Enforcement

SEC Dismisses Antifraud Enforcement Action

Summary: The U.S. Securities and Exchange Commission filed a joint stipulation dismissing, with prejudice, a long-pending civil enforcement action alleging violations of the antifraud provisions of the federal securities laws. The case stemmed from allegations that senior executives made materially misleading statements and omissions regarding the valuation and impairment of a significant overseas mining asset, including the timing and disclosure of asset write-downs following regulatory and operational setbacks. The dismissal reflects the specific procedural posture and factual circumstances of the matter and does not indicate a broader shift in enforcement policy.

Why it matters: A dismissal with prejudice permanently bars the SEC from re-filing the same claims, underscoring how complex, fact-intensive enforcement actions—particularly those involving valuation judgments, disclosure controls, and management intent—can evolve over extended litigation timelines. The outcome highlights the challenges regulators face in sustaining scienter-based claims in cases involving accounting estimates, internal deliberations, and evolving market conditions.

Potential action: Compliance and legal teams should continue to emphasize robust disclosure controls, contemporaneous documentation, and governance around valuation decisions and impairment analyses. Firms facing or anticipating regulatory scrutiny should closely manage document retention, internal communications, and early case assessment strategies, as these factors can materially affect the trajectory and resolution of long-running enforcement matters.

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Rulemaking

Treasury and FinCEN Postpone Effective Date of, and Reopen, Investment Adviser AML Rule

Summary: The U.S. Department of the Treasury, through its Financial Crimes Enforcement Network (FinCEN), announced that it will postpone the effective date of the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Program and Suspicious Activity Report (SAR) filing requirements for registered investment advisers and exempt reporting advisers (“IA AML Rule”). FinCEN will delay the original January 1, 2026, effective date to January 1, 2028, and intends to revisit the scope and substance of the rule through future rulemaking. To provide regulatory certainty during this period, FinCEN plans to issue appropriate exemptive relief recognizing the delayed effective date while it reevaluates the requirements.

Why it matters: The delay effectively gives advisers an additional two years before new Bank Secrecy Act-based AML/CFT compliance obligations take effect, providing more runway to assess and build out risk-based AML programs. The postponement also signals that FinCEN may refine or narrow the rule’s requirements to better tailor them to the diversity of adviser business models and risk profiles, potentially reducing compliance burdens compared with the original rule framework.

Potential action: Advisers should monitor further regulatory developments as FinCEN begins its reevaluation of the IA AML Rule and the related customer identification (CIP) requirements, including opportunities to submit comments once new proposals are published. Firms should also continue to maintain and strengthen AML/CFT risk-based policies, procedures, training, and independent testing in anticipation of eventual implementation, and assess how a revised rule could affect internal compliance resourcing and reporting obligations.

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SEC Proposes Changes to “Small Entity” Definitions for Advisers and Funds

Summary: The U.S. Securities and Exchange Commission has proposed amendments to the definitions of “small entity” for investment advisers, investment companies, and business development companies under the Regulatory Flexibility Act. The proposal would modernize asset-based thresholds, update aggregation standards across related entities, and introduce periodic inflation adjustments, with the goal of better reflecting today’s asset-management landscape when assessing the economic impact of SEC rulemaking.

Why it matters: By expanding and updating who qualifies as a “small entity,” the SEC would be required to conduct more robust cost-benefit and burden analyses for future rulemakings affecting a broader segment of advisers and funds. This could influence how new compliance obligations are designed and potentially reduce disproportionate regulatory burdens on smaller and mid-sized managers as markets continue to grow.

Potential action: Firms should monitor the proposal and evaluate whether the revised thresholds could affect their classification in future SEC rulemakings. Advisers and fund complexes may also consider submitting comments during the open comment period, particularly on threshold levels, aggregation mechanics, and the practical impact on compliance costs.

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What regulators are saying

SEC Staff Clarifies Broker-Dealer Custody and Trading of Crypto Assets

Summary: In December 2025, the staff of the U.S. Securities and Exchange Commission Division of Trading and Markets issued a statement and accompanying FAQs that clarify how broker-dealers may take custody and trade crypto asset securities and non-securities under existing securities laws. The guidance builds on earlier 2025 FAQs and supersedes restrictive interpretations that had limited custody to special-purpose broker-dealers. The staff’s position outlines how a broker-dealer can establish “physical possession” of crypto asset securities under Rule 15c3-3, including maintaining access to private keys and implementing written policies and controls to protect against operational and security risks. The FAQs also address related trading questions for crypto asset pairs on registered trading platforms.

