Enforcement

SEC Settles With New York Adviser Over Custody Rule and Identity Theft Program Failures

Summary: On October 23, the SEC settled charges against a New York-based adviser with more than $7 billion in regulatory assets. The order found that from 2015 to July 2024 the adviser did not subject 112 client accounts, where employees held signatory authority, powers of attorney or trustee roles, to annual surprise examinations, and did not review or update its Regulation S-ID identity theft program until December 2023. It was censured and agreed to pay $175,000.

Why It Matters: Signatory authority, powers of attorney and trustee roles can each create custody, and a stale identity theft program is a violation on its own, even where logged fraud attempts failed. Examiners had flagged related custody gaps in 2015 and 2024.

Potential Action: Advisers should inventory accounts where employees hold signatory authority, powers of attorney or trustee roles, confirm each is covered by a surprise examination or an available exception, and document an annual Regulation S-ID program review with senior-management oversight.

Read More Here (SEC)

CFTC Sues Utah to Block State Enforcement Against Registered Prediction Markets

Summary: The CFTC sued Utah and its attorney general in federal court on October 26, announcing the action on October 27, to stop the state from using its laws to shut down CFTC-registered contract markets. The suit follows civil enforcement proceedings Utah brought in state court on October 20 against CFTC-regulated markets and other businesses. The CFTC says Congress preempted state law and that Utah is the tenth state it has challenged.

Why It Matters: The suit escalates the federal-state dispute over event contracts while the CFTC’s swap-definition proposal is open for comment. Courts have ruled both ways on preemption, leaving exchanges and the businesses that trade on them exposed to state enforcement.

Potential Action: Firms that trade, make markets in, clear or distribute event contracts should map their offerings by state, review escalation procedures for state inquiries, and decide whether to comment on the CFTC’s swap-definition proposal before the November 18 deadline.

Read More Here (CFTC)

Former New Jersey Broker-Dealer Partner Pleads Guilty in SPAC Insider Trading Conspiracy

Summary: On October 22, a former partner and senior salesperson at a New Jersey broker-dealer pleaded guilty to conspiracy to commit securities fraud. DOJ said he traded SPAC securities in 2020 on confidential merger information that a client and friend, a trader at a Canada-based asset manager, sent him over an encrypted messaging platform. His sales after the merger announcement yielded nearly $1.5 million in profit; his plea agreement puts total profits at $2 million to $3.5 million.

Why It Matters: The case shows how material nonpublic information can pass between asset management and broker-dealer personnel through personal relationships and encrypted messaging, and that trading on a friend’s tip carries criminal exposure years after the trades.

Potential Action: Advisers and broker-dealers should review MNPI policies, personal-trading surveillance and controls for SPACs and pending transactions, and confirm employees understand that confidential information from friends, clients or contacts, including via encrypted apps, remains restricted.

Read More Here (DOJ)

DOJ Secures 15-Year Sentence in $76 Million Private Lending Ponzi Scheme

Summary: On October 26, a federal court in Georgia sentenced the founder of a private lender to 15 years in prison and ordered about $76.45 million in restitution after he pleaded guilty to wire fraud. DOJ said more than 300 investors were promised monthly returns of 8% to 18% on short-term bridge loans, while he falsely said the loans were performing, used new investor money to pay existing investors, and diverted millions to personal and political spending.

Why It Matters: The case highlights core private lending risks: unsupported claims about loan performance, misleading statements about where investor money goes, and distributions funded by new capital rather than portfolio cash flows.

Potential Action: Private credit managers should independently verify loan performance, collateral and repayment sources, reconcile investor distributions to actual portfolio cash flows, and confirm marketing materials accurately describe credit quality, liquidity and use of proceeds.

Read More Here (DOJ)

What Regulators Are Saying

SEC Examinations Division Releases Fiscal Year 2027 Priorities

Summary: On October 23, the SEC’s Division of Examinations published its fiscal year 2027 priorities, covering more than 34,000 registrants. For advisers, staff will emphasize economic conflicts of interest, illiquid products including private credit, and private fund disclosures on leverage, fund-level credit lines, affiliated service providers and fee calculations. Examiners will also test preparedness for super intelligence-enabled cyberattacks, such as deepfake social engineering, and Regulation S-ID and S-P compliance.

Why It Matters: The priorities are staff views, not rules, but they show where examiners will concentrate, including private fund fee and expense calculations, valuation of illiquid assets and, for broker-dealers, extended-hours trading and Regulation Best Interest.

Potential Action: Chief compliance officers should map these areas against their risk assessments and testing plans, and be ready to evidence controls over fee and expense calculations, credit-line disclosure, valuation, third-party account access and identity theft red flags.

Read More Here (SEC)

In the News

Moody’s Says AI Financing Is Reshaping Private Credit as Refinancing Risks Build

Summary: Moody’s Ratings said on October 27 that heavy borrowing to fund AI infrastructure is expanding private credit beyond traditional corporate lending, with 2027 capital spending by the five largest US hyperscalers and CoreWeave expected to approach $1 trillion. It said loans maturing between 2027 and 2029 will test weaker borrowers, that about 17% of the 607 borrowers it tracks use payment-in-kind interest, and that circular financing creates correlated risks.

Why It Matters: Payment-in-kind interest and refinancing exposure bear directly on the valuation and disclosure issues the SEC raised in its September staff statement on private credit and in its new examination priorities.

Potential Action: Private credit managers and registered funds should review valuation inputs for payment-in-kind and near-term maturity exposure, document how refinancing risk affects marks, and confirm that risk and liquidity disclosures reflect AI-related concentrations.

Read More Here (Reuters)

Events

CFTC Event Contract Swap Proposal and Interim Rule: Comments Due November 18

Summary: The CFTC’s October 9 proposal to include event contracts, such as those tied to sports, politics, culture and weather, in the definition of “swap,” and its companion interim final rule excluding casino-style gambling products, were slated for Federal Register publication on October 19. Comments on each are due within 30 days of publication, which puts the deadline at November 18. The interim rule takes effect on publication.

Why It Matters: A fixed deadline gives firms a defined window to shape a proposal that would place event contracts within swap regulation, amid conflicting court rulings and growing state enforcement.

Potential Action: Firms that offer, clear, trade or advise on event contracts should finalize their analysis of registration, reporting and disclosure consequences, decide whether to comment, and confirm the deadline against the Federal Register notice.

Read More Here (CFTC)