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    Aug. 1, 2024

Jarkesy and Loper: Bombshells or Busts?

Much ink has been spilled on the recent decision by the U.S. Supreme Court (Court) in SEC v. Jarkesy, with some commentators proclaiming that the decision signals the end of the administrative state and others dismissing it as having few practical consequences. This guest article by MoloLamken attorneys Eric R. Nitz and Kenneth E. Notter III discusses the Court’s decision in Jarkesy; the implications for the SEC and other agencies, such as the CFTC, as well as for pending and future enforcement actions; and what Jarkesy, when read together with Loper Bright Enterprises v. Raimondo, means for the future of the SEC and its approach to rulemaking and enforcement. For more on Jarkesy and the lower court decisions, see “Common Law Fraud and SEC v. Jarkesy: The Key Issue Underlying the Questions Presented” (Mar. 28, 2024); “Agency Power and Adjudication: The Government Seeks Supreme Court Review of Jarkesy v. SEC” (Jun. 8, 2023); “A Jury of Your Peers: Fifth Circuit Ruling in Jarkesy v. SEC Broadly Expands the Right to a Jury Trial for SEC Actions” (Jul. 21, 2022); and “Fifth Circuit Decision Could Hamstring SEC Enforcement Abilities” (Jun. 9, 2022).

Update on SEC Rulemaking, Examinations and Private Fund Rules

The SEC under Chair Gary Gensler has been engaged in rulemaking at an unprecedented pace, but the industry is pushing back. At the recent Morgan Lewis 2024 Hedge Fund Practices Conference, the firm’s attorneys reviewed the significant new rules affecting private fund advisers and associated examination activity; discussed the status of significant pending rule proposals; and parsed the decision of the U.S. Court of Appeals for the Fifth Circuit invalidating in full the final rules applicable to private fund advisers and its implications for SEC rulemaking, examinations and enforcement activity. This article distills insights from Morgan Lewis partners Craig A. Bitman, Zeke Johnson, Christine M. Lombardo, John J. O’Brien and Christine Ayako Schleppegrell made during the program. See “Private Funds Remain Focus for SEC’s 2024 Exam Priorities” (Jan 4, 2024).

SEC Penalizes Hedge Fund Adviser for Misleading Performance Claims

A fundamental tenet of the SEC’s Marketing Rule – Rule 206(4)‑1 under the Investment Advisers Act of 1940 – is that advertisements must not contain materially misleading information. Presentation of performance information in compliance with the Marketing Rule remains a significant challenge for advisers – and a continuing focus of the SEC’s attention. In a recent enforcement proceeding, the SEC asserted that a hedge fund adviser ran afoul of the Marketing Rule and defrauded investors by presenting the performance of a single investor in a private fund as the fund’s performance, even though certain other investors in the fund did not participate in all profitable fund investments and the fund’s overall performance was much worse than the individual investor’s. This article details the facts that gave rise to the proceeding and the terms of the settlement. See “Third Marketing Rule Risk Alert and New Settlements Portend Vigorous Enforcement” (Jun. 6, 2024).

In an Election Year, Advisers Should Be Particularly Alert for Potential Pay to Play Issues

With limited exceptions, the SEC’s so-called “pay to play” rule – Rule 206(4)‑5 (Rule) under the Investment Advisers Act of 1940 – makes it unlawful for an adviser to provide advisory services for compensation to a government entity for two years after a “covered associate” of the adviser makes a political contribution to a government official who has the ability to influence the agency’s choice of adviser. Notably, the Rule applies regardless of the adviser’s intent or how long the government entity has been a client. A private fund adviser missed this nuance, allegedly violating the Rule when one of its principals made a campaign contribution to a state pension fund official – more than a decade after the pension first invested with the adviser. This article parses the SEC’s settlement with the adviser and Commissioner Hester M. Peirce’s dissent, with additional commentary from Nicholas R. Miller and Daniel G. Viola, partners at Seward & Kissel. See “Fund Managers Must Continue to Guard Against Pay to Play Violations” (Oct. 29, 2020).

E.U. Harmonizes AML Regulation, Creates New Authority

New European Union (E.U.) anti-money laundering legislation seeks to strengthen and harmonize regulations across its 27 Member States. The new legislation also calls for the creation of a new regulatory authority to combat money laundering, with the power to supervise the highest-risk financial players directly and to support and coordinate various countries’ financial intelligence units. The legislative package, collectively dubbed the Anti-Money Laundering and Countering the Financing of Terrorism package, is intended to beef up the monitoring of suspicious transactions and to eliminate loopholes that allow for laundering of illicit proceeds, such as E.U. Member States’ differing rules on companies’ beneficial ownership. The Hedge Fund Law Report spoke to experts in the field to understand the implications for international business. See “SEC Risk Alert Highlights Continuing Broker-Dealer AML Shortcomings” (Sep. 28, 2023).

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