‍Introduction

Generative AI technology has emerged as both a powerful and disruptive force, transforming workflows and enabling tasks that once seemed impossible. This disruption is especially noticeable in the asset management industry, where efficient, compliant, and scalable AI solutions are becoming competitive necessities. As companies in the sector look to harness this technology, the “build or buy” decision is becoming increasingly important—particularly when considering Large Language Model (LLM)-powered tools.

At Zeidler Group, we frequently face the “build-or-buy” decision, both within our own operations and when advising our clients. With extensive experience working with LLMs, beginning with OpenAI’s GPT-3.5 model, we’ve developed a robust framework to evaluate when to build proprietary solutions and when to adopt market offerings. Supported by our innovation lab and a team of in-house software engineers, we have gained valuable insights into the nuances of this decision-making process.

Our Marketing Material Review Tool (MMR-Tool) serves as a prime example of when we chose to build. We began its development 1.5 years before launching it publicly, providing our clients with an automated compliance solution that significantly enhances efficiency. This proprietary solution, built with input from both our legal and tech teams, has positioned us ahead in the market.

However, we also recognize that in some cases, buying an existing solution can be the more prudent choice—especially when time-to-market is critical and available market offerings meet client needs.

Key Insights for Your Decision-Making Process

To assist you in making your own evaluations, we’ve compiled a downloadable PDF with step-by-step practical questions on approaching the “build or buy” decision, tailored specifically for asset managers and legal tech solutions.

By reflecting on these insights, you’ll be better equipped to navigate the fast-evolving world of generative AI and make strategic decisions that will strengthen your firm’s AI capabilities.

Key Considerations:

Understanding Financial Costs: Initial vs. Ongoing Expenses

Cost is often the largest factor in the build-or-buy equation. While acquiring software might appear straightforward, it’s essential to evaluate both immediate and long-term financial impacts. Generative AI solutions can be expensive to procure, with additional ongoing costs—such as API usage fees, vendor support, and updates.

On the other hand, building a tool from scratch usually requires significant upfront investment in development, followed by ongoing maintenance. In some cases, a hybrid approach, blending market solutions with customisable elements, can offer a more cost-effective path.

Understanding all expenses involved is key to making an informed choice.

Labour Costs: Skill Availability and Key-Person Risk

Human capital plays a critical role in the decision. While some companies may already have the skilled staff to develop LLM technology, others may need to hire or train talent.

Additionally, companies should account for “key-person risk,” where knowledge is concentrated in a few employees, leaving the business vulnerable if they depart.

When purchasing a tool, labour costs are generally lower, though staff may need to undergo training and adaptation.

It is important to weigh the internal expertise and depth of labour commitment needed for either building or buying.

Time Constraints: Development vs. Onboarding Speed

Time-to-market can differ drastically between building and buying. Building a solution typically takes longer, as it involves development, testing, and integration. Even purchasing a solution may involve a lengthy procurement process and time spent on onboarding and adapting the tool to fit your organisation’s needs. Moreover, operational time and speed are also critical—AI tools must perform with minimal latency to maximise user experience and productivity. Evaluating both expected runtime and adaptability for future requirements is vital.

Market Dynamics: Scalability and Commercial Alignment

Market dynamics, including scalability and alignment with commercial goals, must also be factored in. If your company plans to offer a solution as a service, building proprietary technology could provide new revenue opportunities. However, entering the software market comes with its own set of challenges. When adopting a purchased solution, you’ll need to assess licensing terms, data privacy issues, and the long-term vendor relationship.

Competitive Advantage: Proprietary Edge vs. Vendor Risk

Technology often serves as a key driver for competitive advantage. Owning a proprietary tool can offer exclusive features, giving your company a unique position in the market. However, proprietary solutions come with the risk of being surpassed by emerging technologies or innovations from competitors. Purchased solutions, by nature, are not exclusive, and vendors typically aim to expand their market reach within the industry. Understanding how your investment aligns with long-term competitive goals will influence whether building or buying makes the most sense.

The Maintenance Question: Balancing Control with Vendor Dependency

Maintenance is an often overlooked but crucial consideration. Whether you choose to build or buy, the solution will require upkeep. This includes both technical performance monitoring and regular updates to keep pace with innovation. A purchased solution may come with vendor support, but you will be dependent on their update schedule. On the other hand, a proprietary solution offers greater control over updates but requires dedicated resources to manage its lifecycle.

Why the MMR-Tool Is the Perfect Starting Point for Asset Managers Exploring AI Solutions

Our Marketing Material Review Tool (MMR-Tool) is an ideal entry point for asset managers exploring AI-driven compliance solutions without the immediate commitment of building custom software. Our proprietary lawyer-educated AI solution is designed specifically for the asset management industry, bringing together our deep legal expertise and AI-driven automation to deliver outstanding efficiency and compliance confidence.

In fact, several of our most innovative product offerings started as client requests and evolved over time through collaborative development. This approach allowed our clients to gain highly tailored, effective solutions while enabling us to expand our business into new areas and capture additional value in new markets.

If you’re navigating the “build-or-buy” decision, download our comprehensive PDF to explore our internal framework. This resource offers practical, industry-specific questions to help guide your AI strategy.

Let’s Talk! If you’re interested in how the MMR-Tool or other solutions can be customised to meet your firm’s needs, don’t hesitate to contact us. We’d be delighted to explore how our expertise can help unlock the potential of AI in asset management—now and for the future.

Conclusion

The build-or-buy decision in generative AI is a complex one, requiring careful consideration of financial, labour, time, market, and competitive factors. Each company’s unique needs and constraints will shape this decision, but thoughtful analysis of these elements will help ensure that AI investments align with broader strategic goals.

Generative AI has immense potential to transform businesses. Whether building or buying, making the right choice now will position your company for success—both in the present and for years to come.

As AI in asset management continues to evolve, staying agile and adaptable will be essential to maximising its benefits. Aligning AI investments with strategic goals will ensure that companies remain competitive and well-positioned to meet future challenges.

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The SEC has officially released its 2025 Examination Priorities, coincidentally just in time for Halloween. Every year, the SEC’s Division of Examinations announces its priorities, outlining specific areas of concern and risks for market participants.

For investment advisers, the focus areas for 2025 are as anticipated. The four priority areas are:

1. Adherence to Fiduciary Standards of Conduct;
2. Effectiveness of Advisers’ Compliance Programs;
3. Examinations of Advisers to Private Funds; and
4. Never Examined Advisers, Recently Registered Advisers, and Advisers Not Recently Examined.

Key Insights into 2025 Examination Priorities

Looking at the priorities holistically, the SEC continues to focus on core areas for investment advisers, particularly fiduciary duties and compliance programs. These areas are already under significant scrutiny and remain a top concern for advisers.

When comparing the 2025 priorities to the 2024 Examination Priorities, the SEC appears to have followed a similar approach, especially regarding Fiduciary Standards of Conduct. Much of the Division’s focus on illiquid, high-cost, and complex products, as well as conflicts of interest, remains unchanged.

However, one notable update is the specific mention of asset classes “sensitive to higher interest rates or changing market conditions, including commercial real estate.” This marks a call for advisers investing in real estate and similar asset classes to be particularly cautious.

Interestingly, there is no mention of ESG or sustainable investing, which had taken a backseat in 2024 as well. This might be influenced by the stalling of U.S. anti-greenwashing rules, signaling that ESG remains a lower priority for the SEC this year.

The Rise of Artificial Intelligence (AI)

In a significant shift from 2024, the Division has placed a spotlight on artificial intelligence. Last year, AI was briefly mentioned, but 2025 marks a major change. The Division now addresses how advisers are integrating AI into their advisory operations, including portfolio management, trading, marketing, and compliance.

This heightened focus suggests that the SEC is not only aware of the increasing use of AI but is prepared to examine its integration within advisory firms. Advisers leveraging AI, particularly through third-party vendors, should ensure robust oversight, as the Division is likely to scrutinize data protection and potential data leakage during its exams.

Private Fund Managers: Key Areas of Focus

As expected, private fund advisers remain a priority for the Division in 2025. Following the collapse of the Private Fund Rules, it’s likely the SEC will enforce as much of those rules as possible through its examination powers.

Key areas of focus for private fund advisers include:

1. Ensuring disclosures align with actual practices, especially for funds with poor performance or significant withdrawals;
2. The accuracy of calculations and fee allocations;
3. Adequate disclosure of conflicts of interest and risks, along with robust policies and procedures; and
4. Compliance with recent SEC rules, including Form PF and the SEC Marketing Rule.

Conclusion

While the 2025 SEC Examination Priorities may not introduce groundbreaking changes, they provide valuable insight into the SEC’s current focus. With the 2024 elections behind us, the SEC may face potential shifts in 2025 as a new presidential administration takes over. Advisers should remain vigilant in maintaining proper recordkeeping, compliance processes, and adherence to the Investment Advisers Act.

Strengthen Your Compliance Today!
Don’t wait for an SEC exam to uncover potential weaknesses in your compliance program. Our expert team can help you navigate the 2025 SEC Examination Priorities and ensure your firm is fully prepared. Book a complimentary consultation today to gain insights and protect your firm from regulatory risk.

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Introduction to the SEC’s Recent Charges Against Investment Managers

On September 9^th, the SEC announced charges against nine investment managers for non-compliance with the Marketing Rule, totaling over 1.2 million dollars.  However, the monetary costs will pale in comparison to the reputational damage caused by the non-compliance as well as any potential litigation from clients.

Summary of SEC Violations: Common Compliance Mistakes

In summary, the SEC uncovered several types of violations, including:

• Untrue statements about third-party ratings;
• Memberships to organizations that did not exist;
• Claims about services without any substantiation; and
• Endorsements without required disclosures relating to compensation or dates.

Why Investment Managers Struggle with Marketing Rule Compliance

These types of mistakes are very common but also very easy to catch.  Unfortunately, a lot of investment managers do not have the time, resources, and in some cases the requisite legal knowledge to prevent these issues in their marketing materials.

In particular – using the claim of membership to a non-existent organization as an example – some of these mistakes highlight flaws in many managers’ processes. It is very likely that the creators of the marketing material either added the membership claim after compliance had signed off on the document or the compliance team did not have the time to check that the organization existed.

The SEC’s Focus on Marketing Rule Reviews: What to Expect

As Zeidler has outlined in previous posts, the SEC’s power had been narrowed in 2024 which led us to predict that the SEC staff would focus on the remaining areas where they can flex their power: non-compliance with the SEC Marketing Rule.  The fines to these nine investment managers should be seen as a shot across the proverbial bow for the investment management industry because the SEC will continue with rolling Marketing Rule reviews, most likely at an increased rate.

Note: The SEC’s Division of Examinations will release its priorities in October, and Marketing Rule compliance should be a priority (this is not great news for firms that do not have a robust marketing compliance process).

How the Zeidler MMR Tool Can Prevent Costly SEC Compliance Failures

With all that said, what could have prevented these issues for those nine firms? A simple, reliable tool that checks marketing materials for SEC Marketing Rule compliance. Good news: such a tool already exists!

The Zeidler Marketing Material Review (MMR) tool would have completely prevented these issues.  Had these firms used the Zeidler MMR tool, their respective marketing materials would have been flagged for every one of the violations the SEC found.

Protect Your Firm from Fines and Reputational Damage

By using the Zeidler MMR Tool, investment managers can prevent compliance failures, avoid costly penalties, and, most importantly, safeguard their firm’s reputation from long-term damage caused by SEC violations.

Take Control of Your Marketing Compliance Today

Don’t wait for the SEC to come knocking. Protect your firm from costly fines and reputational damage by ensuring your marketing materials are fully compliant, let our lawyer-educated AI do the heavy lifting!

Book a demo of the Zeidler Marketing Material Review (MMR) Tool today and see how easy it is to safeguard your firm from compliance risks.

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‍New York, NY, United States, 4 September 2024 Zeidler Group is pleased to announce that Waystone, a leading global provider of institutional governance, administration, risk and compliance services to the asset management industry, has adopted our AI-powered Marketing Material Review Tool (MMR-Tool).