Why it matters: This crypto-focused statement and FAQs signal a practical shift in how SEC staff view broker-dealer engagement with digital assets, enabling a broader set of carrying brokers to custody, trade, and transferring both crypto asset securities and non-securities within the existing regulatory framework. The guidance provides greater clarity on compliance with the Customer Protection Rule’s custody requirements, reduces barriers that previously limited institutional participation, and frames expectations for policies, procedures, and controls around private key management and distributed ledger assessments.

Potential action: Broker-dealers and market participants operating in crypto markets should review the staff statement and FAQs to assess how the clarified custody and trading expectations apply to their business models. Firms may need to update custody policies, procedures, and risk-controls, especially around private key governance, distributed ledger assessments, and incident response planning. Participants should also monitor related SEC and FINRA guidance as the regulatory landscape for crypto custody and trading continues to evolve.

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SEC Chair Paul Atkins Calls for Reform of Regulation S-K

Summary: SEC Chair Paul S. Atkins issued a statement calling for a comprehensive review of Regulation S-K, the body of disclosure requirements for public company filings outside of financial statements. Chair Atkins noted that Regulation S-K has grown significantly since its adoption in 1982 and now produces extensive disclosure that may include immaterial information that does not aid investors’ decision-making. To address this, he instructed the Division of Corporation Finance to evaluate existing requirements and recommend revisions, beginning with executive compensation disclosures under Item 402 and expanding to other S-K disclosure items. Chairman Atkins invited public comment on how to tailor Regulation S-K to elicit material information and avoid burdensome, immaterial reporting, with comments due by April 13, 2026.

Why it matters: This initiative underscores a broader regulatory shift toward simplifying and modernizing public company disclosure to focus on material information that investors use, rather than voluminous immaterial detail. Reforming Regulation S-K could affect a wide range of disclosure obligations in periodic reports and proxy statements, including executive compensation, risk factors, and other narrative sections, potentially reducing compliance burdens while enhancing investor clarity.

Potential action: Public companies, investor relations teams, and legal/compliance groups should monitor the Regulation S-K review process and consider submitting feedback on specific disclosure requirements. Firms may also begin internal assessments of their S-K disclosures to identify areas where materiality-based refinements could improve clarity and streamline reporting ahead of any future rule changes.

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SEC Names New Deputy Directors of the Division of Enforcement

Summary: The U.S. Securities and Exchange Commission announced that Paul H. Tzur and David M. Morrell have been appointed as Deputy Directors in its Division of Enforcement. Mr. Tzur joined the agency on January 6, 2026, and will oversee enforcement efforts in the Chicago, Atlanta, and Miami regional offices, bringing extensive experience from private practice and his prior service as an Assistant U.S. Attorney. Mr. Morrell joined on January 12, 2026, to lead enforcement programs in the New York, Boston, and Philadelphia regional offices, drawing on his background in private practice, senior roles at the U.S. Department of Justice, and government service, including as White House counsel.

Why it matters: These leadership appointments reflect the SEC’s continued emphasis on strengthening its enforcement infrastructure across key regional markets, with seasoned litigators placed in strategic roles to support investigations and actions that protect investors and maintain market integrity. The moves also underline the Commission’s focus on robust civil enforcement as a core component of its regulatory mission.

Potential action: Compliance and legal teams should note the expanded enforcement leadership and consider how these regional deputies’ priorities may influence the Division of Enforcement’s focus in upcoming examinations and enforcement initiatives. Monitoring public enforcement trends and regional enforcement activity may help firms anticipate shifts in exam emphasis or investigatory trends.

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Events

AI Governance and Operational Impact in Hedge Funds — Panel Discussion

Summary: On Thursday, January 29, 2026, Jim Leahy will be speaking on a panel hosted by Lowenstein Sandler focused on artificial intelligence risks, controls, and the operational impact of AI on alternative asset managers. The in-person program will take place from 3:00–6:30 p.m. ET at Lowenstein Sandler’s New York City office and will feature two panel discussions examining how hedge fund managers are approaching AI from both a governance and operational perspective. Topics will include allocator expectations, policy design, practical AI use cases, regulatory considerations, and examination readiness. A cocktail reception will follow the panel discussions.

Why it matters: As AI adoption accelerates across the alternative investment industry, regulators, allocators, and compliance teams are increasingly focused on governance, oversight, and real-world implementation. This program offers timely insight into how fund managers are operationalizing AI while managing regulatory risk, aligning with evolving exam expectations, and demonstrating appropriate controls to investors and regulators.

Potential action: Investment managers, CCOs, COOs, and operations professionals may benefit from attending to better understand emerging best practices around AI governance, operational deployment, and regulatory preparedness. Firms evaluating or expanding AI use cases should also consider how the discussion informs internal policy development, due diligence readiness, and exam response strategies.

Register Here