During the third quarter of 2023, 28 stories were written that involved legal prosecution or settlements, and an additional 95 stories on legislation and regulation.
Thirteen trade associations including the Alternative Investment Management Association, American Investment Council and American Securities Association expressed concern that the SEC’s artificial intelligence proposal is inadequate and flawed. The proposal will ask firms to opt out of deploying technological innovations amid potential conflicts of interest. Trade associations expressed concerns about the SEC’s restriction on the use of predictive data analytics by investment advisers and broker-dealers. Based on the SEC’s proposal, investment advisers will have to decide if innovative technologies perfect, predict, guide, forecast, or direct investment-related behaviors or outcomes, and proper assessments are needed periodically.
SEC Chair Gary Gensler further commented that “the outcomes of Al algorithms may be unexplainable, and it could be difficult to ensure fairness as data often reflects historical biases…. the challenges of explainability may reveal systemic racism and bias embedded in predictive data analytics.”
President Joe Biden signed an executive order prohibiting companies in private equity, and venture capital sectors from investing in Chinese semiconductors, microelectronics, quantum technology and artificial intelligence. The regions of concern include China, Hong Kong and Macau.
Jeremy Hunt, the U.K. chancellor of the exchequer, has laid out plans to encourage the retirement industry and U.K. institutional investors to invest in private companies or high-growth companies to capitalize on potential developments in Al and science sectors. Hunt signed the Mansion House Compact, and it would require the government and large U.K. DC plans to allocate at least 5% to unlisted equities by 2030. Hunt intends to transfer all local authority pension funds into pools by March 2025, expand the role of the Pension Protection Fund and create a permanent regulation for superfunds. To further improve the capital market efficiency in U.K., restrictions will be lifted to allow companies to raise large capital quickly, and the “intermittent trading venue” will be introduced to grant private companies capital access before they go public.
- The SEC approved the final rules governing private fund advisers, requiring them to provide quarterly statements that include fund fees to investors; an annual audit of each private fund that managers advise/invest on behalf of investors needs to be provided; and the final rules prohibit advisers from charging or allocating private funds where there are violations of the Investment Advisers Act of 1940. After the SEC finalized the rule on Aug. 23, six organizations including the American Investment Council and the National Association of Private Fund Managers filed a lawsuit claiming that the SEC has overstepped statutory authority, undermined competition and reduced investment opportunities.
- The National Association of Manufacturers and the Kentucky Association of Manufacturers sued the SEC for its new interpretation of Rule 15c2-11 issued in September 2021. The new disclosure requirement applies to private companies that raise capital via corporate bond issuance and the groups consider it a violation of the Administrative Procedure Act, which can cause 100,000 job losses by NAM and the Kentucky Association of Manufacturers.
Department of Labor
- The Department of Labor sent the latest rule proposal on fiduciary investment advice for review. The controversial topics include the term fiduciary, the scope of conflicts of interest in investment advice, as well as evaluating prohibited transaction class exemptions. Sen. Bill Cassidy and Rep. Virginia Foxx urged Labor Secretary Julie Su to cease fiduciary rule-making efforts.
- The Advice and Consent Act was introduced to prevent Acting Labor Secretary Julie Su from performing the duties of the secretary of labor in an acting secretary capacity. The Federal Vacancies Reform Act sets a time limit of 210 days for cabinet-level nominees, including Su, to perform duties without the Senate’s consent and confirmation; Under the Biden administration, the Labor Department’s succession statute has no time limit. The Department of Labor Succession Act, which aligns with the Federal Vacancies Reform Act of 1998, was approved by the House Education and Workforce Committee in a 23-19 vote on Sept. 14.
- Federal Reserve Vice Chairman Michael S. Barr said the Federal Reserve has not decided whether it would issue a central bank digital currency and would only move the agenda forward with clear support from the executive branch and Congress. While evaluating potential technology-driven opportunities and trade-offs for payment innovation, Barr has expressed interest in stablecoins, which offer a stable value via its pegging to an existing currency. The Clarity for Payment Stablecoins Act of 2023 was introduced to clear the pathway for stablecoins and establish the legislative and regulatory framework needed for its issuance.
- The Senate approved Lisa Cook and Adriana Kugler’s nominations to serve on the Federal Reserve Board of Governors.
- The Financial Stability Board, with members made up of finance ministers, bankers and regulators in G20 countries, warned that complex synthetic leverage using derivatives or financial instruments (particularly those kept off balance sheets) could trigger market instability. In addition to hedge funds that use macro and relative value strategies, two-thirds of nonbank global assets, such as pension funds and insurance firms, use high-level leverage in their liability-driven strategies.
- The $40.1 billion Iowa Public Employees’ Retirement System reached a $499 million partial settlement with banks including Morgan Stanley, Goldman Sachs and UBS after alleging that pension funds are unfavored by banks’ shared price-fixing platform EquiLend. Pension funds and retirement plans often lend out unutilized shares in portfolios to hedge funds and other investors while paying a certain fee to banks. The lawsuit centered on the low fees banks paid to pension plans as well as unsatisfactory low returns received, as a result of the loss of capital appreciation when the shares are held in the hands of banks. The antitrust lawsuit claimed that Equilend did not facilitate market efficiency and improved transparency is needed for asset owners seeking better pricing and security lending.
Lawsuits and prosecution
- After UBS Group completed its acquisition of Credit Suisse, UBS agreed to pay $387 million for its dealings with Archegos Capital Management. Credit Suisse’s earlier mismanagement of credit risk led to a $268.5 million fine, and a $112 million fine will go toward the Bank of England’s Prudential Regulation Authority.
- Citigroup Global Markets agreed to a cease-and-desist order settlement with the SEC and a penalty of $2.9 million for using an indirect expense calculation method as an underwriter. The SEC also charged Archipelago Trading Services $1.5 million for not filing at least 461 suspicious activity reports between August 2012 and September 2020.
- The SEC charged Prime Group Holdings $20.5 million for performing improper due diligence and its failure to disclose conflicts of interest, due to a hidden $18 million real estate brokerage fee paid to the Prime Group CEO via an affiliate brokerage firm. Prime Storage Fund II used Prime Group personnel and independent contractors to acquire “off-market” facilities, and the fees paid were separate from a 3% brokerage fee paid to deal acquisition teams.
- Morgan Stanley was sued for convincing private equity firms Certares Management and Knighthead Capital Management to invest in Brightline Holdings loans that back the development of the luxury Los Angeles-Las Vegas rail line. Morgan Stanley falsely guaranteed loan and interest amounts based on early loan repayment projection, and private equity firms invested in distressed assets visa CK Opportunities Fund.
- CalPERS sued PBI Research Services for allegedly not keeping participants’ birth dates and Social Security numbers confidential. CalPERS hired PBI Research Services/Berwyn Group to verify participants’ deaths to ensure proper payment after the Social Security Administration no longer notifies public pension funds when a retiree dies.