SEC Actions in Review: What Officers and Directors Should Know for 2025
As the regulatory landscape continues to evolve, public company officers and directors must stay abreast of the enforcement priorities and expectations of the Securities and Exchange Commission (SEC). Over the past year, the SEC has brought various enforcement actions that involve the oversight and reporting obligations of management and boards. These cases highlight potential blind spots in corporate compliance programs. This article summarizes recent enforcement actions related to director independence, cybersecurity, insider “shadow” trading, internal investigations, executive compensation beneficial ownership and insider transaction reports, and Artificial Intelligence, which despite the change in administration, public company officers and directors should view as potential areas of continued SEC focus over the upcoming year.
Director Independence
In September 2024, the SEC announced it had settled[1] charges against a director of an NYSE-listed consumer packaged goods company for violation of the proxy rules, for failure to disclose in his D&O questionnaire information about his close friendship with an executive officer, which caused the company to falsely list him as an independent director in its proxy statement.[2] This undisclosed relationship included multiple domestic and international paid vacations with the executive.[3] The director also allegedly provided confidential information to the executive about the company’s CEO search and instructed the executive to withhold information about their personal relationship to avoid the impression that the director was biased toward the executive becoming CEO of the company.[4] The director agreed to a civil penalty of $175,000, a five-year officer and director bar, and a permanent injunction from further violations of the proxy rules.
Takeaway: For directors, this case underscores the importance of being “honest, truthful, and forthright”[5] when completing D&O questionnaires and not treating them as mere formalities that are rolled forward from one year to the next. This enforcement action further shows that material misstatements and omissions in the D&O questionnaire can give rise to a direct violation of the proxy disclosure rules against the director for causing a company’s proxy statements to contain false and misleading statements. The determination of independence can be complex. However, directors are not tasked with making that determination themselves; they merely must disclose all relevant facts in their D&O questionnaires, including social relationships with management.
Cybersecurity
In October 2024, the SEC announced settlements with four issuers for misleading disclosures regarding cybersecurity risks and intrusions. [6] These cases stemmed from an ongoing investigation of companies impacted by the two-year long cyberattack against a software company, which the SEC charged a year earlier for failure to accurately convey its cybersecurity vulnerabilities and the extent of the cyberattack.[7] Each issuer charged by the SEC in October 2024 utilized this company’s software and discovered the actor likely behind the software company’s breach also had accessed their systems, but according to the SEC, their public disclosures minimized or generalized the cybersecurity incidents. Specifically, two of the issuers failed to disclose the full scope and impact of the cyberattack, including the nation-state nature of the threat actor, the duration of the malicious activities, and in one case[8] the number of compromised files and the large number of customers whose information was accessed, as well as in another case the percentage of code that was compromised.[9] The other two issuers failed to update their risk disclosures in SEC filings and instead framed cybersecurity risks and intrusions as general and not material[10] or in hypothetical terms[11] rather than disclosing the actual malicious activities and their impact on the company.
The SEC charged each issuer with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act (which prohibit misleading statements or fraud in connection with the offering or sale of securities) and Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 13a-15(a) thereunder (rules related to required filings for public companies, including requirements that such filings include any material information to ensure filings are not misleading, and companies have internal controls and procedures over financial reporting). One of the companies also was charged with disclosure controls and procedures violations. While each issuer received credit for cooperating in the SEC investigation, the settlements included civil penalties ranging from $990,000 to $4 million.
Takeaway: When a cybersecurity breach is identified, the board and management must ensure their company’s disclosures are accurate, current, and tailored to the company’s “particular cybersecurity risks and incidents.”[12] Indeed, the SEC’s cybersecurity disclosure rules, adopted on July 26, 2023, specifically require registrants to, among other things, report on Form 8-K any cybersecurity incident deemed to be material and to disclose on Form 10-K the registrant’s processes for assessing, identifying, and managing material risks from cybersecurity threats, the material impacts of cybersecurity threats and previous incidents, and specific information relating to the role of the board and management in identifying and managing such risks.[13] As the SEC stated, “Downplaying the extent of a material cybersecurity breach is a bad strategy”[14] and, as these cases demonstrate, can subject the company to an enforcement investigation and action. Navigating cybersecurity disclosure obligations, however, especially when the breach is ongoing and the origin and impact is not fully understood, presents unique challenges for issuers. And despite the dissenting opinion in the October 2024 cybersecurity enforcement cases by two of the SEC commissioners, who believed the omitted details were not material to investors, the board and management must constantly evaluate whether their company’s cybersecurity risk disclosures, as well as the disclosed scope and impact of any material breach, are sufficiently detailed and remain accurate throughout the company’s investigation.
