Compliance

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Motivated by a rapidly evolving geopolitical climate, governments around the globe have increasingly scrutinized and intervened in transactions under foreign direct investment (FDI) screening regimes in recent years. Rising protectionism, concerns over cybersecurity threats, Covid-19 and the desire to protect critical domestic industries have driven the expansion of FDI regimes beyond purely national security or defense specific industries.

More than 100 jurisdictions now apply FDI screening in some form. The notification triggers and review processes vary significantly between these regimes, and their proliferation has significantly increased complexity for investors planning cross-border investments.

With Paul Atkins as the new SEC Chair, the agency’s priorities have shifted away from many of the aggressive policies of former Chair Gensler. The first four months of the Republican controlled SEC saw a dramatic shift in the approach to crypto with the dismissal or pause of major litigation, the termination of several longstanding investigations, the recission of accounting guidance regarding the safeguarding of crypto assets and the establishment of a new task force to help formulate the regulatory approach to crypto going forward. With the enforcement program under a new SEC undergoing significant changes, there will likely be a return to more traditional enforcement cases with greater emphasis on egregious conduct involving pecuniary gain or investor harm, moving away from “pushing the envelope” cases. Enforcement sweeps involving off-channel communications, late filings and other “broken windows” initiatives are expected to fall by the wayside. Regulation by enforcement could be replaced by increased interaction with the Staff, formal or informal guidance or lighter-touch rulemaking.

Over the past year, regulatory scrutiny of the credit markets has intensified, with the SEC investigating the potential use of material nonpublic information (“MNPI”) relating to credit instruments. The SEC brought a number of enforcement actions against investment advisers involving the failure to maintain and enforce written MNPI policies involving trading in distressed debt and collateralized loan obligations, even in the absence of insider trading claims. We anticipate that these investigations of trading in private credit instruments and related MNPI policies will continue, as SEC enforcement staff has increased their focus on these markets. 

With ESG regulation now well embedded across all major jurisdictions, the trend we see for 2025 is about increasingly sophisticated triangulation by private fund managers between the regimes that apply by default (such as mandatory corporate sustainability reporting), those that apply by choice (such as becoming an Article 8 fund within the meaning of the EU’s SFDR or the new for 2024 ESMA ESG Fund Name Guidelines – see summary here) and those that apply by third party request or expectation (such as reporting obligations within side letters). As regimes evolve, the ESG-approach of any fund once identified, chosen and defined must also take into account tracking developments and monitoring compliance.

Confession: writing this in May 2025, we cannot predict with confidence what the rest of 2025 will bring. The year has already seen four months of change and upheaval – political, regulatory, and economic. The new US administration has touted a business-friendly regulatory environment, with actual and promised tax cuts and deregulation. However, geopolitical tensions, tariff trade wars and political instability have introduced new risks and created a climate of extreme unpredictability. We should expect 2025 to hold several surprises still, whether that is a breakout of peace or new political themes obtaining prominence in one or more jurisdictions.

As reported today, Vice President Harris has announced Tim Walz, the sitting governor of Minnesota, as her running mate. This announcement is particularly significant for investment advisers due to the Advisers Act Political Contributions Rule, otherwise known as the “pay-to-play” rule.

As we reach the midpoint of 2024, the SEC’s enforcement actions continue to shape the private funds industry. From the continuing off-channel recordkeeping sweep to heightened scrutiny on AI claims, fiduciary obligations of fund managers, and insider trading, the SEC is as vigilant as ever. Compounding these efforts are significant…

The SEC’s recent settlement involving a “pay-to-play” rule violation by a private equity firm is a timely reminder for fund managers, especially with the November elections approaching. 

As a refresher, Rule 206(4)-5 of the Investment Advisers Act – known as the “pay to play” rule – prohibits investment advisers from receiving compensation for providing advisory services to state and municipal entities for two years after the adviser or one of its “covered associates” makes certain political contribution to candidates for public office. Note that the SEC Enforcement Division staff periodically reviews public campaign contribution reports (which are publicly available online) to identify donations by individuals associated with investment advisers.

In response to rising geopolitical tensions – from the Middle East to the Taiwan Strait to the ongoing conflict in Ukraine –the Biden Administration is increasingly using economic incentives and sanctions to assist the United States’ foreign policy objectives or mitigate the risk of increased conflict.

Hope for a resurgence during 2024 in Venture Capital fundraising, investment, and returns was strong at the beginning of this year, with optimism fueled by the recovery in 2023 of U.S. stock markets (lead by the performance of large tech companies) and anticipation about how AI might transform industries. Market observers were optimistic then that U.S. venture investment activity would pick up significantly from 2023 levels, which—based on PitchBook data—had reverted to the lower average level of investment seen during the period of 2018-2020 as compared to the robust levels of activity seen in 2021 and the first half of 2022. This hope was centered in large part on expectations about how the Federal Reserve would begin lowering interest rates.