Our Investment Services team just published its March 2024 Regulatory Update, analyzing a wide selection of federal agency enforcement actions and initiatives in Q1.  You can access the articles below.

On February 13, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a proposed rule1 that would extend certain anti-money laundering/countering the financing of terrorism (AML/CFT) program requirements to investment advisers registered with the Securities and Exchange Commission (SEC) and exempt reporting advisers (ERAs) with the SEC.

The proposed rule would require certain covered advisers (i.e., RIAs and ERAs) to apply certain AML/CFT requirements under the Bank Secrecy Act (BSA), including implementing AML/CFT programs, reporting suspicious activity and complying with recordkeeping requirements. The proposed rule would amend the definition of “financial institution” under the BSA to specifically include RIAs and ERAs, which have historically not been subject to most anti-money laundering requirements under U.S. law.

Anti-Money Laundering Program

The proposed rule would require covered advisers to maintain an AML/CFT program that:

  • develops internal policies, procedures and controls reasonably designed to address money laundering, terroristfinancing and other illicit financial risks;
  • designates one or more anti-money laundering compliance officers, who should be an officer of the coveredadviser (or individual with similar authority);
  • institutes an ongoing employee training program;
  • independently tests its AML/CFT program for compliance with applicable BSA requirements; and
  • implements risk-based procedures for conducting ongoing customer due diligence to (1) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (2) identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

The proposed rule would require that each covered adviser’s anti-money laundering program be approved in writing by its board of directors or similar governing body or persons.

While aspects of a covered adviser’s anti-money laundering program may be delegated to third parties, the covered adviser would remain fully responsible and legally liable for the program.

Reporting Suspicious Activity

Covered advisers would be required to evaluate customer activity and relationships for applicable money laundering and illicit financial risks and design a suspicious transaction monitoring program tailored to such risks. In addition, the proposed rule would require covered advisers to file suspicious activity reports (SARs) relevant to possible violations of law or regulation with FinCEN.

Recordkeeping

The proposed rule would require covered advisers to create and maintain certain records relating to the transmittal of funds, including originator and beneficiary information, to be shared with other financial institutions in the payment chain.

Key Takeaways

If adopted, the proposed rule would represent significant additional compliance responsibilities and obligations with respect to the compliance programs of investment advisers, in the form of new and unique policies and procedures, the implementation of additional compliance processes and related testing, and additional dedicated resources. Covered advisers will be well served to begin preparing for these requirements now.

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With the advent of messaging apps such as Slack, Microsoft Teams, and Signal, the ways in which employees are able to communicate and collaborate with each other are rapidly expanding. At the same time, companies have increased use of document collaboration platforms such as Microsoft SharePoint and eRooms to supplement or replace traditional closed-system document management systems. Message and document retention within these platforms is uneven and, in some cases (such as in the popular messaging app SnapChat), speedy message erasure is not a bug, but a feature. On Friday, January 26, the Federal Trade Commission (“FTC”) and Department of Justice Antitrust Division (“DOJ”) announced that the two agencies are updating the standard preservation obligation guidance to keep pace with the expanded use of collaboration tools that do not otherwise prioritize message retention.

Continue Reading FTC and DOJ Update Preservation Obligation Guidance

On January 22, the FTC announced updated dollar thresholds triggering the bar on interlocking officers and directors under Section 8 of the Clayton Act, 15 U.S.C. § 19. Section 8 of the Clayton Act prohibits one person from serving as a director or officer of two competing corporations if the corporations meet certain size and competitive sales thresholds.  For 2024, Section 8 applies if each corporation has capital, surplus, and undivided profits aggregating more than $45,257,000; however, no corporation is covered if the competitive sales of either corporation are less than $4,525,700.  These new thresholds took effect on January 22, 2024. 

The next day, the FTC announced updated dollar thresholds triggering the jurisdiction of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), 15 U.S.C. § 18a, to certain acquisitions.  The new HSR Act thresholds will take effect 30 days after publication in the Federal Register

Continue Reading FTC Increases HSR Thresholds and Clayton 8 Thresholds

On December 22, 2023, President Biden issued Executive Order (E.O.) 14114 further addressing the Russian Federation’s (Russia) continued use of its military-industrial base to support its aggression against Ukraine and to further counteract Russia’s continued evasion of U.S. sanctions. This latest round of sanctions targets foreign financial institutions (FFIs) that engage in certain transactions involving Russia’s military-industrial base. It is likely additional sanctions will be adopted as we approach the second anniversary of the war in Ukraine.