Developed by a collaboration between Zeidler Group’s team of specialist investment fund lawyers and software engineers, the MMR-Tool exemplifies the seamless integration of law and technology using Large Language Model (LLM) capabilities. The tool significantly enhances both the speed and accuracy of compliance checks, minimizing manual review efforts and reducing the risks of regulatory breaches.

LLM technology signals a transformative shift in the legal review of documents, offering unparalleled capacity to comprehend complex text, interpret charts and graphs, and verify that materials adhere to the required legal frameworks.

Arne Zeidler, CEO & Founder of Zeidler Group, commented on the new partnership:

“We are proud to welcome Waystone to our growing roster of clients utilising the MMR-Tool. Waystone’s commitment to AI innovation reflects a digitally native and progressive mindset. This partnership underscores the value and confidence that our AI solutions deliver to the asset management industry. With the MMR-Tool, we are confident that AI-powered compliance checks will soon be indispensable in delivering heightened accuracy, efficiency, and regulatory assurance. With this strategic partnership in place, Zeidler Group continues to push the boundaries of AI and legal technology, providing unparalleled solutions for the investment fund sector.”

Brian Riordan, Director – Distribution Oversight at Waystone, also shared his thoughts:

“Embracing digital transformation is a key focus at Waystone as we continuously strive to deliver a superior client experience. Zeidler’s MMR-Tool provides us with a streamlined, tech-driven approach to consistent, compliant, multi-jurisdictional marketing materials review management.”

Experience the MMR-Tool in Action

Book your Personal Demo to Witness Marketing Material Reviews in Minutes.

About Zeidler Group

Zeidler Group is a technology-driven law firm and compliance provider offering scalable services to the asset management industry. Zeidler Group fosters collaborative, strategic partnerships by delivering innovative digital solutions and bespoke, research-based legal advice and regulatory guidance. The firm serves more than 250 clients with aggregate assets under management exceeding USD 1.5 trillion, including some of the industry’s largest and most respected names, as well as boutique operators.

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New York, NY – 6 September 2024 – Zeidler Group is pleased to announce the promotion of Kate Horgan to Head of Business Development-US, based in the firm’s New York office.

In her new role, Ms. Horgan will spearhead Zeidler Group’s business development, marketing, and brand awareness strategies across the US market. She will report directly to Arne Zeidler, CEO & Founder of Zeidler Group.

Ms. Horgan brings over 10 years of experience in business development, marketing, and demand generation. She has previously overseen Zeidler Group’s global marketing efforts, a responsibility she will continue alongside her expanded role. Prior to joining Zeidler Group, Ms. Horgan held various project management, business development, and marketing positions at several prominent asset servicing firms. She holds a first-class MA in Business Management from the University of Limerick, a Postgraduate Diploma in International Business from the Irish Management Institute, and a first-class degree in English and History.

Arne Zeidler, CEO & Founder, commented on the appointment: “Kate has been an invaluable asset to our business development efforts globally, and I am confident she will continue to drive our success in the US with her leadership and vision.”

Ms. Horgan added: “I am excited to lead business development efforts in the US at such a pivotal moment for Zeidler Group. Our unique combination of legal and regulatory expertise, combined with innovative use of AI and Large Language Models, offers exceptional opportunities for enhancing the value we provide to legal and compliance teams in the asset management industry.”

About Zeidler Group

Zeidler Group is a technology-driven law firm and compliance provider offering scalable services to the asset management industry. Zeidler Group fosters collaborative, strategic partnerships by delivering innovative digital solutions and bespoke, research-based legal advice and regulatory guidance. The firm serves more than 250 clients with aggregate assets under management exceeding USD 1.5 trillion, including some of the industry’s largest and most respected names, as well as boutique operators.

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Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

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Explore the latest ESG Regulatory Insights Across Europe and beyond!

Our latest ESG Regulatory Round-Up newsletter is here, tailored for our esteemed clients and the wider community seeking valuable sustainable finance insights and updates.

What began as a quiet quarter in April 2024 quickly transformed into a period of meaningful developments from May through July, prompting us to extend this newsletter to cover the latest updates. Highlights include the ESMA Final Guidelines on Fund Names, the long-awaited publication of the Corporate Sustainability Due Diligence Directive in the Official Journal of the EU, and the adoption of the ecosystems and Natural Habitats Restoration Law. Even though there is still no clarity around the SFDR reform, these strides mark substantial progress in establishing a comprehensive and clear legal framework for environmental matters.

Download Now

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New York, NY, United States, 30 July 2024 – Zeidler Group, a prominent legal and compliance firm focused on investment funds, proudly announces the latest upgrade to its Marketing Material Review Tool (MMR-Tool). The LegalTech tool now includes extensive coverage of US marketing communication regulations, including the SEC Marketing Rule and FINRA rules on Communications with the Public.

Developed, trained, and meticulously maintained by Zeidler Group’s team of expert investment fund lawyers, the MMR-Tool is designed to review marketing materials against the regulatory frameworks of multiple jurisdictions. Built on Large Language Model technology, the MMR-Tool can generate lawyer-like reviews of marketing materials in less than ten minutes. It currently covers over 30 individual national laws, circulars, and official publications, forming the basis for its automated reviews.

Streamlining Compliance with US Regulations

The automated MMR-Tool allows investment fund professionals to upload a variety of marketing materials, such as factsheets, brochures, pitch presentations, and fund commentary. With its latest release, the MMR-Tool can now also review these materials against a comprehensive array of US regulations governing marketing communications, including:

• Investment Advisers Act of 1940

• SEC Investment Adviser Marketing Final Rule

• FINRA Communications with the Public

• Securities Act of 1933

• Global Investment Performance Standards (GIPS®) For Firms

In addition to US regulations, the MMR-Tool covers the European ESMA Marketing Communication Guidelines, EU national “gold-plating” requirements, as well as Swiss and UK marketing communication rules. Using its additional “Consistency Check” feature, the MMR-Tool ensures consistency between marketing materials and fund documents like the UK UCITS KIID, PRIIPs KID, and the summary and fund prospectus.

Zeidler Group’s dedication to innovation and LegalTech excellence is demonstrated through the continuous development and enhancement of the MMR-Tool.  

Leadership Insights

Scott G. Parkin, Head of US at Zeidler Group, commented:

"The integration of comprehensive US regulatory coverage into the MMR-Tool is a game-changer for our clients. As a former legal counsel for some of the industry’s largest firms, I recognize the immense value the MMR-Tool provides for compliance and legal teams. The SEC's regulations are notoriously intricate and often open to interpretation, making our latest enhancement crucial. The MMR-Tool tool offers unparalleled accuracy and speed in aiding with compliance, which is essential for maintaining trust and competitiveness in the market”.

Arne Zeidler, CEO and Founder of Zeidler Group, added:

"Incorporating extensive US marketing communication regulations into the MMR-Tool marks a significant milestone for our clients. This enhancement not only streamlines compliance but also accelerates time to market, providing a substantial competitive edge. Scott's deep legal expertise and comprehensive industry experience have been instrumental in this advancement, adding immense value to our clients' daily operations. The MMR-Tool now covers over 30 rules and regulations from around the globe, making it the perfect companion for every investment fund manager with an international reach."

Experience the MMR Tool in Action

Book your personal demo to witness the Marketing Material Review Tool review marketing materials reviews in real-time

About Zeidler Group 

Zeidler Group is a technology-driven law firm and legal and compliance services provider, revolutionising legal, regulatory, compliance, and reporting services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships by providing innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry, as well as boutique operators. The firm services more than 250 clients with aggregate assets under management above USD 1.5 trillion. 

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Breakthrough Large Language Model (LLM) Technology Set to Revolutionize Compliance Processes for Investment Fund Marketing Materials

New York,  United States,  July  18 2024 -Global ETF Specialist VanEck Becomes New Client for Zeidler Group’s AI-based Marketing Material Review Tool

Like every fund manager of a certain size, VanEck produces large volumes of marketing materials including fund fact sheets, brochures, and pitch books to market its ETF products in many different countries. The content and presentation of these materials are subject to the rules and regulations of each country where the marketing materials are circulated.

VanEck will now use the Marketing Material Review Tool (MMR-Tool) to automatically review investment fund marketing materials for compliance in each relevant country. In addition to understanding local laws, the MMR-Tool can ingest marketing materials in different languages.

Developed and trained by Zeidler Group’s legal experts and software engineers in a year-long project, the MMR-Tool exemplifies how law and technology can be combined in the era of Large Language Models.

The MMR-Tool offers significant benefits, including reducing manual review time and enhancing the accuracy of compliance checks, which is crucial for maintaining the integrity of investment fund communications on an international scale.

Large Language Model technology represents a paradigm shift in how investment fund and legal documents can be reviewed and processed, offering capabilities that range from understanding context, interpreting graphs, charts and images to ensuring compliance with necessary legal standards.

Arne Zeidler, CEO & Founder at Zeidler Group, said:

“We are thrilled to welcome VanEck as our latest client for the MMR-Tool. This partnership is a testament to the trust and value our solutions bring to the investment fund industry. VanEck is challenging the status quo and is an early adopter of next-generation technology in the legal and compliance space. We predict that within less than a year, it will be the industry standard to use AI-based applications to review marketing materials.”

Sabrina Giagheddu, Senior Legal Counsel at VanEck, added:

“Partnering with Zeidler Group allows us to harness cutting-edge LLM technology, trained by lawyers, to enhance our compliance operations. Their solution offers us a significant advantage in managing the complexities of analyzing fund marketing materials for regulatory adherence.”

With the partnership between Zeidler Group and VanEck now official, Zeidler Group reaffirms its dedication to using AI to enhance compliance processes across the investment fund sector.

Experience the MMR-Tool in Action

Book your personal demo to witness the Marketing Material Review Tool review marketing materials in real-time.

About VanEck

VanEck has a history of looking beyond the financial markets to identify trends likely to create impactful investment opportunities. We were one of the first U.S. asset managers to offer investors access to international markets. This set the tone for the firm’s drive to identify asset classes and trends – including gold investing in 1968, emerging markets in 1993, and exchange-traded funds in 2006 – that subsequently shaped the investment management industry.

Today, VanEck offers active and passive strategies with compelling exposures supported by well-designed investment processes. As of March 31, 2024, VanEck managed approximately $101.9 billion in assets, including mutual funds, ETFs, and institutional accounts. The firm’s capabilities range from core investment opportunities to more specialized exposures to enhance portfolio diversification. Our actively managed strategies are fueled by in-depth, bottom-up research and security selection from portfolio managers with direct experience in the sectors and regions in which they invest. Investability, liquidity, diversity, and transparency are key to the experienced decision-making around market and index selection underlying VanEck’s passive strategies.

Since our founding in 1955, putting our clients’ interests first, in all market environments, has been at the heart of the firm’s mission.

About Zeidler Group

Zeidler Group is a technology-driven law firm and provider of legal and compliance services, revolutionising legal, regulatory, compliance, and reporting services for the asset management industry. Zeidler Group fosters collaborative, strategic partnerships by delivering innovative digital solutions and bespoke, research-based legal advice and regulatory guidance. The firm serves more than 250 clients with aggregate assets under management exceeding USD 1.5 trillion, including some of the industry’s largest and most respected names, as well as boutique operators.

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This summer has been tumultuous for the SEC, with potentially significant short- and long-term implications for the investment management sector.

What Happened?

It began on June 5^th when the 5^th Circuit Court took a chainsaw to the SEC’s Private Fund Rules by vacating the rules in their entirety.  What makes the ruling extra painful is the court’s legal justification.  The court ruled that the entire promulgation of the rules –including the SEC’s legal basis for how it could regulate private funds – exceeded the SEC’s statutory authority under the Advisers Act. Ouch…

The SEC Private Fund Rules were supposed to be one of Chairman Gensler’s crowning achievements by imposing retail-like disclosure requirements to private funds – the rules being characterized as an attempt to protect investors from riskier investments in hedge funds, private equity funds etc.  While there was much rejoicing from the private fund industry, the SEC stared at their first real limitation on regulating private funds in a long time.

