Ransomware – Form 13F Proposal – Proxy Voting – Form CRS

By August 3, 2020Uncategorized

HRL newsletter published August 3, 2020


Over the past month, regulators are talking ransomware, Form 13F, proxy voting, and Form CRS. Below we highlight each topic and cite the source for easy reference. We welcome questions from our clients relative to these important matters.


OCIE Risk Alert: Cybersecurity – Ransomware Alert

issued July 10, 2020


Risk Alert Summary

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a new Risk Alert on July 10, 2020 concerning increased criminal attempts to gain and then ransom access to the computer networks of SEC registrants, including investment advisers, and their key service providers. In a nutshell, bad actors are using sophisticated phishing attempts to gain access to investment adviser systems and subsequently blocking access to such systems until a ransom is paid. The Risk Alert refers readers to the Department of Homeland Security Cybersecurity and Infrastructure Security Agency’s (“CISA”) series of cybersecurity alerts and provides suggestions on best practices for addressing the threats. OCIE further encourages registrants to share this information with their third-party service providers, particularly with those that maintain client assets and records for registrants.

The perpetrators behind ransomware attacks typically demand compensation (ransom) to maintain the integrity and/or confidentiality of customer data or for the return of control over registrant systems.

OCIE acknowledges that there is no such thing as a “one-size fits all” approach, and therefore shares its examination observations to assist investment advisers as they consider how to enhance cybersecurity preparedness and operational resiliency to address ransomware attacks. It is noteworthy that the Ransomware Risk Alert measures highlighted by the regulator mirror the factors cited by the SEC in its January 2020 guidance entitled “Observations on Cybersecurity and Resiliency Practices”.[1]

The measures highlighted in the Ransomware Alert include:

  • Incident response and resiliency policies, procedures, and plans
  • Operational resiliency
  • Awareness and training programs
  • Vulnerability scanning and patch management
  • Access management
  • Perimeter security

Next Steps

The bottom line: we routinely remind our clients that Risk Alerts matter, as they set the stage for the SEC to articulate concerns and recommended practices and to bring enforcement actions against advisers who ignore the guidance. Investment advisers are urged to review their cybersecurity policies and procedures in light of this Risk Alert and fill in any gaps or vulnerabilities.

More Information

Follow this link to download a copy or the OCIE Risk Alert: https://www.sec.gov/files/Risk%20Alert%20-%20Ransomware.pdf.

Follow this link to download a copy of the June 2020 CISA alert:  https://www.us-cert.gov/ncas/alerts/aa19-339a.


Form 13F Amendments Proposed

issued July 10, 2020


Summary of Proposed Securities Exchange Act Rule Amendment

July 10, 2020 was a busy day for the SEC. On this day, the SEC released a proposal to amend Form 13F and Rule 13f-1 under the Securities Exchange Act of 1934, seeking to increase the reporting threshold for institutional investment managers and to require filers to provide more information than previously required. These proposed changes reflect the continuing evolution and growth of equity markets and institutional investment advisers since Rule 13f-1’s original implementation in 1978. Comments about the proposed rule are due by September 29, 2020.

As noted in the proposing release, the Commission is considering:

  • Amendment of rule 13f-1 and Form 13F to raise the reporting threshold from $100 million to $3.5 billion to account for the changes in the size and structure of the U.S. equities market since 1975; and
  • Elimination of the omission threshold for individual securities on Form 13F.

Under the proposed amendments, the aggregate value of section 13(f) securities reported by managers would represent approximately 75% of the U.S. equities market as a whole, as compared with 83% without the proposed amendments and 40% in 1981, the earliest year for which Form 13F data is available.

The Release also describes certain additional information that filing advisers will need to provide. The proposed amendments would require each Form 13F filer to provide its CRD number and SEC filing number, if any. If a manager is making a Form 13F-NT filing, the manager must include the CRD number and SEC filing number, if any, of any other manager included in the “List of Other Managers Reporting for this Manager” table on the cover page. This information would allow the Commission and other consumers of Form 13F data to more easily identify other regulatory filings made by the Form 13F filer, and the interrelationships between managers who share investment discretion over 13(f) securities. This could identify for the public additional sources of market information.

Finally, the Commission is proposing to amend the Form 13F instructions for confidential treatment requests to require managers seeking confidential treatment for information contained in Form 13F to demonstrate that the information is both customarily and actually kept private by the manager, and to show how the release of this information could cause harm to the manager.

More Information

To read the proposed rule, follow this link: https://www.sec.gov/rules/proposed/2020/34-89290.pdf.


SEC Adopts Rule Amendments to Provide Investors Using Proxy Voting Advice More Transparent, Accurate and Complete Information

issued July 22, 2020


Summary of Securities Exchange Act Rule Amendments

On July 22, 2020, the SEC adopted amendments to its rules that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. The amendments are intended to ensure that clients of proxy voting advice businesses receive more transparent, accurate, and complete information on which to make voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice. The changes affect broad portions of Rules 14a-1, -2 and -9 under the Securities Exchange Act of 1934, with a focus on what constitutes “solicitation” under Section 14(a) of the Exchange Act. The amendments will be effective in September 2020, with full implementation for proxy voting advisers by December 1, 2020. Proxy voting advisers are not taking these rule amendments lightly, with at least one recognized proxy voting adviser pursuing legal action against the SEC, arguing vehemently that its service is not a proxy solicitation service.

