effectively vacate a final rule issued by a federal agency after an election if a new president is elected, and the new president’s party controls both the House and Senate. The CRA provides a lookback period giving a new Congress the authority to revoke rules in a period looking back up to 60 working days in the Senate or in the House, which may extend to SEC rules finalized in July or August of 2024.

SEC.gov | Statement on the Spring 2024 Regulatory Agenda

SEC Sweep of Advisers’ Compliance with T+1

In a Risk Alert issued in March 2024, the SEC’s Division of Examinations announced its intention to conduct examinations and outreach in connection with amendments to Rule 15c6-1 under the Exchange Act of 1934, as amended (the “1934 Act”) and Rule 204-2 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) relating to the transition to T+1 settlement, which became effective May 28, 2024.

According to K&L Gates, LLP, in July 2024, several registered investment advisers received examination letters from the SEC requesting that the advisers produce information regarding procedures related to their trade affirmation process and associated recordkeeping requirements to assess such firms’ readiness to comply with the new requirements.

risk-alert-tplus1-032724.pdf

SEC Initiates Sweep of Adviser on T+1 Compliance | HUB | K&L Gates

Fee Rate Advisory – Section 6(b) Filing Fee Rate Advisory (effective October 1, 2024)

On August 20, 2024, the SEC announced that the fees that public companies and other issuers pay to register securities will increase from $147.60 per million to $153.10 per million. This fee increase will be effective October 1, 2024. The fee increase is applicable to the registration of the following securities;

• Registration of securities under Section 6(b) of the Securities Act of 1933
• Repurchase of securities under Section 13(e) of the 1934 Act
• Proxy solicitations and specified tender offers under Section 14(g) of the 1934 Act

SEC.gov | Section 6(b) Filing Fee Rate Advisory for Fiscal Year 2025

SEC Adopts Amendments to Forms N-PORT and N-CEN; Issues Guidance on Liquidity Risk Management Programs; Declines to Adopt Swing Pricing

On August 28, 2024, the SEC announced the adoption of amendments to reporting requirements on Forms N-PORT and N-CEN. The amendments improve the SEC’s oversight of the asset management industry and enhance public transparency by:

• Requiring timelier reporting of funds’ monthly portfolio holdings and related information to the SEC to promote more effective regulatory monitoring and oversight of the fund industry for the benefit of fund investors;
• Providing for more frequent public disclosure of funds’ portfolio holdings to help investors make more informed investment decisions; and
• Requiring information about service providers that open-end funds use to comply with liquidity risk management.

In connection with the amendments, the SEC also provided guidance related to open-end fund liquidity risk management program requirements.

In preparation for the upcoming compliance dates of either November 17, 2025 (for larger entities with $1 billion or more in net assets) or May 18, 2026 (for smaller entities with less than $1 billion in net assets), entities should consider the following:

Form N-PORT Filing and Publication Frequency – The Form N-PORT amendments will require funds to file Form N-PORT reports more frequently and in a timelier fashion, specifically, on a monthly basis and within 30 days after the end of each month. The amendments will also increase the publication frequency of funds’ monthly reports, specifically, each monthly report will be public 60 days after the end of the month. Funds will no longer be required to maintain records of this monthly information within 30 days of month-end because the information will be filed with the SEC.

Form N-CEN Liquidity Service Provider Information – The Form N-CEN amendments will require open-end funds that are subject to liquidity risk management program requirements under rule 22e-4 under the Investment Company Act of 1940, as amended (the liquidity rule), to report certain information about service providers used to fulfill those requirements; for example, certain identifying information about the liquidity service providers and the asset classes for which the liquidity service providers are used.

Guidance on Certain Open-End Fund Liquidity Risk Management Program Requirements – The liquidity rule guidance addresses questions raised through outreach and monitoring and relates to: (1) the frequency of classifying the liquidity of fund investments; (2) the meaning of “cash” in the liquidity rule; and (3) determining and reviewing highly liquid investment minimums.

The SEC declined the adoption of proposed reporting amendments relating to funds’ use of swing pricing or to liquidity classifications.

Final Rule: Form N-PORT and Form N-CEN Reporting; Guidance on Open-End Fund Liquidity Risk (sec.gov)

Fact Sheet: Form N-PORT and Form N-CEN Reporting; Guidance on Open- End Fund Liquidity Risk Management Programs

SEC Division of Examinations Announces 2025 Priorities

On October 21, 2024, the SEC’s Division of Examinations released its 2025 examination priorities. The Division publishes its examination priorities annually to inform investors and registrants of potential risks in the U.S. capital markets and to make them aware of the examination topics that the Division plans to focus on in the new fiscal year. This year’s examinations will prioritize perennial and emerging risk areas, such as fiduciary duty, standards of conduct, cybersecurity, and artificial intelligence.

The Division examines SEC-registered investment advisers, investment companies, broker-dealers, clearing agencies, and self-regulatory organizations, among others, for compliance with federal securities laws. The Division prioritizes examinations of the practices, products, and services that were found, through a risk-based assessment, to present a heightened risk to investors or the integrity of the U.S. capital markets. The annual publication of the examination priorities furthers the SEC’s mission and aligns with the Division’s four pillars to promote and improve compliance, prevent fraud, monitor risk, and inform policy.

For fiscal year 2025, in addition to conducting examinations in core areas such as disclosures and governance practices, the Division will also examine for compliance with new rules, the use of emerging technologies, and the soundness of controls intended to protect investor information, records, and assets.

The 2025 examination priorities cover a broad landscape of potential risks to investors that firms should consider as they review and strengthen their compliance programs. They are not, however, an exhaustive list of all the areas the Division will focus on in the upcoming year. The scope of any examination includes analysis of other risk factors such as an entity’s history, operations, and products and services.