Fast forward a few weeks and the Supreme Court was prepared to issue its rulings on a variety of high-profile cases.  The first came on June 27^th when the Supreme Court ruled in favor of Mr. Jarkesy in SEC v. Jarkesy. While this case did not get the same media attention as Chevron or others, this ruling was a long-awaited result for people involved in SEC enforcement issues.  From a very high level, the ruling gutted the SEC’s ability to use administrative proceedings when seeking civil penalties for securities fraud.  The immediate impact to an investment manager is meaningless unless you are caught up in a securities fraud finding by the SEC, but the ruling is another example of the SEC’s historical methods of operations being fundamentally altered.

Lastly (at least at the time of writing this) is Chevron. The Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo, where it overturned Chevron and eliminated the so-called Chevron Deference, is an unparalleled change to administrative law that had existed for over 40 years (40 years and 3 days to be precise).  In layman’s terms, Chevron Deference allowed agencies like the SEC to have authority for interpreting ambiguities in the regulation it writes and courts must defer to their interpretation.

What Does This Mean?

The impacts of this decision will be felt for decades, at least, and will touch every aspect of how US federal agencies operate.  For the SEC in particular, it is not known what the impacts will be tomorrow.  There are endless examples of SEC decisions and interpretations of its rules whereby Chevron would be relied on if challenged.  Agencies do no state they are using Chevron when implementing or interpreting their rules, but they know they have (well, had) the protection of Chevron in the background.

Impact on Investment Managers

I think everyone can agree that the SEC is weaker today than it was before the summer and it is likely these rulings will slow, if not significantly limit, the SEC’s future rulemaking.

Even if some of the rulings, particularly the vacating of the Private Fund rules, were expected, the SEC likely needs to proceed with more caution than before.  While none of the rulings change the SEC’s legislative obligation to regulate the securities market, if the SEC wants to propose new rules, they must be careful.  The SEC knows that for any new rule market participants – now emboldened by the Private Fund rules result – will challenge the rules in court or challenge the SEC’s interpretation and enforcement of it.  It’s akin to a pre-and post-trade investment compliance check.  Any new rule will be at risk before and after adoption.

While less rulemaking is typically good for the investment management community, there is a flip side to this regulatory coin.  Throughout the SEC’s history, there have been periods where, instead of rulemaking, it focused on “regulation by enforcement”.  This is the concept where the SEC uses enforcement proceedings to change existing regulations. While Jarkesy limited the SEC’s ability to use administrative proceedings instead of civil trials, the SEC’s authority to enforce securities law has not been limited.

Enforcement may be slower when there are civil trials instead of administrative proceedings, but it is enforcement all the same.  In a post-Chevron world, the SEC will need to be mindful of what types of enforcement it takes because often the justification for such enforcement is based on its interpretation of securities regulation.

While Jarkesy and Loper Bright severely limited the SEC’s enforcement and interpretive abilities, the ruling on the Private Fund rules may have the most immediate impact by slowing rulemaking and therefore pushing the SEC to use “regulation by enforcement”.  It is a highly probable outcome that SEC enforcement actions increase going forward to further the current SEC’s agenda.  But alas, as such is the case in America,  the upcoming election could drastically change that agenda.

Conclusion

In conclusion, the SEC faces a challenging landscape post-summer, with reduced rulemaking abilities and a potentially stronger focus on enforcement actions. For investment managers, adapting to these changes will be crucial in navigating the evolving regulatory environment. If you have any questions or require support, the Zeidler’s Team are here to assist. Our global team of professionals stays current on the latest legal, regulatory, and compliance changes affecting the asset management industry. For additional information or assistance, please get in touch with us.

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Introduction: The Need for Modernization in Due Diligence

For decades, US investment managers have relied on a combination of manual processes and extensive use of Excel spreadsheets to conduct initial and ongoing due diligence on outsourced activities. Despite regulatory pressures and evolving market practices that demand more sophisticated systems, many managers continue to handle due diligence manually. It’s time to address the proverbial elephant in the room: Do investment managers need to evolve or modernize their due diligence processes now?

What’s Changing in Due Diligence?

SEC’s Proposed Rules on Outsourced Activities

In 2022, the SEC proposed rules on overseeing outsourced activities and importantly focused on “Covered Functions”. This highlighted areas where the SEC believes expanded oversight is needed for vendors.  These Covered Functions encompass the core activities that managers typically outsource. The proposed rules suggest a comprehensive overhaul of the current due diligence framework, pushing managers towards a more structured approach. Although the rules have not been finalized, the momentum and regulatory signals suggest they will be enacted soon, mandating robust, auditable, documented, and reportable procedures for all aspects of vendors’ services.

Europe’s Advanced Regulatory Standards

European regulators have long established stringent due diligence requirements. US managers, especially those with European operations, are familiar with these rigorous standards. While the US does not always mirror Europe’s regulatory environment, there’s a growing trend toward adopting similar vendor due diligence practices. Enhanced oversight is universally recognized for mitigating risk, and this shift is gaining traction in the US market.

The Future: More Oversight and Comprehensive Due Diligence

Combining the US regulatory movement with European standards, the future of due diligence is clear: increased oversight, more structured processes, and a comprehensive due diligence framework are essential. Investment managers must adapt to these changes to stay compliant and minimize risks effectively.

Embracing Modern Solutions: Zeidler Due Diligence Tool

Introducing Zeidler Due Diligence (ZDD)

Zeidler Due Diligence (ZDD) —a game-changer for investment managers. Our innovative, web-based platform transforms the entire due diligence process, allowing managers to streamline and centralize vendor due diligence management.

Key Features of ZDD:

• Comprehensive Questionnaire Management: ZDD enables managers to upload and manage all types of due diligence questionnaires in one place, facilitating seamless vendor responses.
• Customization and Automation: The tool offers extensive customization of questionnaires and automates routine tasks, including vendor reviews, follow-ups, and monitoring. This automation reduces manual work and enhances efficiency.
• Advanced Reporting and Monitoring: ZDD supports a wide range of reporting features, such as response rates, risk ratings, and specific areas of concern. Reports can be generated instantly, aiding fund boards, audits, and general reviews.

Why Choose ZDD?

ZDD is more than just a due diligence tool; it is a one-stop solution for managing all vendor due diligence processes. It ensures compliance with upcoming SEC rules as well as European rules including CP86 and CSSF Circular 18/698  and ultimately prepares investment managers to future-proof their operations.

Conclusion: Future-Proof Your Due Diligence with Zeidler Due Diligence (ZDD)

As regulatory expectations tighten and the demand for robust due diligence increases, Zeidler Due Diligence (ZDD) emerges as the essential tool for investment managers. ZDD simplifies due diligence processes, enhances compliance, and provides the structured framework needed to meet future challenges.

Don’t wait until new regulations catch up with you—embrace ZDD today to stay ahead in the evolving landscape of investment management.

Book a Demo

Ready to revolutionize your due diligence process? Book a demo of ZDD now and see how it can transform your compliance and oversight procedures.

Need Assistance? We’re Here to Help

If you have any questions or require support, the Zeidler’s Due Diligence, Legal, and Regulatory Team are here to assist. Our global team of professionals stays current on the latest legal, regulatory, and compliance changes affecting the asset management industry. For additional information or assistance, please get in touch with us.

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Earlier this month, the SEC published an updated version of its Marketing Compliance Frequently Asked Questions (FAQ). The FAQ clarifies the provisions of the Marketing Rule (the Rule), covering fund performance marketing requirements related to the use of subscription lines. The SEC occasionally updates this FAQ to include additional responses from the Division of Investment Management staff. However, it is important to note that the FAQs are not statements from the SEC itself.

The newly added question is:

Must gross and net performance shown in an advertisement always be calculated using the same methodology and over the same time period?

In short, yes.

This question arises in response to the Marketing Rule provision that mandates accompanying gross performance presentations with net performance. These presentations should be calculated over the same time period and using the same type of return and methodology. The Rule also requires that net performance is presented in a format designed to facilitate comparison with gross performance.

The updated FAQ focuses on how private funds may wish to present the gross internal rate of return (Gross IRR) and the net internal rate of return (Net IRR). The concern is that the Net IRR may be inflated compared to the Gross IRR due to differences in the time period and methodology used. For example, if the Gross IRR is based on a period during which the fund relies on lines of credit and does not reflect fund borrowing or subscription facilities, presenting the Net IRR including the impact of subscription facilities is inconsistent and therefore in violation of the Rule. As a result, the Net IRR can be inflated, an effect the SEC seems eager to discourage.

As provided in the FAQ, the types of fund-level subscription facilities contemplated include subscription line financing, capital call facilities, capital commitment facilities, bridge lines, or other indebtedness incurred by a private fund. The inclusion of subscription facilities in the Net IRR but not the Gross IRR could also be construed as a use of different methodology as well as different time periods.

This FAQ helps clarify this aspect of the Rule, which does not prescribe the methodology to be used when an advertisement presents net and gross performance. The FAQ advises considering disclosures that discuss the impact of subscription facilities on the Net IRR that is shown.

Based on this new addition to the FAQ, it is advisable for private funds to seriously consider the manner in which they choose to present net and gross performance. Several display methods can ensure the proper disclosures, including:

• Displaying Gross and Net IRR both commencing from a time prior to the time that capital commitments were called from investors if that is when the display of Gross IRR begins; or
• Showing four sets of data – Gross and Net IRR both with and without the impact of subscription facilities, so four sets of performance.

Understanding and working within the parameters of the Rule is essential for SEC compliance, and the published FAQ provides valuable insight into the best path forward for private funds. The industry has taken up marketing and advertising material as a concern on a global level, so understanding whether your materials comply is crucial for fund managers.

If you have questions about this newly published guidance in the FAQ, please reach out to our team! For any queries or support for your regulatory and compliance needs, get in touch with our team of specialists.

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In 2021, Congress passed the Corporate Transparency Act (CTA) which obliges reporting companies to submit a Beneficial Ownership Information Report (BOI Report) to the Financial Crimes Enforcement Network (FinCEN). The goal of the new requirement is to limit an individual’s ability to mask or benefit from their gains through shell companies or other ownership structures.  

Key Dates for BOI:

FinCEN began accepting BOI Reports on January 1, 2024, but the first deadline is not until January 1, 2025 for companies that were created or registered before January 1, 2024. For newer companies, specifically those that are created or registered after January 1, 2024, they will have 90 days after receiving notice of their creation or registration to file their reports. Companies created or registered on or after January 1, 2025 will have 30 days to report after receiving notice of their registration or creation.  

Information Included in the BOI Report:

The BOI Report includes a variety of information about company applicants and beneficial owners, including names, addresses, and contact information. While the BOI Report itself is not very onerous, determining whether your company qualifies for the reporting requirements can be a challenge, especially for companies domiciled outside the United States but authorized to conduct business in the United States. Unless an exemption applies, reporting companies include a corporation, an LLC, or a company that was otherwise created in the United States by filing a document with a secretary of state or any similar office, or a foreign company that is registered to do business in any U.S. state.  

Update Requirements:

In addition to the initial BOI Report, companies are required to update or correct their BOI Reports as necessary. The threshold for needing to update the BOI report is low- if there is any change to the required information the company must file an updated BOI Report within 30 days of the date when the change occurred. The same applies for discovering inaccuracies in the BOI  Report.  

Exemptions to Reporting Requirement:

As mentioned, there are several exemptions from the reporting requirement (23, to be exact). Three that may be pertinent are the exemptions for broker dealers, investment companies or advisers, and for pooled investment vehicles.

• To qualify for the broker dealer exemption, an entity must be a broker or dealer as defined in the Securities Exchange Act of 1934.  
• To qualify for the investment company or investment adviser exemption, the entity must be defined as an investment company or an investment adviser and must be registered with the SEC as such.
• To qualify for the pooled investment vehicle, an entity must meet two criteria:  

• Either be a registered investment company under the Investment Company Act of 1940 or be a company that would be an investment company but for qualifying for a Section 3(c)(1) or 3(c)(7) exemption from the registration requirements of the Investment Company Act of 1940; and
• Is operated or advised by another exempt entity such as a bank, credit union, Broker or Dealer in securities, investment company or investment adviser, or venture capital adviser.