New Investment Adviser Proxy Guidance

In concert with the rule amendments, investment advisers simultaneously received guidance updating last year’s proxy voting guidance.[2]  The prior guidance discussed how the fiduciary duty and Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, relate to an investment adviser’s exercise of voting authority on behalf of its clients.  The SEC’s July 2020 supplemental guidance is intended to assist investment advisers in fulfilling their proxy voting responsibilities in light of these amendments to the solicitation rules under the Exchange Act.

The supplemental guidance assists investment advisers in assessing how to consider issuer responses to recommendations by proxy advisory firms that may become more readily available to investment advisers as a result of the amendments to the solicitation rules under the Exchange Act.  In particular, issuers will have access to proxy advisory firm recommendations in a timeframe that will permit those issuers to make available to shareholders additional information that may be material to a voting decision in a more systematic and timely manner than they could previously. The amendments are expected to result in the availability of that additional information being made known to proxy advisory firms and their clients in a timely manner.

For example, the supplemental guidance states that an investment adviser should consider whether its policies and procedures address circumstances where the investment adviser has become aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline.  If an issuer files additional information sufficiently in advance of the submission deadline and such information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider such information prior to exercising voting authority to demonstrate that it is voting in its client’s best interest. Documentation of such consideration would be necessary in of course.

The supplemental guidance also addresses disclosure obligations and client consent when investment advisers use automated services for voting. The guidance states that an investment adviser that uses automated voting should consider disclosing: (a) the extent of that use and under what circumstances it uses automated voting; and (b) how its policies and procedures address the use of automated voting in cases where it becomes aware before the submission deadline for proxies to be voted at the shareholder meeting that an issuer intends to file or has filed additional soliciting materials with the Commission regarding a matter to be voted upon.

Advisers are also urged to consider whether its policies and procedures are reasonably designed to address these disclosures.  Depending on the facts and circumstances, these disclosures may be necessary for advisers to provide sufficiently specific information so that a client is able to understand the role of automated voting in the investment adviser’s exercise of voting authority. In those cases, the client may not, without this disclosure, have sufficiently specific information to provide informed consent with respect to the use of automated voting as a means of exercising voting authority either (a) for purposes of agreeing to the scope of the relationship; or (b) as it relates to the adviser’s obligation, under its duty of loyalty, to provide full and fair disclosure relating to the advisory relationship. In this regard, advisers should also consider their obligations under Rule 206(4)-6 and Form ADV as they relate to their voting policies and procedures.

Next Steps

The supplemental guidance will soon be published on the Commission’s website and in the Federal Register.  The guidance will be effective upon publication in the Federal Register. The bottom line is that advisers must make fulsome disclosures to facilitate client informed consent with respect to the use of automated voting as a means of exercising voting authority and for advisers to satisfy their obligations under Rule 206(4)-6 and Form ADV. We encourage our advisory clients to review their policies, procedures, and disclosures in light of this new regulatory guidance. 

More Information

To review the SEC’s press release and detailed guidance, follow this link: https://www.sec.gov/news/press-release/2020-161.


Statement by the Staff Standards of Conduct Implementation Committee Regarding New Form CRS Disclosures

issued July 27, 2020


Statement Summary

Although investment advisers and broker-dealers may be relieved that Form CRS is filed, posted, and delivered, this is no time to sit back and relax. As telegraphed earlier this year, the SEC is now reviewing Form CRS to assess compliance with content and format requirements.

Form CRS was implemented to reduce confusion for investors seeking to evaluate brokerage and investment advisory services, and otherwise assist investors when they work with financial professionals. Form CRS is intended to promote transparency and better-informed decision making, through clear, concise disclosures, and by summarizing in one place selected information about a particular registered firm.

The SEC’s inter-Divisional Standards of Conduct Implementation Committee (“Committee”) was established when Form CRS was adopted, and includes representatives from the Division of Investment Management, Division of Trading and Markets, Division of Economic and Risk Analysis, and Office of Compliance Inspections and Examinations. According to its July statement, the Committee is reviewing Form CRS from a cross-section of firms to assess compliance with the content and format requirements of Form CRS. To date, the Committee has indicated mixed reviews and will engage with firms to share best practices and provide feedback on filings.

Next Steps

Stay tuned for additional Committee feedback on Form CRS.

More Information

To read the SEC statement, follow this link: https://www.sec.gov/news/public-statement/staff-form-crs-2020-07-27.

[1] https://www.sec.gov/files/OCIE%20Cybersecurity%20and%20Resiliency%20Observations.pdf

[2] “Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers,” Release Nos. IA-5325; IC-33605, Aug. 21, 2019

Betsy Rathz

Author Betsy Rathz

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