Ropes & Gray’s Investment Management Update April – May 2024

June 17, 2024
12 minutes

The following summarizes recent legal developments of note affecting the mutual fund/investment management industry.

Status of SEC Rulemakings

Predictive Data Analytics and Safeguarding Proposals Delayed. On May 16, 2024, SEC Chair Gary Gensler spoke at the SEC’s 2024 Conference on Emerging Trends in Asset Management. His speech included an update on the status of two pending SEC proposing releases titled (i) “Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers” (described in a Ropes & Gray IM Update) and (ii) “Safeguarding Advisory Client Assets” (described in a Ropes & Gray Alert). Specifically, Chair Gensler stated:

[G]iven the rise of robo-advising, we proposed a rule regarding the use of predictive analytics.

If the optimization function in the AI system is taking the interest of the platform into consideration as well as the interest of the customer, this can lead to conflicts of interest. When brokers or advisers act on those conflicts and optimize to place their interests ahead of their investors’ interests, investors may suffer financial harm.

We’ve received a lot of feedback from the public on this proposal. As we have done from time to time with other rules, I’ve asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal.

We also have gotten robust feedback on a rule proposal regarding investment advisers’ safeguarding of client assets. Congress granted the SEC new authorities in 2010 in response to the financial crisis and Bernie Madoff’s frauds. In particular, Congress gave us authority to expand the advisers’ custody rule to apply to all assets, not just funds or securities.

Based upon the feedback, I’ve also asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal. (Emphases added, footnote omitted).

Other Pending Rulemakings. Based upon the SEC’s Fall 2023 Current Agenda (discussed in a Ropes & Gray IM Update) and subsequent developments, the following proposed rulemakings appear to be the pending items from the Division of Investment Management. The SEC will likely publish its Spring 2024 Current Agenda soon, which will also contain the SEC’s revised timing estimates for adopting these rulemakings.



Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N–PORT Reporting

Proposed. Described in a Ropes & Gray Alert.

Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices

Proposed. Described in a Ropes & Gray Alert.

Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies

Proposed. Described in a Ropes & Gray Alert.

Outsourcing by Investment Advisers

Proposed. Described in a Ropes & Gray IM Update.

Fund Fee Disclosure and Reform

Not yet proposed.

Exchange-Traded Products

Not yet proposed.

SEC Alleges Adviser Had an Unlawful Joint Legal Fee Arrangement with Registered Fund

On April 29, 2024, the SEC issued an order announcing that it had settled an administrative proceeding brought against Catalyst Capital Advisors LLC (“CCA”), a registered investment adviser, concerning a joint legal fee arrangement that CCA had with its client, the Catalyst Hedged Futures Strategy Fund (the “Fund”), a series of the Mutual Fund Series Trust (the “Trust”), an SEC-registered open-end investment company. In the order, the SEC alleged the following facts:

  • Between December 2016 and February 2017, the Fund experienced significant losses from its options-trading investment strategy. Beginning in February 2017, CCA and the Trust began receiving inquiries from the SEC and another regulator (the “Regulatory Inquiries”) related to these losses.
  • In April 2017, a class action was instigated in a federal district court alleging that the Fund had misrepresented, among other things, its investment objective and risk management procedures, and a similar shareholder derivative action was filed in an Ohio state court (collectively, the “Private Lawsuits”).
  • CCA and the Trust retained the same legal counsel (“Counsel”) to represent them in the Regulatory Inquiries and the Private Lawsuits. The engagement letter between the Trust and Counsel acknowledged that conflicts of interest might develop between CCA and the Trust did not address how legal fees and other expenses would be allocated between CCA and the Trust, including when legal services were rendered simultaneously to both entities. Beginning in February 2017 and continuing through October 2020, CCA and the Trust incurred $2.7 million in legal costs associated with the Regulatory Inquiries and the Private Lawsuits.
  • Without the approval or knowledge of the Trust’s independent trustees, CCA arranged for the Trust to pay, at least initially, all the legal fees and related costs resulting from the Regulatory Inquiries and the Private Lawsuits, including the expenses associated with CCA’s legal representation.
  • In April 2020, CCA paid approximately $780,000 of the Trust’s share of a legal settlement in the class action litigation in addition to its own share of that settlement, as a step toward beginning to repay CCA’s portion of the legal fees that the Trust had paid. Counsel and other entities continued to provide and bill for legal services in connection with the Regulatory Inquiries and Private Lawsuits throughout the remainder of 2020. The Trust paid approximately 80% of these new legal fees, while CCA paid the remaining 20%.
  • In March 2021, after the SEC staff contacted CCA about the Trust’s payment of legal fees, the Trust, in consultation with Counsel and independent trustees’ counsel, allocated the legal fees and related costs for the period between 2017 and 2020 between CCA and the Trust. The resulting calculation allocated approximately $1.3 million to CCA and approximately $1.4 million to the Trust. CCA paid the Trust an additional $501,000 as partial reimbursement for the Trust’s payments of CCA’s legal fees and related costs.

