February 15, 2023 - The LSTA this week submitted its comment letter on Liquidity Risk Management but, alas, there is no rest for the weary.  Instead, we immediately turned our attention to the Conflicts in Securitization Rule Proposal (which we covered here), the SEC’s 2023 Examinations Priorities (which impacts private funds especially), and, hot off the presses, the SEC proposed new Custody Rule.  Below briefly update you on goings on relating to the Conflicts rule, tease to the custody rule, and, mainly, discuss the SEC’s 2023 Examination Priorities. 

Conflicts in Securitization Rule.  The SEC has published the proposed rule in the Federal Register, thereby fixing the deadline for comments at March 27th, only 60 days from its approval by the Commission.  An LSTA working group has been formed to develop a comment letter for timely submission to the SEC.  At the same time, a group of trade associations is working on (yet another) letter to the SEC requesting more time to comment.  That letter will likely be submitted in the next few days but, based on our prior recent experience, is unlikely to move the SEC to extend the deadline.

Custody Rule.  The SEC this week approved a proposal for a sweeping revamp of its 2002 Custody Rule.  The rule is far too broad, complex and encompassing to attempt a quick analysis and we will return next week with a deep dive and a special focus on how the proposed rule could impact loans and managers of loans. The Proposed Custody Rule is available here and the SEC’s Fact Sheet for the Proposed Custody Rule is available here.

SEC Examination Priorities.  Last week the SEC published its 2023 Examination Priorities.  Not surprisingly, the primary focus of the exam staff will be on private fund managers and many issues that are very relevant to private funds, including those that manage loans.  Among the issues the SEC has indicated it will be looking at are compliance with the new Marketing Rule (which we wrote about here).  They will also be focusing on several ESG-related issues.  They intend to assess whether funds are operating in a manner consistent with their disclosures, whether funds are appropriately labeled, and whether recommendations of such products are made in the best interests of retail investors.  The SEC will also be measuring  compliance with the (current) custody rule (with which we have been engaged with the SEC for almost seven years).  While the SEC staff has, since 2016, taken the position that loan managers have custody of client assets because loans do not settle “delivery versus payment” (DVP), they have mostly refrained from citing managers for failure to comply with the compliance rule since then while engaging with industry representatives in an effort to resolve the question.  It will be interesting to see whether the Exam staff continues to stand down now that a new custody rule has been proposed.  The SEC has also signaled that it will be focusing on LIBOR transition, not just in the context of private funds but also with respect to broker-dealers and will continue to focus on whether they are prepared for the transition away from LIBOR by the mid-2023 deadline.  The SEC lists many other issues it intends to focus on that are beyond the scope of this article.  Willkie has published a helpful, comprehensive review of the SEC Examination Priorities, available here.

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