As spring and summer of 2021 bring hope and excitement for the “next normal” for work and life, registered investment advisers and regulated funds will not only have to navigate the logistical challenges of returning to work and back to their offices but will have the added burden of implementing a slew of recently passed regulatory rules requiring compliance in 2022. Furthermore, based on recent changes in the administration at the Securities and Exchange Commission (SEC), all signals point to higher levels of accountability and regulatory enforcement for regulated funds and advisers. There may be a lot to get done to prepare for

Regulatory Ramp-Up: SEC Priorities and Implementation Expectations for 2021June 3, 2021

implementation of these new rules and to capitalize on efficiencies and opportunities while continuing to interact and work in a more hybrid-type remote work environment.

This Deloitte point of view highlights implementation and operational considerations of the new regulatory rules around the use of Derivatives, Determination of Fair Value, and Marketing, as well as overall SEC priorities and how financial firms should consider preparing for them and have the discipline to look at them in the aggregate to capitalize and leverage opportunities.

The beginning of 2021 ushered in some critical changes within the SEC’s administration. On February 3, 2021, Gary Gensler, was nominated to replace Chairman Jay Clayton as Chairman of the SEC and was later confirmed on April 17, 2021. Chairman Gensler has a reputation as a proven regulator, having served as the Chair of the Commodity Futures Trading Commission. He is expected to move quickly on an agenda that could include mandatory corporate disclosure on climate and environmental, social, and governance (ESG) risks, regulatory clarity on the

New changes at the SEC expected to build on recently adopted regulatory rulings

Derivatives rule

Valuation rule

Marketing rule

The first of the adopted rules that we will outline relates to the regulation of use of derivatives and certain other transactions (“Derivatives Rule”). The Derivatives Rule is a response to significant changes in the financial industry to replace the existing asset segregation framework, which has been in use for at least 35 years. In adopting the new rule, the SEC also rescinded its 1979 General Statement of Policy (Release 10666), governing asset segregation requirements.2

The second adopted rule relates to the good faith determinations of fair value (“Valuation Rule”) and provides fund boards of directors and registered investment advisers with a consistent, modernized approach to making fair value determinations for regulated fund investment holdings. In the SEC’s first review of valuation guidance in 50 years, the Valuation Rule confirms that a fund’s board of directors is responsible for the good faith determination of fair value and permits a board to designate the determination to a valuation designee, primarily the investment adviser, as long as the fund board continues to provide oversight. Also, by defining readily available market quotation, the Valuation Rule offers a clearer picture of what securities the SEC views as being fair valued.3

The final adopted rule consolidates two rules under the Advisers Act which govern advertisements and compensation to solicitors into the Investment Advisers Marketing Rule (“Marketing Rule”) which is designed to comprehensively and efficiently regulate investment advisers’ marketing communications. These amendments are a reflection of regulatory changes and industry developments since the adoption of advertising rule in 1961 and the cash solicitation rule in 1979. The Marketing Rule updates the definition of “advertisement” as well as prohibits certain advertising practices. The intent of the Rule is to provide investors with useful information as they choose their investment advisers and advisory services, while simultaneously preventing fraud.

use of digital assets, monitoring recent market volatility, and an investigation into family offices and hedge funds,1 as well as the implementation of recently adopted rules.

Before Chairman Clayton’s departure, the SEC adopted a number of rules under the Investment Company Act of 1940 (“40 Act”) and the Investment Advisers Act of 1940 (“Advisers Act”), including the “Use of Derivatives Rule,” the “Good Faith Determinations of Fair Value Rule,” and the “Marketing Rule” (“adopted rules”). Each of the adopted rules includes significant changes and updates for mutual funds, their investment advisers and fund boards of directors which will be required to be implemented by each respective compliance date (as outlined below).

Main areas of focus of the recent SEC’s adopted rules

Regulatory Ramp-Up: SEC Priorities and Implementation Expectations for 2021

Regulatory Rule Summary of Rules Compliance/ Effective Date

Use of Derivatives Rule 18f-44

Rule 18f-4 requires a fund transacting in derivatives to comply with the following requirements, unless the fund is a limited derivatives user:• Derivatives Risk Management Program• Limit on Fund Leverage Risk• Board Oversight and ReportingLimited derivatives users would not need to adopt the requirements above if the fund:1. adopts and implements policies and procedures

reasonably designed to manage the fund’s derivatives risks; and

2. limits its derivatives exposure to 10% of its net assets.