Based on its allegations above, the SEC concluded that CCA willfully violated (i) Section 17(d) of the 1940 Act and Rule 17d-1 thereunder1 and (ii) the antifraud provisions within Section 206(2) of the Advisers Act.2

Solely for the purpose of the administrative proceeding and without admitting or denying the SEC’s assertions, CCA (i) consented to being censured, (ii) agreed to disgorge approximately $280,000 to the Trust (less CCA’s voluntary payment of approximately $183,000 in December 2023), representing the unreimbursed legal expenses allocated to CCA, (iii) agreed to pay approximately $30,000 as prejudgment interest and (iv) agreed to pay a civil penalty of $200,000 to the SEC.

SEC Alleges Adviser Violated the Pay-to-Play Rule.

On April 15, 2024, the SEC issued an order announcing that it had settled an administrative proceeding brought against Wayzata Investment Partners LLC (“WIP”), a registered investment adviser, involving alleged violations of Rule 206(4)-5 under the Advisers Act (the “Pay-to-Play Rule” or the “Rule”). In general, the Pay-to-Play Rule makes it unlawful for an investment adviser to provide investment advisory services for compensation to a government entity for two years after a contribution to an official of the government entity by the investment adviser or any of its covered associates.3 The Pay-to-Play Rule does not require a showing of quid pro quo or actual intent to influence an elected official or candidate.

In the order, the SEC alleged the following facts:

  • Between 2007 and 2013, the Minnesota State Board of Investment (the “SBI”), a state investment board in Minnesota, committed to invest, and subsequently invested, approximately $300 million in private funds advised by WIP (the “Funds”).
  • On April 4, 2022, a WIP covered associate made a $4,000 campaign contribution to a Minnesota government official. The office of the government official had the ability to influence the selection of investment advisers for the SBI, specifically because the government official was on the SBI’s board.
  • The SBI board has influence over investments by SBI and the selection of investment advisers and pooled investment vehicles for the SBI. On the date of the covered associate’s contribution, SBI had already invested in the Funds.
  • Under the Pay-to-Play Rule, the contribution triggered a two-year “time out” on WIP providing investment advisory services for compensation to SBI. However, during the two years after the contribution, WIP provided investment advisory services for compensation, in the form of advisory fees and carried interest, to the Funds, and therefore, to the SBI.

Based on its allegations above, the SEC concluded that WIP willfully violated Section 206(4) of the Advisers Act and the Pay-to-Play Rule thereunder. Solely for the purpose of the administrative proceeding and without admitting or denying the SEC’s allegations, WIP consented to being censured and agreed to pay a civil penalty of $60,000 to the SEC.


The following brief updates exemplify certain trends and areas of current focus of regulatory authorities.

Upcoming Compliance Dates

The following is a reminder of the upcoming compliance dates of significant SEC rulemakings.

  1. Enhanced Reporting of Proxy Votes by Registered Funds. The effective date for this release’s rule and form amendments is July 1, 2024. Thus, registered funds are required to file their first reports on amended Form N-PX by August 31, 2024, with these reports covering the period July 1, 2023 to June 30, 2024. July 1, 2024 is also the date that registered funds must disclose in their registration statements that their proxy voting record is publicly available on (or through) their website and available upon request, free of charge. The related SEC release is summarized in a Ropes & Gray Alert.
  2. Tailored Shareholder Reports for Mutual Funds and ETFs. July 24, 2024 is the compliance date for this release. The related SEC release is summarized in a Ropes & Gray Alert.
  3. Remaining Money Market Reforms. The compliance dates for amended Forms N-MFP, N-CR and PF, as well as distinguishing between U.S. Government agency notes that are coupon-paying and those that are “no-coupon discount” notes in a fund’s website categorization of its holdings, was June 11, 2024. The compliance date for funds required to impose mandatory liquidity fees is October 2, 2024. The related SEC release is summarized in a Ropes & Gray Alert.
  4. Beneficial Ownership Reporting. Beneficial owners are required to comply with the revised Schedule 13G filing deadlines on September 30, 2024. The compliance date of the structured data (XML-based language) requirements for Schedules 13D and 13G filers is December 18, 2024. The related SEC release is summarized in a Ropes & Gray Alert.


NYSE Proposes Rule Changes to Exempt Registered Closed-End Funds from Requirement to Hold Annual Shareholder Meetings
June 12, 2024
On June 6, 2024, the New York Stock Exchange LLC (“NYSE”), a national securities exchange, filed an application pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, as amended, with the SEC proposing amendments to Section 302.00 of the NYSE Listed Company Manual (the “Manual”). Section 302.00 of the Manual currently requires closed-end management investment companies (“CEFs”) listed for trading on NYSE to hold an annual shareholder meeting during each fiscal year. If approved by the SEC, the proposed amendments would exempt CEFs listed on NYSE from the requirement to hold an annual shareholder meeting.