Specifically, E.O. 14114 amends E.O. 14024 to authorize sanctions against FFIs that have

  1. conducted or facilitated any significant transaction or transactions for or on behalf of any person designated pursuant to E.O. 14024 for operating or having operated in the technology, defense and related materiel, construction, aerospace or manufacturing sectors of the Russian economy or other sectors as may be determined to support Russia’s military industrial base; or
  2. conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia’s military-industrial base, including the sale, supply or transfer, directly or indirectly, to Russia of any item or class of items as determined by the Secretary of the Treasury.
Continue Reading Latest Round of Russia Sanctions Targets Foreign Financial Institutions Supporting Russia’s Military-Industrial Base

On Monday December 18, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) released the final version of their Merger Guidelines (“Guidelines”), capping a nearly two-year effort to implement a policy capturing the Biden Administration’s aggressive enforcement stance in merger reviews. The Guidelines are intended to provide transparency into how the agencies evaluate whether a merger or acquisition may lessen competition in violation of the Clayton Act. After the agencies released the draft merger guidelines in July (“Draft Guidelines”), the agencies received over 3,000 public comments, many of them criticizing the Draft Guidelines for being too aggressive and departing too radically from controlling case law and practice.  The final Guidelines reflect the agencies’ consideration of the comments received.

While the final Guidelines largely maintain the same aggressive positions of the draft, they introduce more nuanced language that signals more openness to rebuttal evidence than the Draft Guidelines. The most apparent change is an across-the-board shift away from a flat prohibition on certain effects and toward a more traditional warning about the possible consequences when those effects are present. This is an important change to the draft language, which had come under fire for appearing to set forth several rules of per se illegality. For example, in Guideline 2, the draft language stated that “mergers should not eliminate substantial competition between firms,” (emphasis added), signaling the possibility that the agencies would challenge any merger between rivals even when remaining competitors would discipline any post-merger attempt to raise prices or reduce output or quality. In contrast, the final language states that “mergers can violate the law when they eliminate substantial competition between firms” (emphasis added), affirming what has always been the case.

Continue Reading FTC and DOJ Publish 2023 Merger Guidelines

The Corporate Transparency Act (“CTA” or the “Act”) comes into effect on January 1, 2024. Enacted by Congress as part of the Anti-Money Laundering Act of 2020, the CTA requires certain entities, domestic and foreign, to report beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

The CTA’s reporting obligations will apply to “Reporting Companies” (discussed below) currently in existence, and to those formed after January 1, 2024. However, while FinCEN estimates that the CTA will affect over 32 million entities, it will largely impact only smaller and unregulated companies. For example, companies that meet the CTA’s definition of a “large operating company,” are publicly traded or regulated, or are a subsidiary of certain exempt entities are not required to submit beneficial ownership information to FinCEN. Accordingly, while all companies should take note of the CTA and the significant change in the law for corporate reporting obligations, an equally vast number of entities will likely find themselves exempt from these requirements.

With the CTA’s effective date fast approaching, companies should consider its potential impact to their compliance obligations and, if appropriate, implement appropriate policies and procedures for handling reporting.

Continue Reading The Corporate Transparency Act December 2023 Update

On November 13, 2023, the DOJ Antitrust Division moved to dismiss its last remaining no-poach indictment.  In 2021, a Texas grand jury indicted Surgical Care Affiliates (“SCA”) and a related company for conspiring with competitors not to solicit each other’s senior-level employees.  While a motion to dismiss was pending in that case, a district court in Connecticut entered a judgment of acquittal (“JOA”) on labor market allocation charges brought against several engineering firms, ruling in United States v. Patel that, among other things, ample evidence of employees moving between the defendant companies meant that any conspiracy to restrict such movement could have had no “meaningful” effect on competition and was not illegal per se.    

Continue Reading An Uncertain Future for DOJ’s No-Poach Prosecutions

On November 14, 2023, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced its enforcement results for fiscal year (“FY”) 2023, which ended on September 30, 2023.  The SEC’s FY 2023 results continued to reflect an aggressive approach to enforcement, reaching record highs in multiple enforcement metrics.  Specifically, the SEC announced that it brought 784 total enforcement actions, obtained orders totaling nearly $5 billion in financial remedies, and distributed nearly $1 billion to harmed investors.

SEC Chair Gary Gensler referred to the SEC’s Division of Enforcement as a “cop on the beat” that provided benefits to the investing public, while applauding the Division of Enforcement’s “effectiveness” during FY 2023.  Director of the Division of Enforcement Gurbir Grewal noted that the Division achieved results by “leveraging risk-based initiatives, seeking robust remedies, rewarding cooperation, protecting whistleblowers, or returning nearly a billion dollars to harmed investors.” 

Continue Reading SEC Releases Enforcement Highlights for Fiscal Year 2023

President Biden issued an Executive Order on October 30, 2023 designed to place the United States at the forefront of law and regulation of Artificial Intelligence (AI). The Executive Order on the “Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” creates binding disclosure requirements for companies that are either developing certain large language AI models or acquiring or possess sufficient computing power to run such AI implementations (as described below). The Order also establishes, and directs several federal agencies to establish, industry benchmarks for ensuring robust, reliable, repeatable and standardized testing and evaluations of AI systems, create new standards for AI safety and security.

The Order contains a lot of detailed provisions and initiatives involving nearly every government agency and calling for wide-ranging studies and recommendations on nearly every facet of AI, significant provisions of which are described below.

Of particular note, however, the President invoked the Defense Production Act to impose certain requirements that will go into effect 90 days after the issuance of the Order. There are two significant requirements going into effect affecting companies that employ AI models and companies that employ or provide large computing capacity that can be used for AI.

Continue Reading President Biden Issues Far-Reaching Executive Order on Artificial Intelligence