Special Rule for Foreign Pooled Investment Vehicles:

Another key point to note is that there is a special rule for foreign pooled investment vehicles. An investment pool formed under the laws of another country but that would otherwise be a reporting company if not for the pooled investment vehicle exemption has limited reporting requirements. These entities need only report on one individual who exercises substantial control over the company.

CTA Compliance and Assistance:

Above all complying with CTA requirements can be intricate, especially for new entities. Our US team is here to help answer your questions, address filing concerns, and ensure a smooth compliance process. Reach out to us for expert guidance and ease your worries about reporting obligations.

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Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

Understanding the EET

The European ESG Template (“EET”) is not a compulsory reporting tool, but it plays a crucial role in the European financial industry. Developed by FinDatEx, a technical working group, the EET serves as a standardized format for sharing ESG data. While it aligns with the Sustainable Finance Disclosure Regulation (“SFDR”) and related acts, its main purpose is to facilitate the communication of ESG characteristics by funds, especially to distributors. This exchange of ESG data is helpful in assessing compliance with the SFDR and other European Financial Market Regulations, ensuring consistency in ESG data across various platforms and aiding in the sustainability assessment of funds. The EET encompasses different reporting levels based on SFDR articles (Article 6, 8, and 9).

Impact and Scope of EET

The EET particularly impacts financial market entities under Article 2 of Regulation (EU) 2019/2088. Although not a regulatory requirement, the EET is necessary for all products marketed in the European Union, aiding distributors in identifying sustainable investment options. This encompasses funds classified under Articles 6, 8, and 9 as per SFDR Level 1 and the Regulatory Technical Standards (“RTS”). It’s important to note that the EET disclosure requirements vary depending on the ESG traits of each financial product.

Who Uses the EET?

The primary users of the EET include Product Manufacturers, Fund Distributors, and Financial Advisers. These entities need the EET for SFDR reporting and to align fund selections with sustainable preferences under the Insurance Distribution Directive (“IDD”) and the Markets in Financial Instruments Directive (“MiFID”).

Recent Updates to the EET

The EET template has evolved from version 1.1.1 to 1.1.2, reflecting ongoing changes in the industry and aiming to enhance its clarity and usability. As of 20 December 2023, FinDatEx released the 1.1.2 version. This update, while not extensive, introduces key changes essential for consistency and reporting.

These include typographical corrections, a change in the Transitional Scope Fields from “Mandatory/Conditional” to “Optional,” and the introduction of new data fields like “30000_PAI_Snapshot_Frequency” and “70010_Financial_Instrument_Total_Fund_NAV_Or_Notional.”

More significant amendments have been postponed to a future date.

Implementation Timeline

The latest EET template, version 1.1.2, is available since 31 December 2023 and will be mandatory for Entity Level Reporting by March 2024.

Assistance and Contact Information

Our team is well-equipped to assist clients with the production, validation, and dissemination of the EET, offering expertise and support to navigate these reporting requirements with clarity and precision.

Reach out to us at ESGServicesDivision@zeidlerlegalservices.com for more information.

Download a copy of our EET guide here.

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Phoenix, AZ, 16 January 2024 – Zeidler Group proudly announces the appointment of Scott G. Parkin as the Head of US, marking a significant stride in fortifying the asset management servicing firm’s presence within the United States.

Based in the firm’s Phoenix office, Mr. Parkin assumes a pivotal role in directing the regulatory and compliance landscape for Zeidler Group’s expansion strategy across North America. His responsibilities encompass steering the provision of regulatory compliance guidance for US asset management firms both domestically and internationally as well as fostering the growth of Zeidler Group’s US-specific services for the fund’s industry.

With a distinguished legal career spanning over 12 years, Mr. Parkin, a seasoned US-qualified attorney, brings a wealth of expertise gained from pivotal roles in leading US financial firms including AllianceBernstein and HSBC Global Asset Management (US).

Reporting to Serena Goldberg, Executive Vice President of Products and Services at Zeidler Group, Mr. Parkin’s appointment underscores the company’s commitment to leveraging top-tier talent to enhance its client delivery and suite of fund solutions.

Serena Goldberg, Executive Vice President of Product and Services said:

“Scott’s in-depth and nuanced understanding of investment funds law in global jurisdictions, coupled with his extensive background in navigating the intricate legal landscape, is a significant asset to our team. We anticipate his strategic insights will further bolster our provision of comprehensive fund solutions. I am delighted to welcome him to the team.”

Expressing his enthusiasm, Scott Parkin, Head of US at Zeidler Group, remarked

“Joining Zeidler Group at this exciting juncture, where the demand for specialized investment funds legal counsel is burgeoning, is an exciting prospect. I’m keen to leverage the firm’s innovative digital RegTech and compliance solutions and research-driven counsel, further solidifying and expanding Zeidler Group’s position as the asset management industry’s premier destination. Having led a large and global legal team for AllianceBernstein, I am thrilled to use my experience to show US firms how valuable and successful Zeidler Group’s services can be.

Arne Zeidler, CEO & Founder of Zeidler Group, commented on the appointment, stating:

“Scott is an esteemed investment funds lawyer with a wealth of practical wisdom gained in the US and the EU. His profound grasp of European and US investment funds law as well as Zeidler Group’s unique value proposition amplifies our capabilities, ensuring superior regulatory compliance services for our valued clients. We extend a warm welcome to him.”

About Zeidler Group

Zeidler Group is a technology-driven law firm and compliance provider revolutionizing legal, regulatory, and compliance services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships through its provision of innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry, as well as boutique operators. The law firm services more than 250 clients with aggregate assets under management above USD 1.5 trillion.

For more information, visit:  zeidler.group.

London, UK, 11 January 2024 – Zeidler Group, a pioneering force in LegalTech, RegTech, and legal services for the asset management industry, proudly announces a historic moment in its trajectory. The company heralds the elevation of two exceptional colleagues to the esteemed position of Executive Vice President, marking a monumental stride towards fostering innovation and achieving unparalleled client delivery and excellence.

"Today marks a monumental milestone for Zeidler Group," remarked Arne Zeidler, CEO & Founder of Zeidler Group. "The appointment of Serena Goldberg and Prashant Patil as Executive Vice Presidents embodies our commitment to fostering innovation and cultivating top-tier leadership within our organization. Their vision, commitment and expertise will propel us to new heights of success."

Serena Goldberg, in her newly appointed role as Executive Vice President of Products and Services, spearheads the firm’s AI integration across the group. Her primary mission is to implement a cohesive, AI-driven strategy that enhances our product and service offerings. Serena will lead in the integration of artificial intelligence into our legal, ESG, reporting, and regulatory offerings, driving the creation of innovative AI strategies that enhance our suite of products and services while meticulously aligning with client needs.

Prashant Patil steps up as Executive Vice President of Technology, bearing the critical responsibility for the successful technical implementation of Zeidler Group’s new AI and tech-infused products and services. He is tasked with ensuring the firm's technical infrastructure is reliable, safe, and effectively supports the company’s strategic vision and service delivery. His role also encompasses developing robust cybersecurity policies, overseeing IT procurement, and ensuring compliance with relevant data and tech use regulations. Prashant’s visionary approach has previously led to the successful and seamless integration of all ten fund solution modules as part of Zeidler Group’s proprietary platform, Zeidler Swift.  

Serena Goldberg, Executive Vice President of Product and Services, expressed her enthusiasm:  

"Taking on the role of Executive Vice President of Product and Services at Zeidler Group fills me with tremendous pride. Our focus on AI integration signifies a transformative shift in our suite of fund solutions, aiming not only for innovation but also for a profound enhancement of our product and service offerings. I am eager to lead our teams towards a future where AI-driven strategies redefine client excellence."

Prashant Patil, Executive Vice President of Technology, echoed this enthusiasm:  

"As the Executive Vice President of Technology, I am thrilled to spearhead the technical evolution at Zeidler Group.  Our unwavering commitment to robust infrastructure and cutting-edge digital solutions will provide greater value to our clients. The integration of AI technology into our solutions will not only support our global vision but also drive greater efficiency and security in an ever-evolving proprietary platform Zeidler Swift.”

In addition to the promotion of Serena and Prashant, Maximilian Harper now holds the dual roles of Chief Operating Officer and Chief Delivery Officer. Max's extensive experience in investment funds law and client delivery, coupled with his operational expertise, strengthens the firm’s management team.

Maximilian Harper, newly appointed Chief Operating Officer and Chief Delivery Officer stated:

"As I step into the dual roles of Chief Operating Officer and Chief Delivery Officer, my foremost goal is to amplify our client experience. By streamlining operations and enhancing delivery mechanisms, we aim to fortify our commitment to clients' needs, ensuring swift and precise support, and ultimately, elevating their journey with Zeidler Group."

Zeidler Group's strategic appointments and restructured leadership underscore its unwavering dedication to innovation, client-centric excellence, and pioneering digital advancements within the asset management servicing industry. With a focus on transformative leadership, cutting-edge AI technology, and an unyielding commitment to client satisfaction, Zeidler Group is poised to embark on a new era of unparalleled growth and client service excellence.

About Zeidler Group

Zeidler Group is a technology-driven law firm and compliance provider revolutionizing legal, regulatory, and compliance services for the asset management industry. The firm establishes collaborative, strategic, and meaningful partnerships by delivering innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group's clientele includes some of the largest and most respected names in the industry, alongside boutique operators, serving over 250 clients with aggregate assets under management exceeding USD 1.5 trillion.

For more information, visit:  Zeidler Group.

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Join Kate Horgan, Business Development Manager at Zeidler Group, as she hosts the latest episode of the Legal Zeidgeist podcast. Get ready for an insightful exploration of the intricate US regulatory landscape. Kate is accompanied by Zeidler Group colleagues, Madeline Gegg and Alex Mercer, both Associates based in Zeidler’s Phoenix office. Together, they navigate the maze of Federal, State, and Self-Regulatory Organizations.

In this podcast episode, gain clarity on the multifaceted regulatory system. Madeline and Alex simplify the complexities by discussing crucial entities such as the SEC, CFTC, state-specific variations, and key players like FINRA. Dive into invaluable insights into the intricate US regulatory framework and discover essential strategies for achieving comprehensive compliance within the financial industry.

Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

Navigate the dynamic ESG regulatory landscape, with our latest ESG whitepaper.

Our ESG experts delve into critical ESG themes that are redefining the narrative:

• Explore the importance of Principal Adverse Impacts (PAIs) and their influence on your ESG strategy.

• ESRS Demystified: Unveil the intricate connection between PAIs and the European Sustainability Reporting Standards (ESRS), unlocking their mutual influence.

• Best Practices & Real-world Insights: Immerse in practical case studies, absorb best practices, and arm yourself with actionable insights to elevate your ESG reporting.

Position yourself at the forefront of ESG excellence with our guide to mastering the nuances of ESG reporting.

Download Now

New York, 8 November 2023 – Zeidler Group, a prominent provider of cutting-edge, digitally innovative fund solutions for the asset management industry, is delighted to announce the introduction of its enhanced transaction cost calculation services. This latest offering is designed to streamline operations, enhance compliance, and improve transparency, particularly concerning costs and charges, addressing critical considerations within the asset management industry.

Zeidler Group’s automated transaction cost calculation solution optimises transaction cost calculation processes, offering asset managers a fully managed and innovative solution that streamlines the calculation process from data ingestion to the delivery of final results. This advancement offers numerous benefits to asset managers, enhancing the efficiency of production processes and the subsequent distribution of data into the market.  

Gemma Capelo, Head of Reporting Services Division, at Zeidler Group, stated:

“Our latest enhancement presents an exciting opportunity for us to ensure our clients succeed with responsive tech-driven solutions.  With our clients’ requirements and the wider asset management industry’s key considerations in mind, we are delighted to provide a standalone, automated end-to-end, fully managed solution for calculating clients’ transaction costs in line with applicable regulatory requirements. In addition, as the need for an all-in-one fund solution service provider continues, we intentionally strive to innovate and enhance our reporting solutions with the future in mind.”

