Q1 2024 Asset Management Regulatory Update

May 1, 2024

Table of Contents

SEC Adopts Amendments to Enhance Private Fund Reporting

SEC Charges Registered Investment Adviser for Failing to Disclose Influencer’s Role in Connection with ETF Launch

SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence

SEC Charges Advisory Firm for Disclosure Failures Ahead of Acquisition Bid

SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet

SEC Proposes Rule to Update Definition of Qualifying Venture Capital Funds


On February 8, the Securities Exchange Commission (the “SEC” or the “Commission”) and the Commodities Futures Trading Commission (the “CFTC”) jointly adopted amendments to Form PF, used by certain investment advisers to private funds, including investment advisers that are registered with the CFTC as commodity pool operators (“CPOs”) or commodity trading advisers, to report confidential information regarding the private funds they advise. According to the final rule’s adopting release, the amendments “are designed to enhance the Financial Stability Oversight Council’s ability to monitor systemic risk as well as bolster the SEC’s regulatory oversight of private fund advisers and investor protection efforts.”

The amendments to Form PF (the “Form Amendments”) require separate reporting for each component of master-feeder arrangements and parallel fund structures (other than feeder funds that invest all of its assets in a master fund, U.S. Treasury bills, and/or cash and cash equivalents). Advisers will also be required to include the value of investments in other private funds when determining whether: (i) the adviser is required to file Form PF; (ii) the adviser meets the thresholds for reporting as a large hedge fund adviser, large liquidity fund adviser, or large private equity fund adviser; (iii) a hedge fund is a qualifying hedge fund, as opposed to permitting an adviser to either include or exclude the value of other investments for determining the adviser’s reporting threshold. In a change from the SEC’s initial proposal, which contemplated permitting advisers to report fully owned trading vehicles on an aggregated or disaggregated basis and requiring advisers to report partially owned trading vehicles on a disaggregated basis, the final rule includes that advisers will be required to identify trading vehicles in Section 1b of Form PF and report on an aggregated basis for the reporting fund and all trading vehicles. In addition, the final rule adds an instruction for advisers to specify whether the reporting fund holds assets, incurs leverage, or conducts trading or other activities through a trading vehicle.

Additionally, the Form Amendments amend Sections 1a and 1b of Form PF (applicable to all filers) to require filers to provide “additional identifying information” about the adviser and its related persons and their private fund assets under management. Filers will also be required to provide additional identifying information about the private funds they manage and certain other information about such funds, including the fund’s assets, financing, investor concentration, and performance.

The Form Amendments also amend Section 1c of Form PF (applicable to private fund advisers to hedge funds). Advisers will be required to report the fund’s use of “digital assets as an investment strategy.” With respect to Sections 2a and 2b of the Form, the Form Amendments remove aggregate reporting questions for large hedge fund advisers and require large hedge fund advisers to report information about the reporting fund’s investment exposure, open and large position reporting, borrowing and counterparty exposure, and market factor effects.

The effective date and compliance date for the Form Amendments is March 12, 2025.


On February 16, the SEC announced that a registered investment adviser (the “IA”) had agreed to pay a $1.75 million civil penalty to settle charges that the IA failed to disclose a social media influencer’s role in the launch of a new exchange-traded fund (“ETF”). The IA launched a social media sentiment ETF designed to track an index “based on ‘positive insights’ from social media, news articles, blog posts and other data.” According to the SEC’s order (the “Order”), the index provider informed the IA that it planned to retain a well-known social media influencer (the “Influencer”) to promote the index in connection with the launch of the Fund. The Order also included that the index provider requested, and the IA agreed, to an index license fee structure that would provide the index provider with a larger percentage of the fee when the ETF’s assets under management reached certain thresholds.

As further described in the Order, the initial discussions between the IA and the index provider with respect to the index license fee resulted in a preliminary agreement in October 2020 that the IA would pay the index provider an index license fee equal to 20% of the management fee the IA received from the ETF, though no agreement was executed at that time. Subsequently, the index provider determined to partner with the Influencer, who would receive a portion of the licensing fees paid to the index provider. In light of this partnership, the index provider proposed new economic terms for the index licensing agreement to incentivize the influencer to raise awareness of the ETF.