FY2025 Division of Examinations Examination Priorities

FinCEN Finalizes AML Program Rule for Investment Advisers

On August 28, 2024, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), issued a final rule, Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers, which extends certain AML compliance obligations to investment advisers registered with the SEC (“RIAs”) and investment advisers that report to the SEC as exempt reporting advisers (“ERAs”).

Key Considerations

Implementing a Risk-Based and Reasonably Designed AML Program

Under the final rule, covered RIAs and ERAs will be required to maintain an AML program by (1) developing internal policies, procedures, and controls to comply with the requirements of the Bank Secrecy Act and address money laundering, terrorist financing, and other illicit financial risks; (2) designating an AML officer; (3) instituting an ongoing employee training program; (4) soliciting independent testing of AML programs; and (5) implementing risk-based procedures for conducting ongoing customer due diligence. While many RIAs and ERAs have voluntarily adopted AML programs that include some of the above elements, the final rule’s suspicious activity reporting and independent testing requirements may be new terrain for RIAs and ERAs.

Filing SARs and CTRs

Pursuant to the final rule, RIAs and ERAs will be required to file suspicious activity reports (“SARs” relevant to a possible violation of law or regulation, as well as file a Currency Transaction Report (“CTR”) for certain “transactions in currency” over $10,000 with FinCEN. Currently, all investment advisers report such transactions on Form 8300. Under the final rule, a CTR will replace Form 8300 for covered investment advisers.

Complying With Recordkeeping and Travel Rules

Under the Recordkeeping and Travel Rules, financial institutions must create and retain records for transmittals of funds and ensure that certain information pertaining to the transmittal of funds “travels” with the transmittal to the next financial institution in a payment chain. The final rule will subject covered investment advisers to the Recordkeeping and Travel Rules, requiring covered investment advisers to obtain and retain originator and beneficiary information for certain transactions and pass on this information to financial institutions in certain funds transmittals.

Responding to Section 314 Requests

The final rule will require RIAs and ERAs to respond to law enforcement requests, pursuant to Section 314(a) of the USA PATRIOT Act, to locate accounts and transactions of persons that may be involved in terrorism or money laundering.

Conducting Special Due Diligence Measures for Certain Accounts

Under the final rule, RIAs and ERAs will be required to maintain due diligence measures reasonably designed to enable an investment adviser to detect and report any known or suspected money laundering or suspicious activity conducted through or involving a correspondent or private banking account that is established, maintained, administered, or managed in the U.S. for a foreign financial institution.

Key Takeaways

With a compliance deadline of January 1, 2026, RIAs and ERAs should take steps to evaluate and establish required AML compliance programs, as well as consider the impacts of FinCEN’s proposed customer identification program (“CIP”) requirements for investment advisers, which were separately proposed by FinCEN and the SEC in May 2024. Although the CIP rule has not yet been finalized, FinCEN has indicated that it intends the compliance date for this final rule and CIP rule to be the same. Finally, investment advisers should continue to monitor for updates to FinCEN’s customer due diligence rule, which FinCEN has indicated will be revised to impose obligations on investment advisers to collect beneficial ownership information from legal-entity customers.

FINAL RULE: Financial Crimes Enforcement Network: Anti-Money Laundering/ Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers

Off-Channel Communications Remain a Priority for SEC

On August 14, 2024, the SEC announced enforcement actions related to extensive “off-channel communications,” charging an additional 26 firms with failing to maintain employee communications on personal devices related to the firms’ business. The new settlements add $390 million to over $1.5 billion in civil penalties that the SEC has collected from more than 50 firms since 2023 for recordkeeping failures related to off-channel communications.

The penalties were assessed due to the firms’ failure to properly maintain and preserve electronic communications, including texts on personal devices used by their employees. The SEC believed that this failure hindered the SEC’s ability to conduct investigations and enforce compliance with securities regulations. The announcement shows the SEC’s continued focus on “off-channel communications” violations. Since August 2023, the SEC has brought several enforcement actions against investment advisers and broker-dealers for failing to implement record retention requirements to employee personal devices.

The SEC emphasized that individuals in supervisory roles exchanged off-channel communications with multiple colleagues under their supervision. The enforcement actions explain that these respondents failed to reasonably supervise employees in order to prevent or detect violations of the recordkeeping requirements, and any record retention policies or procedures were not followed or enforced. The SEC further stated that failure to maintain and preserve these records likely deprived the Staff of relevant evidence in SEC investigations.

SEC.gov | Twenty-Six Firms to Pay More Than $390 Million Combined to Settle SEC’s Charges for Widespread Recordkeeping Failures

SEC Charges Nine Investment Adviser in Ongoing Sweep into Marketing Rule Violations

On September 9, 2024, the SEC settled charges against nine registered investment advisers (the “Advisers”) for violating the Marketing Rule. These Advisers violated the Marketing Rule by disseminating advertisements that included untrue or unsubstantiated statements of material fact, testimonials, endorsements, or third-party ratings that lacked required disclosures.

All nine Advisers settled and agreed to pay over $1.2 million in combined civil penalties in addition to consenting to the entry of SEC orders that they violated the Investment Advisers Act of 1940, were censured, that they cease and desist from violating the charged provisions, and the Advisers must comply with certain undertakings.

A spokesperson from the SEC stated that the Marketing Rule’s provisions regarding truthfulness, substantiation, and disclosures are critical to protecting investors and that the advertisements at issue violated the Marketing Rule and posed a serious risk of misleading investors.

SEC.gov | SEC Charges Nine Investment Advisers in Ongoing Sweep into Marketing Rule Violations