Key features of the enhanced transaction cost calculation solution include:

• Automated Calculation Engine: Our cutting-edge automated calculation engine ensures real-time validation of data inputs, error detection, and a user-friendly interface for reliable results.
• Comprehensive Compliance: Our reporting team guarantees accurate transaction cost calculations in line with PRIIPs/MiFID II ex-post and MiFID II ex-ante requirements.
• Customizable Calculation Models: Tailor your calculations with options like the “Arrival Price” Methodology (EU and UK) and the “New PRIIPs” Methodology.
• Scalability and Integration: Our solution scales to your needs, offering seamless integration with data sources for real-time calculations.
• Enhanced Automation: Customize automated processes to manage transaction results with client-specific thresholds and exception handling.
• Streamlined Data Management: Utilize Secure File Transfer Protocol (SFTP) for data delivery with no specific file format requirements, reducing operational hassles.
• Quality Assurance: Rigorous validation at all stages ensures accuracy and reliability of outputs.
• User-Friendly Interface: Our intuitive interface simplifies navigation, reducing the learning curve for implementation.
• Seamless Dissemination: Easily distribute computed results for inclusion in PRIIPs KIDs and/or MiFID II (EMT) production, enhancing efficiency.
• Transparency and Reporting: Access historical cost data for comprehensive analysis and reporting, promoting cost transparency.
• Cost Savings: Automate transaction cost calculations to reduce internal time and effort, ultimately lowering operational costs.
• Effortless Integration:  Efficiently integrates with our comprehensive suite of fund solutions, including KIDs, EMT, and EPT.

Kunal Grover, Head of Business Development at Zeidler Group, commented:

“At Zeidler Group, we are committed to empowering our clients to scale their fund operations for the future. Whether you are a small or large asset management firm, our calculations engine is scalable to meet your requirements. Our latest enhancements increase efficiency and better serve our clients.”

Arne Zeidler, CEO and Founder at Zeidler Group, added:

“Our enhanced transaction cost calculation solution is a game-changer for asset managers. The latest enhancement and automation of our transaction cost calculation services further solidifies Zeidler Group’s position as a digitally innovative and progressive fund solutions provider. This innovation is a testament to the hard work of our software engineering and of course, our Reporting Services Division.”

About Zeidler Group 

Zeidler Group is a technology-driven law firm revolutionising legal, regulatory, compliance, and reporting services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships by providing innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry and boutique operators. The firm services more than 250 clients with aggregate assets under management above USD 1.5 trillion. 

For more information, visit:  zeidler.group.

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In this episode of the Legal Zeidgeist podcast, the focus is on Swiss Representative Services for foreign collective investment schemes. Kate Horgan, Business Development Manager is joined by Josef El Semari and Michael Meier Directors at  Zeidler Group as they delve deep into the intricacies of the Swiss regulatory landscape.

Josef and Michael unveil the intricacies of Swiss Representative services, peeling back the layers to reveal how these professionals navigate the ever-evolving regulatory terrain. Sharing their expertise as they intricately map out the strategies employed by Swiss Reps, ensuring seamless compliance and fostering a conducive environment for foreign collective investment schemes.

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In this article within our DORA Series, we delve into how financial institutions should categorize ICT-related incidents and assess their impact based on the criteria outlined in the legislation. Companies will need to take into account factors such as the number of affected clients, downtime resulting from the incident, the geographical scope of the incident, data loss, the importance of the affected services, and the economic consequences of the incident. Detailed guidelines regarding these requirements can be found in the draft Regulatory Technical Standards on criteria for classifying ICT-related incidents (the “Draft RTS“), which were published as part of a broader Consultation Paper.

Understanding DORA’s ICT-related incident classification, major incident materiality thresholds, and significant cyber threats:

Are You Affected?

In accordance with the proportionality principle established by DORA, the classification criteria and materiality thresholds are designed to be proportionate to the size, overall risk profile, and the nature, scale, and complexity of services provided by all financial institutions. Consequently, these criteria and thresholds are uniform across financial entities, regardless of their size and risk profile, to ensure that smaller institutions are not burdened with excessive reporting requirements.

However, in certain instances where an incident affects a substantial number of clients and transactions without surpassing the relative thresholds, these incidents should still be reported using absolute thresholds. This approach is primarily intended for larger financial institutions.

What Are Your Responsibilities?

Financial entities must categorize ICT-related incidents and evaluate their impact based on the following criteria:

• The number and relevance of affected clients or financial counterparts, along with the number or amount of transactions influenced by the ICT-related incident.
• The extent of reputational damage caused by the ICT-related incident.
• The duration of the incident and the resulting service downtime.
• The geographic extent of the areas affected, especially if it spans more than two Member States.
• Data losses incurred, including impacts on data availability, authenticity, integrity, or confidentiality.
• The significance of the affected services, including financial entity transactions and operations.
• The economic ramifications of the ICT-related incident in both absolute and relative terms, including direct and indirect costs and losses.

Conclusion

DORA is more than a set of regulations; it stands as a cornerstone for ensuring the future resilience of the financial sector. Embracing these standards and maintaining constant vigilance is not just a means for financial institutions to shield themselves but also a way to actively participate in the collective pursuit of a secure and robust digital financial ecosystem. As DORA continues to mold the financial landscape, it is imperative to stay informed and proactive. We strongly recommend initiating internal project work without delay to ensure timely compliance and fortify the foundation of financial resilience.

How Zeidler Group can help

If you have any questions or require support, the Zeidler team is here to help.  Get in touch with our team of legal and regulatory professionals to remain up to date on the latest legal, regulatory, ESG, and compliance changes affecting the asset management industry. 

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Introduction:

One of the most exciting recent developments in technology has been the proliferation and adoption of AI technology, specifically commercially available large language models (LLMs) like ChatGPT, LLAMA 2, and Claude. These LLMs have had a massive impact across industries as wide-ranging as healthcare to fashion, disrupting existing companies and fostering widespread innovation across all levels of technical competence. While these tools have certainly proven to be impressive, they are not infallible, and using them does not come without potential risks.

The Importance of Responsible AI Use:

Having no safeguards or rules in place can mean that critical internal data could be inadvertently disclosed to a third party, or that you are at risk of erroneous output impacting a process. On the other hand, completely banning the technology can leave you at a competitive disadvantage with lower productivity due to not taking advantage of technological growth. As such, we would recommend having a responsible AI use policy to ensure proper use and maximize the total benefit your organization can receive from the technology.

What should a good policy include?

Download a checklist overview here.

Tailoring to your organization:

A good responsible use policy should first and foremost be tailored to your organization and industry. A great starting point is to look at other implemented policies, such as those regarding the use of software or third-party vendors, and consider the specific requirements that would also be applicable to LLM-based tools. Depending on the method of access, such as a website or through an API, you might have multiple existing policies that would govern the implementation of LLM-based tools. While pre-existing policies might not cover the exact use case of LLM-based tools in your organization, they can provide a great starting point for further refinement.

Understand and define the scope:

Clearly understand both the scope of who will use LLM-powered tools, as well as which specific tools they will use. Will everyone at your organization be able to use LLMs as part of their daily workload, or will it be restricted to certain teams or job functions? Who should authorize the use of specific LLM-powered tools, and will there be oversight in the process? Will you allow employees to access the tool through a web browser, or would you require access through an internal tool powered by an API? Some specialized tools, like GitHub Copilot, may be available company-wide, but the practical implementation of the tool may only be for engineering. It’s important to clearly understand the scope of the tools you would like to implement to tailor an effective policy.

Data protection:

You’ll also want to make sure that there are limits around what information can be provided to the tools. You likely do not want employees to provide either sensitive personal information or critical business knowledge into a tool that will then use that information for training purposes. Depending on the tool you are using, there can be options that keep your data private and separate from a training set, such as using an enterprise edition or direct API access. Depending on the vendor, data privacy and control can vary greatly, so reviewing the individual vendor’s policy and any potential contracts is critical. Remember, if you are not paying for a product, your data is the product.

Output controls:

You’ll also want to consider what controls will be in place surrounding the use of the outputs from the LLM-based tools. In some cases, establishing a human-in-the-loop policy can be incredibly beneficial. This means that before the output from an LLM-based tool is allowed to be integrated into information provided to external or internal stakeholders, an individual reviews the output for accuracy and applicability with the asked question. In other cases, clear disclaimer language might be added to the output, so the end user knows the results were provided by the tool. It is also likely that depending on the specific implementation of LLM-based tools in your organization, multiple output controls will be used. As a rule of thumb, the more critical a process is, the more important controls around integrating the use of LLM tools become.

Ongoing reviews:

Finally, be sure to revisit the policy as time and technology progress. We’ve seen an impressive growth in the LLM field, with multiple competitors and products offering services for varying purposes and niches. Every day there are new developments that both provide increasing opportunities, as well as increasing potential exposure to new issues. While it is important to set reasonable standards around use, treating the policy as a living document will allow you to maximize opportunities and reduce risk from emerging LLM tools.

Conclusion and Next Steps:

The use of LLM tools doesn’t come without its complexities. There can be many factors to consider in implementing an effective policy that enables the safe use of these emerging technologies. It is important to tailor an effective policy that considers your organization’s specific situation and usage of the tools. With the right approach and proper guardrails put in place, LLM tools can serve as a substantial value-add to your organization.

Implementing effective AI technology policies is crucial in harnessing the full potential of these emerging technologies while managing associated risks. Craft a tailored policy that aligns with your organization's unique needs and technology usage. With the right strategy and safeguards in place, AI tools can significantly benefit your organization. Reach out to Zeidler Group today for expert guidance in drafting a custom policy that suits your requirements.

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Zeidler Group is delighted to announce the outstanding achievement of our US associate Madeline Gegg in passing the Arizona Bar Exam.We wish the warmest congratulations to Madeline on this remarkable milestone in her career.

The DORA Information Register

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The financial sector’s rapid digitalization requires strong regulatory measures to safeguard against cybersecurity threats and potential technological disruptions. Part of this effort is the Digital Operational Resilience Act (DORA) which among others addresses the financial sector’s growing reliance on information and communication technology (“ICT”) third-party providers.

The information register forms part of the ICT third-party risk management framework and shall allow the financial entities to identify and assess the risks in respect to contractual arrangements on the use of ICT services.

Separately, by the new reporting obligation of financial entities to the national competent authorities, effective supervision and a broader understanding of the ICT dependencies of financial entities shall be ensured.

Understanding DORA’s Information Register Requirements

Within the ICT risk management framework, financial entities are obliged to maintain a comprehensive register that captures all contractual arrangements with third-party ICT service providers and on the use of ICT services. The financial entities must distinguish between ICT services that support critical/important functions.

Firms shall report to the national competent authority on the number of new arrangements on the use of ICT services, the categories of ICT service providers, the type of contractual arrangements and the ICT services and functions which are being provided at least on a yearly basis and are obliged to provide the entire register upon request.

This high-level requirement is specified by the Consultation Paper On Draft Implementing Technical Standards (“ITS Draft”) that has been published by the European Supervisory Authorities (“ESAs”). This ITS Draft present the templates composing the information register in relation to all contractual arrangements on the use of ICT services provided by ICT third-party service providers. The ESAs expect to submit these draft technical standards to the European Commission by 17 January 2024.

Financial entities are expected to use these standardized templates and to fill in the information as laid out in the Draft ITS as part of the ICT risk framework. 

Are you in scope?

The requirement targets a broad range of financial entities, among others investment firms, managers of alternative investment funds, management companies credit institutions, and payment institutions.

Please note that in the case of groups, all financial entities that are part of the group shall maintain and update, in addition to their register at the entity level, the information register at the sub-consolidated and consolidated level.

Also, group-internal service providers are in scope and the data about this intra-group ICT arrangement must be included in the information register.