Insider “Shadow” Trading
In April 2024, the SEC won a jury verdict in an insider trading case based on a “shadow” insider trading theory.[15] Shadow trading involves an insider’s misappropriation of confidential information about the insider’s company to trade in securities of another company where there is a sufficient “market connection” between the two companies. In this case, the SEC alleged, and the jury found, the defendant used confidential information about a potential acquisition of the biotech company he worked for to purchase call options in a second biotech company in the belief its stock price would materially increase after the deal involving his company was publicly announced. What was novel about this case is the lack of commercial connection between the two companies and the fact that the confidential information did not directly relate to the company whose securities the defendant traded in.[16] The nexus between the two companies that served as the basis for the SEC’s insider trading charges was that they were both operating in a field where viable acquisition candidates were scarce, such that the announcement of the sale of the insider’s company was likely to drive up the stock price of the other company.
Takeaway: Officers and directors should take note of this case and, pending further judicial developments, should refrain from shadow trading when in possession of material non-public information (MNPI). Indeed, corporate insider trading policies and codes of conduct often prohibit trading in the securities of publicly-traded customers, vendors, and other commercial partners when an insider is in possession of MNPI. Further, the SEC’s success in this civil case, and the existence of criminal penalties for insider trading, creates an additional risk of criminal prosecution. In short, officers and directors should avoid becoming embroiled in allegations of shadow trading, which could be costly to defend, cause reputational damage, and lead to the imposition of significant sanctions.
Internal Investigations
The SEC has made clear that when a company fails to investigate and remediate wrongful conduct, it will hold officers and directors responsible even if they may not have been involved in the underlying violation. And when a board and management take prompt action to investigate, remediate, and self-report, the SEC will “reward [] meaningful cooperation to efficiently promote compliance” in the form of reduced charges and/or sanctions.[17]
In September 2024, the SEC brought unsettled civil fraud charges in federal court against the former CEO, former CFO, and former director and audit committee chair of a bankrupt (formerly Nasdaq-listed) software company for their roles in an alleged scheme that resulted in the company overstating and misrepresenting its revenues in connection with two public stock offerings that raised $33 million.[18] The SEC alleged that while the CEO initiated and directed the fraud, the CFO and director received a complaint from a senior company employee regarding revenue concerns about the main product disclosed in the offering materials, but other than consulting with outside counsel, they failed to investigate the employee’s concerns or correct the potential misstatements. As a result, both signed public filings that contained false and misleading statements and, in connection with the year-end audit, falsely represented to the outside auditors that they had no knowledge of any complaints regarding the company’s financial reporting. The SEC is seeking disgorgement of ill-gotten gains, civil penalties, and officer-and-director bars against each defendant. In its press release, the SEC warned, “This case should send an important signal to gatekeepers like CFOs and audit committee members that the SEC and the investing public expect responsible behavior when critical issues are brought to their attention.”[19]
In stark contrast, in December 2024 the SEC declined to impose a civil penalty in a settled administrative cease-and-desist action against a publicly-traded biotechnology company due to its self-reporting, proactive remediation, and meaningful cooperation.[20] The SEC credited the company’s board for (1) forming an independent special committee, which hired outside counsel to conduct an investigation into two anonymous complaints; (2) adopting the special committee’s remediation recommendations, including appointing an interim CEO, establishing a disclosure committee, and appointing two new independent directors; and (3) self-reporting the results of the internal investigation.[21] The SEC filed separate settled charges against the former CEO and former CFO for misleading investors about the status of FDA reviews of the company’s drug candidates related to a follow-on public offering. Among other sanctions, the CEO and CFO agreed to civil penalties, and the CEO agreed to an officer-and-director bar.[22]
Similarly, in a settled action announced in September 2024, the SEC credited a former publicly-traded technology manufacturer for conducting an internal investigation, self-reporting the investigation results, and implementing remedial measures.[23] Despite the existence of fraudulent conduct by a high-level employee, the SEC charged the issuer with only non-fraud violations of the financial reporting, books and records, and accounting control provisions of the federal securities laws and did not impose any penalty. The SEC explained in its press release that “this kind of response by a corporate entity can lead to significant benefits including, as here, no penalty.”[24] The SEC did bring civil fraud charges against the company’s finance director who perpetrated a fraud related to the company’s financial performance during a three-year period.[25]
Takeaway: When accounting errors or improper conduct are discovered or alleged, a company and its board should take prompt action. Conducting an independent investigation, undertaking prompt remediation, and being transparent with the company’s outside auditors are critical to ensuring accurate disclosures, preventing further errors and misconduct, and mitigating regulatory and legal exposure. Failing to do so will increase business and legal costs, damage the company’s reputation, and expose officers and directors to individual liability. And where appropriate, with the advice of experienced counsel, companies should evaluate the pros and cons of self-reporting, which regulators will credit as a mitigating factor when considering charges, sanctions, and settlements.