Specifically, the Order states that under the new economic terms of the proposed licensing agreement, the index provider would receive, “at least 20% of the net management fee [the IA] accrued (after netting out four basis points attributed to expenses) and as much as 60% of the management fee if the new ETF had in excess of $1.25 billion in assets under management within eighteen months of launching the fund.” In mid-November 2020, representatives of the IA and index provider informally agreed to these terms, though the index licensing agreement was not executed until February 2021.

The ETF’s board of trustees (the “ETF Board”) met in early December 2020, at which time the ETF Board considered the advisory contract with the IA. In connection with such approval, the IA provided a memorandum that discussed certain of the economic terms of the licensing agreement. According to the Order, this memorandum disclosed that the licensing fee would equal 20% of the net management fee, but did not disclose the sliding scale whereby the index provider’s compensation would increase if the ETF reached certain asset thresholds. The materials presented to the ETF Board also did not disclose the influencer’s involvement or discuss the controversies surrounding the influencer.

In connection with a board of director’s consideration of an advisory contract, Section 15(c) requires advisers to furnish such information as may reasonably be necessary for the directors to evaluate the terms of the contract. Funds are required to include disclosure in their shareholder reports concerning, among other items, (i) the extent to which economies of scale would be realized as the fund grows, (ii) whether economies of scale are for the benefit of shareholders, and (iii) the costs of services to be provided and profits to be realized by the adviser and its affiliates from its relationship with the fund. According to the Order, the ETF Board did not have ability to consider the economic impact of the sliding scale arrangement as part of its evaluation of the IA’s profitability and the extent to which economies of scale would be realized if the ETF grew. Additionally, the Order included that the IA did not have adequate written policies and procedures for furnishing the Board with accurate information reasonably necessary for the board to evaluate the terms of the advisory contract as well as the material information related to a proposed fund launch.

As a result of the above, the Order stated that the IA violated: (i) Section 15(c) of the Investment Company Act; (ii) Section 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”), which prohibits an investment adviser directly or indirectly, from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; and (iii) Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which required registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.


On March 18, the SEC announced settled charges against two investment advisers (“Adviser 1” and “Adviser 2”) for making false and misleading statements about their purported use of artificial intelligence (“AI”). As the first set of SEC settlements related to AI claims, the settlements highlight the SEC’s focus on investment adviser’s unsubstantiated claims about using AI - “AI washing” – compared to ESG “greenwashing.”

The SEC charged Adviser 1 with violations of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-1 and 206(4)-7 (the “Antifraud Provisions,” the “Marketing Rule,” and “Compliance Rule”, respectively) thereunder in connection with regulatory filings, advertisements, and social media relating to its purported use of artificial intelligence and machine learning. Per the SEC’s order, Adviser 1 represented that it used artificial intelligence and machine learning to analyze its retail clients’ spending and social media data to inform its investment advice when, in fact, no such data was being used in its investment process. For example, in Adviser 1’s Form ADV brochures from August 2019 through 2021, Adviser 1 claimed that its advice was “powered by the insights it makes when individuals . . . connect their social media, banking, and other accounts . . . or respond to Adviser 1’s questionnaires” which make its investment decisions “more robust and accurate[.]” Moreover, starting in November 2020, Adviser 1’s website claimed that Adviser 1 “turns your data into an unfair investing advantage” and that Adviser 1 “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” According to the SEC, these statements were false and misleading because Adviser 1 had not developed the capabilities they represented. The Division of Examinations (“EXAMS”) identified Adviser 1’s AI-related statements as problematic during an examination in October 2021, for which Adviser 1 admitted to EXAMS that it had not used any of its client’s data and had not created an algorithm to use client data. Adviser 1 then took certain corrective actions to correct false and misleading statements regarding the use of client data, such as revising its Form ADV Part 2A, hiring an additional compliance manager for its compliance team, and retaining two outside compliance consulting firms to assist with a corrective review of the firm’s marketing and regulatory disclosure documents. Still, Adviser 1 continued to make certain false and misleading advertising statements regarding using client data in various formats through August 2023. For example, investors who joined Adviser 1 in 2021 and 2022 were sent an email communication stating that their data was “helping [Adviser 1] train [its] algorithm for pursuing even better returns” and that Adviser 1 “will pool your data with everyone else’s to power our algorithm.” Similarly, the aforementioned website claims made in November 2020 remained through August 2023. Without admitting or denying the SEC’s findings, Adviser 1 agreed to pay a civil penalty of $225,000.