Effective Date: February 19, 2021

Compliance Date:August 19, 2022

These newly adopted rules come on the heels of the SEC’s Liquidity Rule and Exchange Traded Fund (ETF) Rule, which is sure to add more to the already full plate of registered investment advisers and fund boards. Given the risk, compliance, legal and operational areas that these rules will impact, the regulatory ready organization needs to have the discipline to look at these rules in the aggregate and adopt technology and data driven solutions that will not only manage compliance risk but strengthen the organization’s ability to use data to make decisions and enhance the client experience.7 Strategic identification of potential operational synergies and productivity gains is important to consider in totality when implementing these rules and may provide productivity and efficiency to an organizations’ operating model as they strive to keep profit margins stable while faced with industry headwinds such as tightening fees and concentrated fund flows.8 Working collaboratively within the organization from front to back will not only encourage all key stakeholders to be at the table but provide more opportunity for

desired outcomes to be achieved, and all key stakeholder objectives to be met. The regulatory ready organizations will dedicate the right resources and may develop a project management office to run a fully transparent implementation plan and process to facilitate success.

In addition to the adopted rules, the SEC has also published its 2021 annual exam priorities which highlights the areas of focus including policies and procedures or disclosures of advisers and regulated mutual funds, climate-related risks, money market reforms, operational resiliency, information security, London Inter-Bank Offered Rate (LIBOR) transition, diversity and inclusion, and proxy voting and corporate governance.9 As noted, a wholistic organizational view of rule adoptions and regulatory compliance models will go a long way to achieving productivity and efficiency enhancements.

Regulatory Ramp-Up: SEC Priorities and Implementation Expectations for 2021

Good Faith Determination of Fair ValueRule 2a-5 & Rule 31a-45

Rule 2a-5 requires boards (or their designee) to perform certain functions with respect to their fair valuation responsibilities, including:• Assessing and managing valuation risks.• Establishing and applying fair value methodologies.• Testing fair value methodologies.• Evaluating and overseeing pricing services and• Adopting and implementing fair value policies

and procedures.

Rule 31a-4 requires funds or their advisers to maintain appropriate documentation to support fair value determinations and, where applicable, documentation related to the designation of the valuation designee.

Effective Date: March 8, 2021

Compliance Date:September 8, 2022

MarketingRule 206(4)-16

Rule 206(4)-1 contains tailored restrictions and prohibits for certain types of advertising and solicitation practices unless the adviser complies with certain conditions: • Materially misleading or omissive statements,

including the discussion of potential benefits of an adviser’s services, without providing fair and balanced treatment of associated material risks or limitations, or which cannot be substantiated upon demand by SEC.

• Use of compensated testimonials and endorsementsin an advertisement.

• Use of third-party ratings in an advertisement; and• Inclusion of performance information in an

advertisement that may be incomplete, partial or misleading.

The rule also adopts amendments to Form ADV that are designed to provide the SEC with additional information about advisers’ marketing practices.

Effective Date: May 4, 2021

Compliance Date:November 4, 2022

Industry Leadership

Paul KraftPartner | Audit & Assurance, US Mutual Fund & Investment Adviser LeaderDeloitte & Touche LLP

Krissy Davis Partner | Deloitte Risk & Financial Advisory, US Industry LeaderDeloitte & Touche LLP

Contacts

Ryan MoorePartner | Audit & AssuranceDeloitte & Touche LLP

Dan RooneyPartner | Audit & AssuranceDeloitte & Touche LLP

Maria GattusoPrincipal | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Bruce TreffManaging Director | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Contributors

Nicolina McCarthySenior Manager | Audit & AssuranceDeloitte & Touche LLP

Amitam KumarManager | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Deloitte Center for Regulatory Strategy

Irena Gecas-McCarthyFSI Director, Deloitte Center for Regulatory Strategy, AmericasPrincipal | Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

Austin TuellManager| Deloitte Risk & Financial AdvisoryDeloitte & Touche LLP

End notes1. Based on publicly available information gathered from Senate confirmation testimony and

statements by lawmakers, regulators, academics, think tanks, and advisers other related documents, as well as Deloitte internal analysis.

2. The SEC also adopted amendments to Rule 6c-11 under the 1940 Act to allow leveraged and inverse ETFs that satisfy the rule’s conditions to operate without the expense and delay of obtaining an exemptive order.

3. Deloitte, “Mutual fund directors and investment advisers digest,” accessed on April 29, 2021.

4. Securities and Exchange Commission (SEC), “Use of Derivatives by Registered Investment Companies and Business Development Companies,” accessed on April 29, 2021.

5. SEC, “SEC Modernizes Framework for Fund Valuation Practices,” accessed on April 29, 2021.

6. SEC, “SEC Adopts Modernized Marketing Rule for Investment Advisers,” accessed on April 29, 2021.

7. Deloitte Center for Financial Services (DCFS), “Building regulatory-ready organizations: Managing regulatory and compliance risk at investment management firms,” accessed on April 29, 2021.

8. Casey Quirk, a Deloitte business, “Righting the ship: Transforming active equity for a competitive world,” accessed on April 29, 2021.

9. SEC, “Press Release SEC Division of Examinations Announces 2021 Examination Priorities Enhanced Focus on Climate-Related Risks,” accessed on April 29, 2021.

Regulatory Ramp-Up: SEC Priorities and Implementation Expectations for 2021

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