Conduct of business – Global Investment Law Watch

Next Regulator Up: Treasury Department Explores AI in the Financial Sector

Jun 11 2024

By: Matthew J. Rogers and Maxwell J. Black

On 6 June 2024, the Department of the Treasury (the Treasury) published a request for information on the use of artificial intelligence (AI) in the financial services sector, with the goal of gathering input from a wide range of stakeholders. This request follows soon after the Treasury’s report on AI and cybersecurity.

Like other US regulators, including the Commodity Futures Trading Commission (CFTC), the Treasury is interested in understanding the opportunities and risks posed by AI, including the potential impact on consumers, investors, financial institutions, and businesses. Specifically, the Treasury is seeking feedback on the definition of AI under President Biden’s Executive Order on Safe, Secure, and Trustworthy Development and Use of AI, the types of AI models and tools used by financial institutions, and the general accessibility of AI.

Of particular interest is the Treasury’s query regarding a potential “human capital shortage” in financial organizations. This concerns the scenario where companies utilize AI tools without sufficient employees that fully understand their mechanisms. Additionally, the request solicits perspectives on model risks, operational risks, compliance risks, and third-party risks, among others.

This request for information shows that the Treasury is looking to augment the efforts of the CFTC, Securities and Exchange Commission (SEC), and banking agencies, which have also requested similar AI-related information. It remains to be seen the extent to which federal agencies such as the Treasury coordinate their rulemaking processes and how any such rules will fit together.

5th Circuit Vacates the Private Fund Adviser Rules in Full

Jun 05 2024

By: Pablo J. Man, TJ Bright, Kenneth Holston, Christopher W. Phillips-Hart, and Tristen C. Rodgers

Earlier today, 5 June 2024, the US Fifth Circuit Court fully vacated the Private Fund Adviser Rules (PFAR) in a unanimous and highly anticipated decision curbing the Securities and Exchange Commission’s authority to regulate private funds. Absent a successful appeal of the decision, the PFAR will not come into effect.

SEC Adopts Enhanced Privacy Safeguards

May 17 2024

By: Rich Kerr, Sasha Burstein, and Brian Doyle-Wenger

On 16 May 2024, the US Securities and Exchange Commission (SEC) adopted amendments to Regulation S-P’s safeguards and disposal rules. The amendments are designed to address the expanded use of technology and corresponding risks that have emerged since the original adoption of Regulation S-P in 2000. The amendments expand the scope of information and broaden the number of customers protected under both rules. The safeguards and disposal rule will apply to “customer information”, which includes records that contain “nonpublic personal information” as defined in the existing rule. Additionally, the amended rule expands the applicability of the safeguards rule to include transfer agents, and the disposal rules to include all transfer agents including those registered with appropriate regulatory authorities other than the SEC.

Europe: UK FCA’s Anti-Greenwashing Rule and Guidance Come Into Force on 31 May 2024

May 17 2024

By: Philip Morgan, Andrew Massey, and Omega Modi

An anti-greenwashing rule comes into force in the UK on 31 May 2024. This is the first part of the FCA’s Sustainability Disclosure Requirements.

Go Ahead and Take a CIP: SEC and Treasury Department Propose New Regulations for Investment Advisors

May 15 2024

By: Richard F. Kerr, Jennifer L. Klass, C. Todd Gibson, and Kenneth Holston

On 13 May 2024, the Securities and Exchange Commission (SEC) and the Department of the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) jointly proposed rulemaking to implement section 326 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (CIP Rulemaking), which would require SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish written customer identification programs (CIP).

CFTC Releases Artificial Intelligence Report

May 09 2024

By: Matthew J. Rogers and Maxwell J. Black

On 2 May 2024, the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee (Committee) released a report entitled Responsible AI in Financial Markets: Opportunities, Risks & Recommendations. The report discusses the impact and future implications of artificial intelligence (AI) on financial markets and further illustrates the CFTC’s desire to oversee the AI space.

Japan: FSA Requires Real Estate Funds Take Additional Safeguards Against Conflicts of Interest

May 08 2024

By: Tsuguhito Omagari, Yuki Sako, Jason Nelms and Charmaine Mok

Financial Services Agency of Japan (FSA) proposed amendments to its supervisory guidelines applicable to managers of investment trust (toshin) funds and real estate funds, and is currently accepting comments until May 13. Of those, amendments relating to real estate funds would require managers to take additional measures to manage transactional conflicts of interest, specifically:

Don’t Bank on it: FDIC Board Withdraws Asset Manager Bank Control Proposals

Apr 26 2024

By: Grant F. Butler and Yuki Sako

Two proposals regarding oversight of the control of banks by asset managers were withdrawn at the 25 April board meeting of the Federal Deposit Insurance Corporation (FDIC). These proposals were a result of increasing concern by bank regulators regarding concentration in control of banks by institutional investors, particularly index funds.

FTC Ban on Non-Competes Could Be Challenging to Asset Managers

Apr 26 2024

By: Ed Dartley and Robert H . McCarthy, Jr.

On 23 April 2024, the Federal Trade Commission (FTC) voted 3-2 to approve a rule that will prohibit for-profit employers from either entering into non-compete clauses with workers or enforcing existing non-compete clauses against most workers (the Non-Compete Rule). Initially proposed in January 2023 (and discussed here), the Non-Compete Rule’s impact on asset managers will be significant if and when it becomes effective, which is currently scheduled to be in August 2024.

Europe: Research Cost Re-Bundling – Is the UK Going Back to the Future?

Apr 23 2024

By: Andrew Massey, Philip Morgan, and Omega Modi

The UK’s FCA has published consultation paper 24/7: Payment optionality for investment research. It proposes a new, more flexible, way to charge third-party investment research to clients.

The new payment option would sit alongside the two existing options under which research costs are either paid by firms from their own resources or charged to clients through a research payment account. The latter approach has not been popular because of its operational complexities, so research has been an out-of-pocket expense for many UK asset managers.

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