With regard to the application outside of the European Union, DORA has an extraterritoriality effect for non-EU companies that provide ICT services in the supply chain. This might become relevant, for example, if ICT services are performed by an intra-group entity, which is based outside of the EU, but provides the service to an EU-based financial entity.

Besides, it is expected that a clarification will be provided if non-EU AIFMs that manage EU AIFs or market AIFs in the EU will fall under the scope of DORA.

What are your obligations?

You will be required to fill out the templates with data using the formats set out in Annex I of the ITS Draft for the information at the entity level, and Annex II of the ITS Draft for  information at the sub-consolidated and consolidated level. 

The register of information at the entity level is composed of 10 templates. The ESAs visualized the templates by the following illustration in the ITS Draft:

The ITS Draft provides additional and extensive details about the information and granular instructions on how to fill out the templates.

Some of the templates are linked to each other by using four relational keys, namely: 

• The contract reference number; 
• The ICT third-party service provider identifier; 
• The function identifier;
• The ICT service identifier.

They are symbolized by the colored dots in the illustration above.

If you are part of a group, you must fill out all of the following templates:

In summary, you are obliged to include information about your own financial entity, the contractual arrangements with an ICT third-party service provider, and in principle also about the entities in the supply chain, identify the functions and ICT services, the assessment of the ICT services and a set of internal definitions. On a group level, you must fill out additional templates, include information about group-internal or -external relations, specify which group entity signs the contractual arrangement, and include clarification on the entities that are covered by the (sub-)consolidation.

Furthermore, you are obliged to report to the competent authority on the number of new arrangements on the use of ICT services, the categories of ICT third-party service providers, the type of contractual arrangements, and the ICT services and functions that are being provided at least on a yearly basis. Upon request, you must make available the entire information register to the regulator.

What should you do now?

We recommend that you read through the detailed instructions of the ITS Draft in order to familiarise yourself with the new regulatory requirements.

Most important will be the review exercise of the existent database and the identification of missing but required data under DORA. The accurate and consistent data is the basis for a compliant information register and any reporting obligation.

Your data management capabilities, operational processes regarding the data collection from various parties, and technical setup of the information register including the reporting functionality to the national competent authorities are crucial to meet the new regulatory requirements.

In addition, you must ensure that all the data is properly stored and archived for 5 years after the contract termination with the ICT service provider.

Furthermore, you should ensure that the information register has an audit trail functionality that allows to retrieve changes that significantly affects the information contained in the register of information for at least the previous 5 years.

Conclusion

The DORA requirement for an information register shall strengthen the digital resilience of the financial sector. For the implementation of the new measures, enormous efforts are expected to be undertaken by the financial entities. Despite the draft character of the ITS and the ongoing consultation, significant and materially new requirements are likely to arise.

Given the complexity, the amount of data, and the impact on the operational processes, we recommend starting with the internal project work as soon as possible.

How Zeidler Group can help

If you have any questions or require support, the Zeidler team is here to help.  Get in touch with our team of legal and regulatory professionals to remain up to date on the latest legal, regulatory, ESG, and compliance changes affecting the asset management industry. 

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Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

This past spring, we discussed the SEC’s proposed rules regarding ESG-Related Regulations, including amendments to the SEC’s Fund Name Rule. To recap, the proposal broadened the applicability of the 80% investment policy mandate. This mandate stipulates that a fund must invest a minimum of 80% of its assets in accordance with terms mentioned in the fund's name. The proposal extends this requirement to include any terms in a fund's name that pertain to ESG (Environmental, Social, and Governance) factors.

On 20 September 2023, the SEC announced in a Press Release that they have adopted the amendments to the Fund Name Rule (section 35d-1 of the Investment Company Act of 1940). The existing Fund Name Rule aims to prevent fund names from misleading investors about the fund’s investment policies and any potential risks the policies may expose investors to. If a fund name suggests a focus in a particular type of investment, it is required to adopt a policy aligning at least 80% of the fund’s assets in those investments. The final rule release reveals that the SEC contemplated a disclosure-based framework instead of the 80% investment policy, however, ultimately concluded that the 80% investment policy method was best for addressing concerns of misleading investors. The SEC attributes this decision, in part, to the fact that a fund’s name is the first information investors receive regarding the fund and has been found to have an impact on investors’ decisions to invest in a fund.

How to comply?

The amendments do not state exactly which additional wording or phrases will bring a fund’s name under the scope of the amendments, however, the primary types of names that the amendment is anticipated to cover, include fund names such as “growth” or “value” or terms that have a thematic or ESG focus according to the SEC factsheet released with the final rule. Terms in fund names will need to be defined in fund prospectuses along with an explanation of criteria used for selecting investments associated with those terms. Terms in fund names must also be consistent with plain English meanings.

The amendments require that funds follow the 80% investment policy during normal circumstances. Where a fund identifies that their portfolio is inconsistent with the 80% investment policy, the fund is obligated to return to compliance as soon as is reasonably practicable, which shall be no later than 90 days after identifying that the portfolio is not in compliance. Funds will be required to assess their portfolio assets’ inclusion in the fund’s 80% basket at least quarterly.

The amendments also include new recordkeeping requirements. Funds that are newly required to adopt an 80% investment policy will need to maintain a written record documenting its compliance with the rule, including the fund’s record of which assets are invested in the fund’s 80% basket. This recordkeeping requirement will be filed on the fund’s Form N-PORT filing. According to the final rule, a fund will also be required to keep records of any notice the fund sends to its shareholders pursuant to the rule. Funds that are not required to adopt an 80% investment policy do not have any obligations under these additional recordkeeping requirements.

Next steps

Certain funds, such as closed-end funds and business development companies (BDCs), will potentially need shareholder approval before changing their 80% investment policy pursuant to the rule amendments.

The Fund Name Rule amendments will become effective sixty (60) days after publication in the US Federal Register.

Funds will have 24 or 30 months to comply with the amendment from its effective date, depending on the size of the fund:

• Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments;
• Fund groups with net assets of less than $1 billion will have 30 months to comply.

Please note that one point remains open for discussion in relation to the ESG “integration funds” as the SEC is not adopting the proposed approach to integration fund names. In this regard, the SEC stated that it is still reviewing public comments and that it remains under consideration.

If you have any questions or require support, reach out to our global team and stay up to date on the latest regulatory compliance changes affecting the asset management industry.

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Overview of the SEC’s Regulatory Changes for Private Fund Advisers

In order to improve oversight for the Private Fund market in the US, the SEC has recently adopted new rules aimed to enhance the regulation of Private Fund Advisers.

The SEC purports that the enhanced rules will help promote greater competition and thereby efficiency in the private fund market. Unless specified otherwise, the rules discussed in this post apply to Registered Private Fund Advisers in the US. Since the enactment of the Dodd-Frank Act in 2010, the SEC’s oversight in the private fund industry has steadily increased. The new rules demonstrate the SEC’s continuing intention to increase oversight and disclosure across the financial services industry.

Key Components of the SEC’s New Rules

The SEC’s new rules for Private Fund Advisers can be summarized into six distinct parts:  

• Quarterly Statement Rule
• Private Fund Audit Rule
• Adviser-Led Secondaries Rule
• Restricted Activities Rule
• Preferential Treatment Rule
• Compliance Rule Amendments  

Quarterly Statement Rule: Transparency in Fund Reporting

The Quarterly Statement Rule will require private fund advisers to provide quarterly disclosure statements to investors including key information regarding fund fees, expenses, and performance.

Private Fund Audit Rule: Annual Financial Audits for Transparency

The Private Fund Audit Rule will also require private fund advisers that are registered with the SEC to provide investors with annual financial statement audits of each private fund that the adviser advises.

Adviser-Led Secondaries Rule: Ensuring Fairness and Disclosure

The Adviser-Led Secondaries Rule requires that all registered private fund advisers to obtain a fairness opinion or a valuation opinion from an independent third party when offering existing investors the option between selling their interests or converting their current interests into shares of another investment vehicle that is managed by the private fund adviser. Additionally, this rule requires the private fund adviser to disclose any relationship the adviser has had, if any, within the last two years with the independent third party.

To reiterate, the theme of the new rules is disclosure, disclosure, disclosure.  

Restricted Activities Rule: Prohibiting Certain Practices

The Restricted Activities Rule provides that certain activities will be prohibited unless the private fund adviser discloses the activities to their current investors. These activities include charging certain fees or expenses of the adviser to the investors, reducing the amount of adviser claw back, charging or allocating fees or expenses related to an investment on a non-pro rata basis, or borrowing or receiving an extension of credit from a private fund client. The conflict of interest that may interfere with investors’ interests is a key concern for private funds the SEC aims to address.

Preferential Treatment Rule: Addressing Investor Fairness

Another key component of the new rules is a prohibition against private fund advisers providing certain types of preferential treatment that have a material negative impact on other investors, as well as prohibiting any preferential treatments without disclosing the treatment to other current and prospective investors. In part, the Preferential Treatment Rule requires certain preferential information about portfolio holdings or exposures to be offered to all investors, otherwise it is prohibited.

Compliance Rule Amendments: Strengthening Compliance Policies

In addition, there are Compliance Rule Amendments being implemented across all registered advisers under the Advisers Act. The reforms require all registered advisers to document in writing the required annual review of their compliance policies and procedures. This is intended to help the SEC with reviewing compliance with SEC rules and identify potential industry weaknesses.

Enforcement Timeline: Implementation of New Rules

As planned, compliance with most of the new rules will be enforced on a rolling basis, depending on the type and size of the fund, from 23 August 2023, when the finalized rule was published on the federal registrar. The Compliance Rule Amendments takes effect in 60 days after the publication on the federal registrar.

What’s Next: Anticipated Litigation and Impact on Compliance

In short, likely a lot of litigation. Multiple private fund industry associations collectively filed suit against the SEC on 01 September 2023 in the Fifth Circuit on behalf of the interests of private fund advisers and associated parties. The complaint alleges that the new rules “exceed the Commission’s statutory authority,” and are arbitrary, capricious, an abuse of discretion, and contrary to law. Furthermore, the complaint alleges that compliance with the rules would interfere with existing contractual terms between investors and their private fund advisers.

While not the first of its kind, the lawsuit comes within the first few weeks after the SEC published its new rules to the federal registrar. As far as moving forward with the new rules in mind, their applicability and compliance requirements may be delayed while the matter is litigated, though, at such early stages of the process, it may be too soon to tell. The enforcement of the new private fund adviser rules will certainly be a space to watch moving forward.

Stay Informed: Future Developments in Private Fund Adviser Regulations

If you have any questions or require support, reach out to our global team and stay up to date on the latest regulatory compliance changes affecting the asset management industry.

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Winterthur, 10 August 2023- Zeidler Group, the technology-driven law firm, and regulatory compliance provider revolutionizing the legal and compliance services for the asset management industry, today unveiled its latest fund solution, Swiss Representative Service.

As a FINMA-licensed and regulated Swiss Representative, Zeidler Group is now authorized to represent foreign funds for offering to qualified and non-qualified investors in Switzerland.  

Zeidler Group is renowned for its use of tech-driven automated workflows and commitment to efficiency and scalability. The law firm’s new Swiss Representative service is resolute in delivering unmatched value and expert legal delivery to ensure robust compliance and ongoing fund governance with Swiss laws and regulations as well as EU, UK and 70+ jurisdictions for global coverage.

Josef El Semari, Director, at Zeidler Group said:

“As the demand for our services grows, we are thrilled to expand our regulatory division offerings with our newest service.  Asset managers seek streamlined processes, and we empower our clients by offering a full suite of fund services.  Obtaining the FINMA license enables us to provide our clients and the wider asset management more flexibility to consolidate all their Swiss requirements under Zeidler Group to achieve great efficiencies.”

Zeidler Group’s Swiss Representative Service stands out in a saturated market of service providers due to its dynamic suite of fund services. The firm facilitates seamless entry into the Swiss market, connecting foreign funds, Swiss investors, and the Swiss financial regulator FINMA.

Based in Winterthur, the highly specialized Swiss Representative team not only ensures legal compliance and administrative tasks but also meticulous fund registration and fund setup in line with the Swiss Collective Investment Schemes Act (CISA), positioning funds for success in Switzerland and beyond.