The SEC charged Adviser 2 with violations of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-1 and 206(4)-7, thereunder in connection with Adviser 2’s false and misleading claims about its purported use of AI on its website and social media sites, as well as in emails to current and prospective clients. According to the SEC, Adviser 2 could not substantiate its claim as the “first regulated AI financial advisor” and falsely claimed on its public website that its technology incorporated “[e]xpert AI-driven forecasts,” when in fact it did not. Adviser 2 was also cited by the SEC for other non-AI related violations of the Marketing Rule (e.g., false claims on Adviser 2’s website and in a press release that it had more than $6 billion of assets on its platform when Adviser 2 did not have or report any regulatory assets under management on its Form ADV; use of hypothetical performance and testimonials on Adviser 2’s website and YouTube without meeting any of the use conditions under the Marketing Rule) as well as other instances of misconduct in violation of the Antifraud Provisions (e.g., an improper liability disclaimer language, commonly referred to as a “hedge clause”). Without admitting or denying the SEC’s findings, Adviser 2 agreed to pay a civil penalty of $175,000.


On March 1, 2024, the SEC announced settled charges against a New York-based investment adviser (the “Adviser”) for its failure to make timely ownership disclosures in the months up to its acquisition bid for a public company (the “Company”), as required under rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. By way of brief background, these rules require investors that beneficially own more than 5% of a public company’s equity securities to publicly disclose their beneficial ownership and other related information in either a Schedule 13D or Schedule 13G. Schedule 13G is available to “passive” investors who acquired shares without intending to change or influence the control of the issuer, as long as their ownership remains below 20%. Once passive intent no longer exists, the investor can no longer file on the shortform Schedule 13G as a passive investor and must file on the longer form Schedule 13D.

According to the SEC, an affiliated hedge fund advised by the Adviser began purchasing Company common stock in August 2021 and first exceeded the 5% beneficial ownership threshold on December 8, 2021. As of December 31, 2021, the Adviser beneficially owned 5.6% of the outstanding common stock of Company. the Adviser disclosed its 5.6% beneficial ownership position on an initial Schedule 13G that it filed with the SEC on February 14, 2022 (the “Company Schedule 13G”).

Under Item 10 of Schedule 13G, a filer relying upon Rule 13d-1(b) or 13d-1(c) must sign a certification specifically attesting to the lack of a “control” purpose or effect. Again, pursuant to Rule 13d-1(e), any person who has filed a Schedule 13G pursuant to Rule 13d-1(b) or 13d-1(c) becomes immediately subject to Rule 13d-1(a) and must file a Schedule 13D if the investor once a passive intent no longer exists and the filer holds the securities with a disqualifying “control” purpose or effect. The term “control” is defined in Rule 12b-2 of the Exchange Act to mean “possession . . . of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Nevertheless, the determination of whether securities are held with the purpose or effect to change or influence control is fact specific analysis.

From January 1, 2022 through April 18, 2022, the Adviser purchased an additional 2,050,000 shares of Company common stock, giving it total beneficial ownership of 5,050,000 shares, or approximately 9.9% of the outstanding shares. the Adviser also entered into cash-settled swap agreements between April 27 and May 12, 2022, which provided the Adviser with economic exposure comparable to approximately an additional 450,000 shares or 0.9% of outstanding Company common stock.

On April 26, 2022, the Adviser first considered making its own acquisition bid for Company, with financing to be provided by a private equity firm. On the same day the Adviser began to draft an offer letter to Company with a placeholder offer price of $85 per shares. According to the SEC, these activities shifted the Adviser from passive to control status by no later than that date (April 26, 2022), as the Adviser held its Company common stock with the intent to change or influence “control” of the issuer. Accordingly, because its Company Schedule 13G certification was no longer accurate, the Adviser was therefore required to convert its Company Schedule 13G to a Schedule 13D within ten (10) days, i.e., no later than May 6, 2022.

Instead, on April 27, 2022, the Adviser contacted outside counsel to advise on its Schedule 13D and provided counsel with a draft of the offer letter. On May 12, 2022, the Adviser met with Company management for the first time to discuss whether management would be receptive to an acquisition bid. The Adviser did not file the required Schedule 13D until May 13, 2022, the same day that it submitted to Company management, and publicly announced, its proposal to acquire all Company shares not already held by the Adviser, at $86 per share, approximately a 20% premium to the prior day’s closing trading price on the New York Stock Exchange.