Executive Compensation
In December 2024, the SEC announced it had settled charges against an NYSE-listed fashion retail company for failing to disclose within its definitive proxy statements $979,269 worth of executive compensation related to perks and personal benefits provided to a now-former CEO for fiscal years 2019, 2020, and 2021.[26] These unreported personal benefits included expenses associated with the authorized use of chartered aircraft for personal purposes.[27] The company’s failure to disclose these benefits resulted in it underreporting the “All Other Compensation” portion of its then-CEO’s compensation by an average of 94% of the three fiscal years.[28] The SEC charged the company with violations of Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-15(a), 14a-3, and 14a-9 thereunder (which prohibits companies from making false or misleading statements in proxy statements).[29] The SEC imposed a cease-and-desist order and declined to impose a civil penalty, in part due to the company’s prompt remediation and self-reporting.[30]
Takeaway: This case underscores the importance of companies having adequate processes, policies, and controls for identifying perks and personal benefits and ensuring they are included in executive compensation disclosures. SEC rules require, among other things, companies to disclose the total value of such benefits provided to named executive officers who receive at least $10,000 worth of such items in a given year. See Item 402 of Regulation S-K. Transparent disclosure not only fulfills a company’s regulatory obligations but also helps maintain public trust. Failing to fully report non-compensation benefits executives receive can lead to increased government scrutiny, reputational damage, and loss of investor confidence. And when a company falls short, prompt remediation is critical and can result in a reduction of regulatory sanctions.
Beneficial Ownership and Insider Transaction Reports
On September 25, 2024, the SEC announced charges against 23 officers, directors, and major shareholders for violating Sections 16(a), 13(d), and 13(g) of the Exchange Act, which requires reporting information concerning holdings and transactions in public company stock.[31] In addition, the SEC charged two publicly-traded companies for their failure to report these insiders’ filing delinquencies or for contributing to these insiders’ failures to file.[32] In its press release, the SEC explained the importance of complying with these reporting obligations: “To make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests.”[33] The settlements included penalties ranging from $10,000 to $200,000 for individuals and $40,000 to $750,000 for companies — totaling more than $3.8 million in penalties.[34] The SEC used data analytics to identify individuals and entities with late required reports.
Takeaway: While it is unusual for the SEC to bring so many actions at once, the “SEC’s enforcement initiatives” are not surprising given the SEC’s continued focus on policing compliance.[35] The SEC continues to send a clear signal to insiders and investors that they need to “commit necessary resources to ensure these reports are filed on time” or risk enforcement action.[36] And as the SEC recently warned, “[T]hese reporting requirements apply irrespective of whether the trades were profitable and regardless of a person’s reasons for the transactions.”[37] For public companies that assist insiders in complying with these filing requirements, the SEC actions further make clear companies are not immune and must stay abreast of amendments and ensure their monitoring processes and controls are working effectively to ensure timely reporting.