Arne Zeidler, CEO and Founder of Zeidler Group, emphasized the company’s strategic expansion:

“Embracing our proven reputation as a trusted EU Facilities Agent Provider and UK facilities provider, we are proud to introduce this latest addition to our arsenal of fund services. This strategic move not only meets but surpasses our clients’ long-standing demands, bridging a crucial gap in our offerings. With our latest service expansion, we are thrilled to cover the entire European continent, solidifying our position as a dynamic and forward-thinking industry leader.”  

Jasminka Makovec, Head of Regulatory Services Division of Zeidler Group highlighted the firm’s client-centric approach, stating:

“We are unwavering when it comes to delivering a truly end-to-end service that empowers our clients to meet their  regulatory and compliance requirements worldwide. Zeidler Group is achieving economies of scale that are appreciated by our clients by offering solutions for cross-border distribution in-house. We believe this approach is beneficial not only for our clients but also for the end investors.”  

To learn more about the Swiss Representative Service, please contact SwissRep@Zeidlerlegalservices.com

About Zeidler Group  

Zeidler Group is a technology-driven law firm and compliance provider revolutionizing legal, regulatory, and compliance services for the asset management industry.  Through innovative digital solutions and research-based legal advice, Zeidler Group establishes collaborative partnerships and serves a diverse range of asset management clients, including industry leaders and boutique operators. The firm’s services extend to over 200 clients with aggregate assets under management exceeding USD 1 trillion.

For more information, please visit zeidler.group.

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*Zeidler Group US does not offer legal advice.‍

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Introduction

In recent years, Environmental, Social, and Governance (“ESG”) factors have become a focus point for investors and advisers alike when considering investment strategies. In addition to the standards adopted by the EU, such as the ‘Sustainable Finance Disclosure Regulation’ (“SFDR”), the US Securities and Exchange Commission (“SEC”) has proposed rules addressing ESG approaches to prevent greenwashing and requiring transparency for US actors as well.

Whilst SFDR requires different levels of disclosure depending on the ESG integration adopted, one of the rules proposed by the SEC actually differentiates between three types of funds, thereby formally introducing a “labelling regime”.  

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Proposed Rules

The SEC has published three proposals: the first is a proposal for climate-related disclosure rules for Public Companies; the second is a proposal for ESG disclosure rules for Investment Companies and Advisers; the third is an amendment to the existing Name Rule to address misleading investment company names.

The Proposal for Climate-Related Disclosure Rules for Public Companies (the “Climate Risk Disclosure Proposal”)

The first set of rules requires public companies registered with the SEC to disclose “information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition,”. The rules within this Climate Risk Disclosure Proposal would require disclosures to be made in periodic SEC reports and registration statements. The Climate Risk Disclosure Proposal requires qualitative – description of risks, impacts and opportunities – and quantitative climate-related disclosures.  The quantitative metrics must be provided in accordance with XBRL and will need to be in part attested by an independent attestation service provider. These disclosures will need to be included in the publicly traded companies annual reports and, if applicable, reports throughout the year.

These rules are based on recommendations from the Task Force on Climate-Related Financial Disclosures (“TCFD”) as well as the Greenhouse Gas Protocol and are in the final state before enforcement, coming into force under a phased-in approach at the earliest by 2024.

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The Proposed ESG Categorizations

The SEC is proposing three categories of funds to reflect differences of sustainability related objectives. Funds will only fall into the different categories if they consider any ESG factors at all.

i. Integrated Funds

Integrated funds are funds which integrate both ESG and non-ESG factors in investment decisions. The disclosure requirement for Integrated Funds is to explain to investors how ESG factors are included in their strategy in the prospectus. The proposed rules include amendments to the registration and periodic reporting forms themselves, as such the required disclosures must be included in the relevant forms. For example, integrated funds would need to include disclosures on the funds’ annual and periodic reports.

ii. ESG-Focused Funds

ESG-focused funds are funds which use ESG factors “as a significant or main consideration” in investment selection or engagement. These disclosures require information about the fund’s strategy, including:

• a table demonstrating ESG-related investment strategy;

• the procedure for proxy voting or engagement with issuers as part of ESG strategy;

• the portfolio’s carbon footprint;

• the fund’s use of exclusionary screening methods if applicable; and

• how the fund considers GHG emissions.

This type of funds also includes those whose name indicates the incorporation of ESG factors in the investment decision making.

iii. Impact Funds

Impact funds are a subset of ESG-focused funds mentioned above. The disclosure requirements for Impact funds are the same as those for ESG-focused funds with the addition of qualitative and quantitative measures assessing the progress made in achieving the specific ESG impact.

These rules also affect advisers who will be required to provide specific disclosures in relation to their approach to ESG investing in the Adviser Brochures.

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The Proposed Amendments to the Fund Name Rule  

These proposed rules seek to amend the Name Rule, which regulates the labelling of investment products under the Investment Company Act of 1940 to prevent misleading investors. The proposal would require funds to disclose additional information about their ESG investments and strategies, which includes information on the criteria used to select ESG investments, the extent to which the investments align with their ESG goals, and the methods used to evaluate the ESG performance of the investments. The proposed rules amend the scope of the 80% investment policy requirement, by extending this to funds whose names indicate particular characteristics being considered in the investment decision. These funds will be required to invest at least 80% of their assets (incl. derivatives calculated by using the notional amount rather than market value) in alignment with the ESG objective, whilst allowing potential drifts to be rectified withing 30 days. This includes references to “ESG”. In addition, affected funds will be required to disclose in the prospectus how they define the terms used in the name as well as the criteria described by the name that are used to select investments.

These rules also mean that ESG-related terms cannot be used in the name of funds which consider ESG factors along with, but not more significantly than, other factors (e.g. integration funds).

Other procedural amendments are also included in the proposed rules.

The proposed amendments are expected to be finalized by October 2023.

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*This is an article from Zeidler Group's International site. Zeidler Group US does not offer legal advice.

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Introduction

The European Long-Term Investment Fund (“ELTIF”) has been around since 2015 and was created to provide investors with an opportunity to invest in long-term projects that support economic growth and job creation. However, despite its potential benefits, the uptake of ELTIF has been slow due to several regulatory and operational challenges.  

On 20 March 2023, the European Long-Term Investment Funds Regulation (EU) 2023/606 (“ELTIF 2.0”), amending Regulation (EU) 2015/760 (the “ELTIF Regulation”), was published in the Official Journal of the European Union. ELTIF 2.0 aims to be a new and improved version of this fund type that aims to address these issues and unlock the full potential of long-term investments.  

ELTIF 2.0 was entered into force on April 9th, 2023, and the amendments to the ELTIF Regulation will apply from January 10th, 2024.

ELTIF 2.0 addresses several supply and demand constraints and clarifies the scope of eligible assets and investments, portfolio composition and diversification requirements, cash borrowing and lending conditions and other fund rules, including sustainability considerations. The changes create improvements aimed at increasing investor protection and facilitating the creation of a more diversified and transparent market. The main aim of ELTIF 2.0 is to increase participation by retail investors, for example through private equity, which is traditionally the sphere of wealthy investors and institutions.

Background

The ELTIF Regulation was first introduced in April 2015. The focus of the ELTIF Regulation was to facilitate to raise European long-term investments for certain types of assets together with the framework of a passporting regime, similar to the AIFMD and UCITS passporting regime.  

ELTIFs invest on a long-term basis in infrastructure projects, real estate and SMEs, among others. The aim of the ELTIF Regulation was to support the development of ELTIFs as an alternative long-term investment vehicle for institutional and retail investors and to encourage long-term investments towards European long-term investments in the EU’s ‘real economy’.1. Despite the aims to promote European long-term investments, since the introduction of the ELTIF Regulation in 2015, only a relatively small number of ELTIFs have been authorised.2 The aggregate size of net assets of those funds was estimated at only approximately EUR 2.4 billion in 2021 compared to the total net assets of European investment funds (UCITS and AIFs) of EUR 19.6 trillion.3

Key changes

1. Increased Investor Protection

In order to enhance the level of trust especially for retail investors, ELTIF 2.0 places a greater emphasis on investor protection by introducing more stringent due diligence requirements and a requirement for greater transparency in the investment process. This will help reducing the risk of investors being exposed to unsuitable or fraudulent investments.

2. Simplification of the Suitability Test

To simplify the administration for ELTIF managers, the ELTIF specific suitability test requirement was deleted. It is now required to carry out an assessment of suitability and provide potential retail investors with such in accordance with Article 25(2) and (6) of Directive 2014/65/EU (“MiFID II”).

3. Ease of Requirements for Marketing to Retail Investors  

ELTIF 2.0 introduces a harmonised distribution regime for retail investors by way of removing the EUR 10,000 initial minimum investment requirement and the 10 % limit on aggregate investment cap on financial instrument portfolios not exceeding EUR 500,000 for retail investors.  

In addition, the requirement of the local facilities was removed alongside other complementary amendments.4 This complements the efficient and effective use of the passport for the retail-distribution passport.

4. Encouraging Long-term Investments

ELTIF 2.0 aims to encourage long-term investments by increasing the maximum investment period from ten to fifteen years. This will provide more time for investments to mature and generate returns, thereby making the ELTIF more attractive to institutional and retail investors.

5. ELTIF Manager Authorisation

ELTIF 2.0 does no longer require that the ELTIF Manager to have an additional ELTIF management authorisation. ELTIF 2.0 amends Article 5 of the ELTIF Regulation to provide that only the ELTIF itself is subject to regulatory authorisation.  

6. Enhanced Market Liquidity and Redemption Rights

ELTIF 2.0 aims to increase the liquidity of the long-term investment market by allowing ELTIF managers to invest in listed securities and facilitating the trading of ELTIF units on the secondary market. This will make it easier for investors to buy and sell their units and increase the attractiveness of the ELTIF as an investment vehicle.

While the ELTIF remains a closed-ended product by nature, ELTIF 2.0 introduces redemption rights during the lifetime of the fund under certain specific circumstances, including where appropriate redemption policies and liquidity management tools are compatible with the relevant ELTIF’s long-term investment strategy.5

7. Amendments to Eligible Assets and Portfolio Diversification

ELTIF 2.0 allows for a broader range of assets to be included in the ELTIF portfolio, including renewable energy, infrastructure, and real estate. It also removes the minimum threshold for individual value of real estate assets. This will provide investors with a wider range of investment opportunities, thereby increasing the diversification of the market.  

The amended thresholds in portfolio composition and diversification include the reduction of the diversification requirements by way of lowering the minimum investment in eligible investment assets from 70% to 55%.  

ELTIF 2.0 permits fund of fund strategies and removes the 20% investment limit. It also expands the scope of eligible collective investment undertakings to include ELTIFs, EuVECAs and EuSEFs and UCITS and EU AIFs managed by EU AIFMs (with setting a concentration of limits of no more than 30% of the units or shares of a single ELTIF, EuVECA, EuSEF, UCITS or EU AIF) as eligible investments.  

The investment rules are further amended with regard to master-feeder ELTIFs structures by permitting that one ELTIF may invests at least 85% of its assets into another ELTIF.   

ELTIF 2.0 distinguishes between ELTIFs marketing to professional investors and ELTIFs marketing to retail investors. It is noteworthy that ELTIFs marketing solely to professional investors will be able to take advantage of the revised leverage limit, increased from 30% to 100% of such ELTIF’s net asset value.  

In addition, ELTIF 2.0 increases borrowing limits (exceeding short-term borrowing) from 30% to 50% of the net asset value of the ELTIF, when marketing to retail investors, and 100% of the net asset value of the ELTIF, if marketing only to professional investors.

Impact for existing ELTIFs

Existing ELTIFs or those established between 9 April 2023 and 10 January 2024 can choose to opt-in to ELTIF 2.0, subject to notification of the competent authority of the ELTIF, such as the CSSF in Luxembourg or the CBI in Ireland. This creates an opportunity for structures that do not yet exist or are not yet authorized as ELTIFs prior to 10 January 2024 to take advantage of the ELTIF 2.0 regime from their establishment/authorization date, subject to the non-objection of the relevant regulatory authority.