NFA Amends Member Questionnaire
May 30, 2024
The National Futures Association (“NFA”) recently published amendments (the “Amendments”) to the Member Questionnaire, formerly Annual Questionnaire, (the “Questionnaire”), which will become effective on October 15, 2024. The Amendments will impact the frequency with which NFA member firms (“Members”), including asset managers who are registered commodity pool operators and commodity trading advisors, are required to update the Questionnaire and will require Questionnaire updates to be filed by a person who is both a registered associated person and listed principal of the Member.

The DOL’s Final Fiduciary Rule: What Private Fund Managers Need to Know
May 20, 2024
On April 23, 2024, the U.S. Department of Labor (“DOL” or “Department”) released its final fiduciary rule, marking the completion of its third attempt since 2010 to update the definition of what it means to be an investment advice fiduciary to IRAs and ERISA Plans. Entitled the “Retirement Security Rule,” the release revises regulation the DOL first adopted in 1975 defining what it means to be a fiduciary in the context of providing advice to retirement investors (the “Final Rule”) and amends various class prohibited transaction exemptions applicable to investment advice fiduciaries (including, PTE 2020-02, PTE 84-24 and others). The Final Rule focuses on whether advice is being provided to retirement accounts in the context of a trusted advice relationship. The Final Rule is considerably narrower in scope from the rule the DOL adopted in 2016 (which the Fifth Circuit vacated in its entirety two years later) since it limits fiduciary status to recommendations made by persons who effectively hold themselves out as occupying a position of trust and confidence with respect to a retirement investor. This should make the Final Rule less disruptive for managers of private funds such as private equity, credit, real estate and hedge funds than the 2016 rule, but there are certain important points for managers to focus on. This Alert focuses on the practical impacts of the Final Rule on such private fund managers.

Recent Developments in Asset Management M&A Transactions
May 20, 2024
This is Issue No. 12 of PErspectives, Ropes & Gray’s periodic publication featuring news, trends and legal developments in the private equity industry.

In recent years, the alternative asset management industry has undergone unprecedented levels of consolidation and transformed firms from smaller partnerships into larger institutions that offer a variety of products. In this Issue, Ropes & Gray examines the strategic imperatives driving the growth of Asset Management M&A transactions, which include firm mergers, IPOs, minority stakes deals, and other financing options for general partners.

FinCEN and SEC Propose Affirmative KYC Requirements for Registered Investment Advisers and Exempt Reporting Advisers
May 15, 2024
On May 13, 2024 the U.S. Treasury Department’s Financial Crimes Enforcement Network and the SEC jointly released a notice of proposed rulemaking (the “CIP Proposed Rule”) that would require SEC-registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”) to establish, document, and maintain written customer identification programs (“CIPs”). The CIP Proposed Rule would require RIAs and ERAs to establish CIPs that closely track the customer identification requirements that currently apply to banks, broker-dealers, and mutual funds (among other financial institutions).

Federal Trade Commission Issues Sweeping Non-Compete Ban
April 24, 2024
On April 23, 2024, the U.S. Federal Trade Commission (“FTC”) issued a proposed final rule that would ban most post-employment non-competition agreements—deeming them an “unfair method of competition” under Section 5 of the FTC Act. The final rule is sweeping in its application, covering most clauses that would effectively restrict workers’ post-termination employment opportunities. Certain notable issues, such as its application to equity awards and partnership agreements, are not squarely addressed in the final rule, creating lingering uncertainty and room for interpretation and disputes.

The rule will become effective September 4, 2024, but it is already subject to legal challenge, including lawsuits seeking to enjoin the rule from taking effect while courts consider whether the issuance of the rule was within the scope of the FTC’s authority and otherwise comports with constitutional and administrative law.

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If you would like to learn more about the issues in this IM Update, please contact your usual Ropes & Gray attorney contacts.

  1. Section 17(d) of the 1940 Act and Rule 17d-1 thereunder generally prohibit any affiliated person of a registered investment company, acting as principal, from participating in or effecting any transaction in any joint enterprise or other joint arrangement or profit-sharing plan in which such registered investment company is a participant, absent an order issued by the SEC.
  2. Section 206(2) of the Advisers Act makes it unlawful for any investment adviser, directly or indirectly, to “engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.” Scienter is not required to establish a violation of Section 206(2), but rather a violation may rest on a finding of negligence.
  3. Covered associates are defined to include (i) any general partner, managing member or executive officer, or other individual with a similar status or function, (ii) any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee and (iii) any political action committee controlled by the investment adviser or by any of its covered associates. See Rule 206(4)-5(f)(2).