Artificial Intelligence
The SEC continued its crackdown on “AI-washing” by bringing a settled enforcement action on January 14, 2025 against a restaurant services technology company due to alleged misrepresentations concerning “critical aspects of its flagship artificial intelligence [] product[.]”[38] According to the SEC, AI-washing is a deceptive tactic that consists of promoting a product or a service by overstating the role of artificial intelligence integration.[39] The product at issue in the enforcement action employed AI-assisted speech recognition technology to automate aspects of drive-thru ordering at quick-service restaurants. Among other things, the SEC accused the company of disclosing a misleading reporting rate of orders completed without human intervention using the product.[40] The company was charged with violations of Section 17(a)(2) of the Securities Act and Section 13(a) of the Exchange Act.[41] The SEC declined to impose a civil penalty based on the company’s cooperation during the Staff’s investigation and remedial efforts, with the company consenting to a cease-and-desist order.
While this most recent enforcement against AI-washing led to a cease-and-desist order, the Commission’s enforcement cases in 2024 included steep penalties for violators.[42] In an earlier enforcement action against two investment advisory companies, the SEC levied civil penalties of $400,000 for the company’s false and misleading statements concerning their purported use of artificial intelligence.[43] Specifically, the companies were alleged to have marketed to their clients (and prospective clients) that they were using AI in certain ways when they were not.[44] In the SEC’s press release, Chair Gary Gensler warned, “We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. . . . Such AI washing hurts investors. . . . [P]ublic issuers making claims about their AI adoption must [] remain vigilant about [] misstatements that may be material to individuals’ investing decisions.”[45]
Takeaway: It is evident that “[a]s more and more people seek out AI-related investment opportunities,” the SEC becomes more and more committed to “polic[ing] the markets against AI-washing[.]” [46] The SEC’s emphasis, that any claims regarding AI must be substantiated with accurate information, makes it essential for companies integrating AI to have clear and accurate ways to measure and assess its AI-supported products and/or services. For directors and executives, this means carefully reviewing public disclosures and press releases related to AI technologies to ensure that all AI-related statements are supported by verifiable information. Without this verifiable information, a company opens itself up to significant penalties from enforcement actions brought pursuant to Section 17 of the Securities Act, which may also result in lost trust from shareholders around a company’s AI-related technologies.
Closing
The news for boards and management isn’t all bad; the number of SEC enforcement actions dropped significantly in 2024, and there is reason to believe that this drop may continue into 2025. In 2024, there were 583 SEC enforcement proceedings, compared to between 697 and 862 for each of the prior five years.[47] While the SEC touted record financial remedies for 2024,[48] over half of that amount came from a single case.[49] Signals from the new administration indicate reduced enforcement activity is likely to continue, given the administration’s focus on deregulation and government efficiency, which will likely lead to fewer resources available to the SEC. There also is an expectation that the SEC will avoid “regulation by enforcement” and take a “friendlier” view of certain activities that the outgoing SEC administration sought to reign in, such as with the crypto industry.[50] An additional factor pointing toward changes in enforcement approach is that the SEC is no longer able to try certain cases in administrative proceedings and instead must adjudicate such matters in federal jury trials.[51] This could result in the SEC choosing to pursue fewer actions or lesser sanctions, particularly given that it has historically been less successful in federal courts compared to in-house proceedings.[52] Nonetheless, the SEC’s enforcement actions involving public companies over the past year serve as a reminder to officers and directors of the importance of complying with their duties and obligations and ensuring strong internal controls and reporting practices. Staying ahead of compliance requirements is not just a matter of risk mitigation — it is essential for preserving shareholder trust and corporate integrity.
If you have questions about these and other SEC enforcement actions, contact the authors or your Foley & Lardner attorney.
[1] Typically with settled SEC actions, the settling party neither admits nor denies the SEC’s findings. See 17 CFR § 202.5.
[2] https://www.sec.gov/newsroom/press-releases/2024-161.
[3] See id.
[4] See id.
[5] See id.
[6] https://www.sec.gov/newsroom/press-releases/2024-174.
[7] https://www.sec.gov/newsroom/press-releases/2023-227. In July 2024, most of the SEC’s claims were dismissed; most notably, the court held that charges of internal accounting controls failures do not extend to cybersecurity deficiencies. See https://www.foley.com/insights/publications/2024/08/down-but-not-out-federal-court-curbs-sec-cybersecurity-enforcement-authority/.
[8] See https://www.sec.gov/newsroom/press-releases/2024-174.
[9] See id.
[10] See id.
[11] See id.