ELTIFs authorized under the original regulation before 10 January 2024 are deemed to comply with ELTIF 2.0 until 11 January 2029. After this date, they will need to comply with ELTIF 2.0. However, if such ELTIFs do not raise additional capital on or after 10 January 2024, they will be deemed to comply with ELTIF 2.0 even after 11 January 2029.

Conclusion

ELTIF 2.0 represents a significant step forward in the development of a robust and efficient long-term investment market in the European Union. By introducing greater investor protection, a more diversified investment market, enhanced market liquidity, and longer investment periods, ELTIF 2.0 aims to unlock the potential of long-term investments and support economic growth. Investors and fund managers should note these developments and consider the opportunities presented by the new ELTIF framework.

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The objective of the Cross-Border Distribution Directive and Regulation, effective from 2 August 2021, is to improve and simplify the cross-border distribution of investment funds within the EU. The directive and regulation apply to both UCITS and AIFs.

Zeidler’s legal and regulatory experts have summarised the implementation progress of the new CBDF-Directive in the relevant EU / EEA member states to ensure firms are aware of potential operational blind spots to maintain ongoing fund governance best practices.

Get clarity on each Member States’ implementation progress with Zeidler’s legal and regulatory expertise.

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Access the whitepaper here

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Please note this document will be updated periodically to reflect the implementation progress in each EU / EEA member state.

The document was last updated on Friday, 3 June 2022.

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London, 12 July 2022- Zeidler Group, the technology-driven law firm and compliance provider revolutionising the legal and compliance services for the asset management industry, today announced its inclusion in the AIFintech100.

The prestigious ranking highlights the world’s most innovative solution providers developing artificial intelligence (AI) and machine learning technologies to solve challenges or improve efficiency in financial services. The firms chosen were selected by a panel of industry experts and analysts based on research produced by FinTech Global on over 2,000 FinTech companies.

“Now, more than ever, established financial institutions need to be aware of the latest AI and data analytics technology in the market to deliver competitive financial products and reach new customers. The AIFinTech100 list helps senior decision-makers in the industry filter through all the vendors in the market by identifying the market-leading AI innovators which will have a lasting impact on the industry.”

“We are delighted to be recognised and included among the world’s most innovative companies. Using digital innovation to create efficiencies and added value for our clients is a cornerstone value of our firm. The recognition demonstrates the hard work and tenacity of our software engineering division as well as the collaboration we have we our clients.”

“The recognition is a testament to our service divisions and their commitment to client delivery. As a tech-driven law firm and compliance provider, we continuously look to innovate and explore new ways to deliver streamlined and futureproofed solutions for our clients and wider community. We are delighted to be ranked again this year”.

Zeidler Group is a technology-driven law firm and compliance provider revolutionising legal, regulatory and compliance services for the asset management industry. Zeidler Group builds collaborative, strategic, and meaningful partnerships through its provision of innovative digital solutions and bespoke research-based legal advice and regulatory guidance. Zeidler Group’s range of asset management clients includes some of the largest and most respected names in the industry, as well as boutique operators. The law firm services more than 200 clients with aggregate assets under management above USD 1 trillion.

The Zeidler Group today announced that industry leader Rüstem Dagtekin has joined as Director – Product Owner, in the Reporting Services Division, based in Luxembourg. Mr. Dagtekin brings deep experience managing fund data and regulatory reporting solutions, including UCITS and PRIIPs production, costs, and risks calculations.

Most recently, Mr. Dagtekin served as the PRIIPs and MIFID cost and charges calculations subject matter expert at KNEIP- Deutsche Borse Group, where he was a pioneer in developing automated solutions to efficiently report and disclose MIFID and PRIIPs cost and charges figures. He has successfully developed and marketed his products throughout his career and has built an extensive client base.

“I am thrilled to join such an innovative firm as Zeidler where I can continue to transform manual workstreams into technology-driven, automated solutions that bolster efficiency and add value to clients,” said Mr. Dagtekin.

Zeidler’s Reporting Services Division simplifies regulatory reporting requirements with an end-to-end intuitive dashboard built to eliminate human error and manual processes, enabling asset managers to fulfil their regulatory reporting requirements digitally.

“We are pleased to welcome a talented professional like Rüstem to our global team,” said Zeidler CEO Arne Zeidler. “With his deep expertise in providing transaction costs and ongoing charges calculations and our transformational technology platforms, we are redefining legal value by building robust, automated solutions for our asset management clients.”

Mr. Dagtekin earned his M.S. in Banking and Finance from the Luxembourg School of Finance, an Executive M.S. in Corporate Finance from NYU Stern, a double M.S. in International Finance and industrial economics from the CEFI – University of the Mediterranean, Aix-Marseille II, and a B.S. in economics and corporate management from Nancy II University. He speaks and writes on topics related to quantitative analyses, model validation, risk management and is fluent in English, and French, Kurdish, and Turkish.

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Zeidler Group's Head of ESG Services Division, Elisa Forletta-Fehrenberg and Senior Associate, Sarah Noville have analysed and summarised the following ESG regulatory updates:

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• European Commission's Response to ESAs Q&As,
• ESA's clarification on RTS - May 2022
• ESMA Supervisory statement

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Ensure you are aware fo the practical implications and key items to consider.

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Download the guide here.

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This impact assessment is dated 17 June 2021. Given the dynamic nature of regulatory changes in this space, please note that the assessment results may be subject to change.

On 17 November 2022 the Luxembourg regulatory authority (Commission de Surveillance du Secteur Financier- "CSSF") published a new Standardised Model Prospectus (the "SMP") in English for undertakings of collective investment in transferable securities ("UCITS") accompanied by a general User Guide and a Sub-Fund Specific Guidance for the set-up of sub-fundsusing the SMP.

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The SMP should serve as a guidance for the set-up of UCITS and good practice to shorten the authorisation process by the CSSF. It composes and reflects the current and up-to-date practice and allows users to insert compulsory information of the UCITS in a template.
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Background
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An investment fund set up as a UCITS must be previously authorised by the CSSF in order to carry out any activities in Luxembourg. Before the creation or registration of a UCITS in Luxembourg, an application letter must be filed with the CSSF for entry on the official list. The official list is a register of all the investment funds authorised in Luxembourg and which are subject to the supervision of the CSSF. The entry on the official list is tantamount to authorisation and the CSSF will notify the entry to the investment fund concerned.

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The application letter must be accompanied by several documents including the prospectus of the UCITS. A UCITS will only be authorised if the CSSF has approved the respective management regulations (i.e., prospectus, Articles of Association/Fund Rules) and the choice of the depositary. Upon receipt of the prospectus and all compulsory documents, the CSSF will examine and if satisfactory, processes the registration of the UCITS on the official list.

1. Scope

• a UCITS to be set up as a common fund or with multiple sub-funds of low to average complexity domiciled in Luxembourg;
• a UCITS to be set up in the form of an investment company with variable capital ("SICAV") domiciled in Luxembourg; and
• a UCITS to be managed by a Luxembourg-domiciled Management Company ("ManCo") or by a Management Company domiciled in another EU Member state in accordance with the freedom to provide services on a cross-border basis.

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1. Practical implementations of using the SMP
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The SMP shall effectively be used for the establishment of new UCITS and does not have an impact on already authorised UCITS. The CSSF clarifies that the SMP shall not be considered as a regulatory requirement or as a guarantee for the approval and does not limit the right of the CSSF to request additional information as it deems necessary in the context of the authorisation process. The creation of a uniform structure shall solely simplify the review of the content and be understood as a guide as to what and where rather than the extent and content of the information to be provided. A review of whether the information given meets the regulatory requirements remains
mandatory.
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In practice, the authorisation process of UCITS remains unchanged and the processing times from submission of the application to approval will depend on the content, completeness, accuracy, complexity of the investment strategies and the speed of response either by the Mano or the CSSF.

III. How can Zeidler Group assist?

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We support you with the set-up of UCITS in Luxembourg including the drafting of your fund's constitutional and offering documents for filing, ensuring that the documents meet the relevant regulatory requirements and liaise with the CSSF to obtain fund approval.

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For additional queries in respect of the above, please do not hesitate to reach out and contact a member of our Legal Services Division or Regulatory Services Division.

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Introduction

On 21 April 2021 the European Commission adopted:

• a new Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU (the “UCITS Delegated Directive”), as regards sustainability risks and sustainability factors for undertakings for collective investment in transferable securities (“UCITS”); and
• a new Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) No 231/2013 (the “AIFMR”), as regards sustainability risks and sustainability factors to be taken into account by alternative investment fund managers (“AIFMs”).

Specifically, it impacts management companies and AIFMs and how they integrate sustainability risks in their management process.

For a definition of “sustainability risks” and other ESG-related industry terms, please refer to our ESG Glossary.

Background: what was required so far?

Under Article 3 of the Regulation (EU) 2019/2088 on sustainability-related disclosures (“SFDR”), financial market participants – in our case, management companies and AIFMs – must publish on their website “information about their policies on the integration of sustainability risks in their investment decision‐making process”. In some cases, management companies and AIFMs opted for simply disclosing that they would not integrate sustainability risks in their investment decision-making process.

What are the new requirements?

The UCITS Delegated Directive and the AIFMR go one step further as management companies and AIFMs are now required – in accordance with the proportionality principle – to take into account sustainability risks when establishing, implementing and maintaining their internal procedures and organisation. This is regardless of whether these are offering sustainable funds or not. With this in mind, there is also an obligation for management companies and AIFM to ensure sufficient resources and expertise for effectively integrating sustainability risks in their processes.

The responsibility for integrating sustainability risks in the firm’s activities will lay with senior management. This means ensuring that sustainability risks are integrated when:

• implementing the investment policy for each managed fund and overseeing the approval of such investment strategies;
• ensuring that it has a permanent and effective compliance function;
• reviewing periodically that the general investment policy, the investment strategies and the risk limits of each managed fund are properly and effectively implemented and complied with;
• approving and reviewing periodically the adequacy of the internal procedures for undertaking investment decisions for each managed fund;
• approving and reviewing periodically the risk management policy and arrangements, processes and techniques for implementing that policy; and
• for AIFM, ensuring that valuation procedures are well designed and implemented.

Sustainability risks should also be considered when identifying potential conflicts of interest or when performing due diligence on investments or implementing the risk management policy as regards the portfolio composition of a specific fund.

Sustainability risks must now be considered alongside the traditional market, liquidity, and counterparty risks.

What does it mean in practice?

When implementing the new requirements under the UCITS Delegated Directive and/or the AIFMR, you should pay particular attention to the following:

• the website disclosures under Article 3 SFDR;
• the product pre-contractual disclosures under Article 6 SFDR; and
• all relevant policies and procedures relating to:
• investment due diligence;
• risk management;
• remuneration;
• recruitments and human resources (including a sufficient panel of expertise and regular trainings on sustainability-related matters);
• organisational structure and decision-making;
• internal reporting and recording keeping; conflict of interest;
• delegation monitoring; accounting and valuation;
• costs and fees;
• reporting; and internal control functions and regular controls by senior management.

Entry into force

For management companies, the deadline for transposition by Member States is 31 July 2022, for the measures to apply from 1 August 2022. You can follow transposition in each Member State here.

For AIFMs, the measures will apply directly from 1 August 2022.

In conclusion

Sustainability risks have the potential to really impact funds, and as such should be taken into account by management companies and AIFMs at several levels, regardless of whether these are offering sustainable funds or not.

With the deadline for implementation upon us, management companies and AIFMs should review their internal procedures and processes as well as their risk management policies, whilst at the same time ensuring that they have sufficient capabilities and expertise to perform this review and continuous monitoring effectively.

Finally, they should ensure that disclosures previously made under Article 3 and/or Article 6 SFDR are still accurate after having reviewed those procedures and processes to integrate sustainability risks as well as a review of the delegation arrangements.

If you have any further specific questions or queries in this regard or require support in implementing the above, do not hesitate to reach out to our team.