Securities Regulation and Enforcement: Four Trends in Asset Management – Finance and Banking

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When the US Investment Company Act and the Investment Advisers Act of 1940 came into force, assets under management were only $ 1 billion. Sixty years later they have passed $ 20 trillion, and by the end of 2020 they have skyrocketed to $ 110 trillion. Along with dramatic increases in the US economy and markets, the industry is experiencing spectacular growth and success. In the last seven years alone, from 2013 to 2020, the number of registered Investment Advisors has increased by 50%.

So where does this success come from? During a session on securities regulation and enforcement at Katten’s annual Capital Markets Litigation and Enforcement Symposia, Katten attorneys and guests spoke discussed the trajectory of this remarkable growth. The main takeaways are the growing popularity of exchange-traded funds, especially the new Bitcoin Futures ETF, big SEC wins, and rule changes for asset managers.

Four trends to note:

1. Where growth is trend

The 2020 performance shows that, while remaining the largest group of assets, hedge funds were static and private equity funds, once a growing segment, were stable. However, the asset management industry is showing serious growth, primarily in three distinct areas: robotics advisers, individual managed accounts, and venture capital funds. .

Globally, registered funds totaled about $ 60 trillion, with U.S. registered funds accounting for about half of that number, holding 30 percent of public enterprise equity, 23 percent of debt. public enterprises and nearly 30 percent of municipal bonds. Almost 61 million Americans now have a substantial percentage of their retirement savings invested in registered investment companies.

In particular, 2020 saw a pandemic-fueled exodus of people from the Northeast, California and Illinois – home to many regulated entities – to states such as Texas and Florida. If this trend continues, we are likely to experience a dramatic change in where Investment Advisors register their primary establishment.

2. Exchange-traded funds take center stage

After more than eight years of shutdowns and starts, on October 19, 2021, the SEC approved the very first Bitcoin-linked ETF, the ProShares Bitcoin Strategy ETF. The launch marked one of the biggest of all time, with the Bitcoin futures ETF accumulating more than $ 1 billion in assets in the first two days. Notably, the Bitcoin futures ETF provides institutional investors with exposure to bitcoin, but through the more regulated futures market – bitcoin futures rather than bitcoin. Supporters of Bitcoin and the cryptocurrency industry more generally hope that cryptocurrency-linked ETFs will increase the industry’s legitimacy through wider exposure and adoption.

While other cryptocurrency-related ETFs are eager to get started, the SEC has indicated that it is not ready to approve leveraged Bitcoin ETFs or spot market-based Bitcoin ETFs, largely out of fear that investors could take uninformed risks and lose large sums. However, as Canada has already approved a spot market-based Bitcoin ETF that has been operating for several months, there is pressure on the SEC to reconsider its approach. Despite such pressure, the SEC recently rejected another application for a spot market-based Bitcoin ETF, this time filed by Cboe BZX Exchange to list and trade the VanEck Bitcoin ETF.

Not to be overshadowed by the Bitcoin futures ETF, traditional and non-traditional ETFs continue to be attractive to most investors, which are relatively inexpensive and tax-efficient. In fact, many analysts believe the Biden administration’s proposal to increase U.S. capital gains taxes should spark more interest in ETFs as opposed to mutual funds, with a few caveats. The performance of non-traditional ETFs over time can be amplified in volatile markets. For businesses, regulators continue to take disciplinary action regarding the sale of non-traditional products to retail investors and advise increased oversight processes, carefully drafted disclosures, and adequate training for brokers and supervisors regarding future risks.

3. The SEC wins

The general consensus is that the SEC is winning big, and advisers can expect more pain next year. Several important court decisions confirm or increase the power of the SEC.

In October, the United States Court of Appeals for the Fifth Circuit upheld a surrender order issued by the SEC, marking the first appeal decision on the matter since the Supreme Court’s Liu ruling (Liu v. DRY.) in 2020. The ruling allows the SEC to continue seeking restitution as a remedy in federal courts. The impact of Liu is not so much a question of whether the SEC can obtain restitution, but under what circumstances it can obtain such relief.

In another SEC victory in 2021, the Supreme Court dismissed a certiorari petition brought by a broker involved in an SEC lawsuit for violating anti-money laundering rules, leaving the ruling in place. of the second circuit asserting the authority of the SEC to apply certain requirements of the law on banking secrecy under the law on foreign exchange.

In addition, over the past year, the courts have dismissed challenges to the SEC’s “gag rule”. The SEC’s “gag rule” provides that when a party settles an SEC enforcement action, the party cannot deny the allegations after the settlement. The gag order is written into every settlement agreement and the settling party must agree to the gag order. Two recent rule challenges have failed, which virtually nullified future challenges of the gag rule. In both cases, the courts refused to strike down the gag rule, ruling that if the settling party didn’t like the terms of the settlement, they shouldn’t have settled in the first place.

4. Rule changes lead to disclosure activity

New rules, collectively referred to as “Marketing Rules”, came into effect in May 2021 and significantly change the advertising and solicitation practices of investment advisers. Investment advisers have until November 4, 2022 to comply.

Additionally, the SEC has approved a Nasdaq listing requirement that public companies must disclose the diversity of their boards of directors. Public companies without a diverse board of directors need to explain why. SEC Chairman Gary Gensler is also considering such disclosure requirements for fund managers and brokers.

On the ETF side, Rule 6c-11 grants certain ETFs exemptions from the 1940 law and also imposes the following conditions: (1) ETFs must provide daily portfolio transparency on their website; (2) ETFs are permitted to use baskets that do not reflect a pro rata representation of the funds in the portfolio if they have certain written policies and procedures in place; and (3) ETFs must disclose certain other information on their website, including historical information regarding premiums and discounts and information on bid-ask spreads.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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