The SEC found that the Adviser’s seven-day delay in filing Schedule 13D violated Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder. Without admitting or denying the SEC’s findings, the Adviser agreed to pay a $950,000 civil money penalty to settle the matter.


On March 27, the SEC adopted amendments to Rule 203A-2(e) under the Advisers Act that exempt certain investment advisers that provide advisory services through the internet (“Internet Advisers”) from the prohibition on SEC registration (the “Internet Adviser Exemption”), as well as related amendments to Form ADV.

Under Section 203A of the Advisers Act, investment advisers are generally prohibited from registering with the SEC unless they reach assets under management threshold, advise an investment company registered under the Investment Company Act of 1940, or qualify for an exemption under SEC rules or another statute. However, Internet Advisers are exempt from the Section 203A prohibition under the Internet Adviser Exemption if they meet certain conditions. As initially adopted in 2002, an adviser could rely on the Internet Adviser Exemption if, among other obligations, it provided investment advice to all of its clients exclusively through an “interactive website,” with a de minimis exception which permitted Internet Advisers to have a limited number (i.e., fewer than 15) of non-internet clients in the preceding 12-month period. According to the SEC’s adopting release, the amendments to the Internet Adviser Exemption are designed to modernize Rule 203A-2(e) to reflect the broader evolution in technology and the marketplace since its adoption in 2002 and to better align current practices in the investment adviser industry with the narrow exemption for certain investment advisers that did not fall neatly within the framework established by Congress.

The SEC’s 2024 amendments change the conditions of the Internet Adviser Exemption in two key ways. First, the amendments rename and redefine Rule 203A-2(e)’s existing defined term “interactive website” as “operational interactive website.” Existing Rule 203A-2(e) defines an “interactive website” as a website in which computer software-based models or applications provide investment advice to clients based on personal information each client supplies through the website. As amended, an “operational interactive website” is defined as a website or mobile application through which the investment adviser provides “digital investment advisory services” on an ongoing basis to more than one client (except during temporary technological outages of a de minimis duration). The amendments also define “digital investment advisory service” as investment advice to clients generated by the operational interactive website’s software-based models, algorithms, or applications based on personal information each client supplies through the operational interactive website. Second, the amendments eliminate the de minimis exception of 15 non-internet clients. Accordingly, under amended Rule 203A-2(e), an Internet Adviser must provide advice to all its clients exclusively through an operational interactive website. As noted in the adopting release, when the SEC initially adopted the fewer than 15 client de minimis exception, the Commission stated that it was similar to the since repealed “private adviser exemption,” which, subject to certain additional conditions, exempted from the requirement to register with the Commission any adviser that during the course of the preceding 12 months, had fewer than 15 clients.

Lastly, the Internet Adviser Exemption amendments amend Form ADV to require an Internet Adviser relying on the Internet Adviser Exemption as a basis for registration to represent on Schedule D of its Form ADV that, among other things, it has an operational interactive website.

The amendments to the Internet Adviser Exemption will become effective July 8, 2024 (90 days after publication in the Federal Register). An Internet Adviser relying on the exemption must comply with the amended rules, including the requirement to amend its Form ADV to include the required representations, by March 31, 2025. An Internet Adviser that is no longer eligible for the exemption and otherwise ineligible for SEC registration must register in one or more states and withdraw its SEC registration by filing a Form ADV-W by June 29, 2025.


On February 14, the SEC proposed a rule that would, if adopted, adjust for inflation the threshold for a fund to qualify as a “qualifying venture capital fund” for the purposes of the Investment Company Act. Qualifying venture capital funds are excluded from the definition of an “investment company” under the Investment Company Act. A “qualifying venture capital fund” is defined under the Investment Company Act as “a venture capital fund that has not more than $10 million in aggregate capital contributions and uncalled committed capital.” Pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, the SEC is required to adjust the threshold for inflation once every five years. The proposed rule would raise the threshold to $12 million aggregate capital contributions and uncalled committed capital, based on the Personal Consumption Expenditures Chain-Type Price Index (PCE Index). The proposed rule also would establish a process for future inflation adjustments every five years.

The period to submit comments on the proposed rule closed on March 22, 2024.

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