[12] Release Nos. 33-10459, 34-82746 (Feb. 21, 2018) (“We expect companies to provide disclosure that is tailored to their particular cybersecurity risks and incidents”).
[13] See Release Nos. 33-11216, 34-97989 (July 26, 2023); see also https://www.foley.com/insights/publications/2023/08/sec-adopts-new-cybersecurity-disclosure-rules/.
[14] https://www.sec.gov/newsroom/press-releases/2024-174.
[15] See https://www.sec.gov/enforcement-litigation/litigation-releases/lr-25970; see also https://www.sec.gov/enforcement-litigation/litigation-releases/lr-25170.
[16] https://www.foley.com/insights/publications/2024/03/sec-v-panuwat-shadow-trading-insider-trading-trial/.
[17] https://www.sec.gov/newsroom/press-releases/2023-234.
[18] https://www.sec.gov/newsroom/press-releases/2024-131.
[19] Id.
[20] https://www.sec.gov/newsroom/press-releases/2024-189.
[21] https://www.sec.gov/files/litigation/admin/2024/33-11332.pdf.
[22] https://www.sec.gov/files/litigation/admin/2024/34-101796.pdf.
[23] https://www.sec.gov/newsroom/press-releases/2024-116.
[24] Id.
[25] Id.
[26] https://www.sec.gov/newsroom/press-releases/2024-203
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] https://www.sec.gov/newsroom/press-releases/2024-148
[32] Id.
[33] Id.
[34] Id.
[35] https://www.sec.gov/newsroom/press-releases/2023-219 (press release); https://www.sec.gov/files/33-11253-fact-sheet.pdf (fact sheet); https://www.sec.gov/files/rules/final/2023/33-11253.pdf (final rule).
[36] https://www.foley.com/insights/publications/2014/09/sec-charges-insiders-for-violations-of-section-16a/
[37] https://www.sec.gov/newsroom/press-releases/2024-148
[38] https://www.sec.gov/enforcement-litigation/administrative-proceedings/33-11352-s
[39] See https://www.sec.gov/newsroom/speeches-statements/gensler-office-hours-ai-washing-090424
[40] Id.
[41] Id.
[42] https://www.sec.gov/newsroom/press-releases/2024-36
[43] Id.
[44] Id.
[45] Id.
[46] See https://www.sec.gov/newsroom/press-releases/2024-70
[47] https://www.sec.gov/files/fy24-enforcement-statistics.pdf.
[48] https://www.sec.gov/newsroom/press-releases/2024-186.
[49] See https://www.sec.gov/enforcement-litigation/distributions-harmed-investors/sec-v-terraform-labs-pte-ltd-do-hyeong-kwon-no-23-cv-1346-jsr-sdny.
[50] https://www.nytimes.com/2024/12/04/business/trump-sec-paul-atkins.html.
[51] See https://www.foley.com/insights/publications/2024/06/us-supreme-court-rules-sec-securities-fraud-cases-federal-jury/.
[52] Id.
BANKING HEADACHES: Plaintiff Challenges Debt Collections Under TCPA ATDS Provisions
Hi Folks! We just saw an interesting complaint filed, where the plaintiff claims he revoked his consent to be contacted by a debt collector.
Generally, debt-collection-related TCPA lawsuits are at an all-time low, especially in the Ninth Circuit. However, Plaintiff Aaron Maxwell brought a complaint against First National Bank of Omaha for three different claims relating to its debt collection attempts, including a violation of the automatic telephone dialing system (“ATDS”) provisions of the TCPA. Maxwell v. First National Bank of Omaha, 2:25-cv-00652 (C.D. Cal. filed January 27, 2025). Plaintiff alleges that he revoked his consent to be contacted via a “certified notice” sent to Defendant. Id. The “certified notice” was a letter from Plaintiff’s counsel confirming that he represented Plaintiff and advising Defendant to no longer contact the Plaintiff. Id.
The de facto rule is that consumers may revoke TCPA consent through any reasonable means. New revocation rules—unimpacted by the 11th Circuit’s decision to strike down 1:1 consent requirements—are coming into effect April 11, 2025, which will codify the reasonable revocation rule into 47 C.F.R. § 64.1200, among additional changes.
It appears that a certified notice sent on Plaintiff’s behalf constitutes reasonable means through which to revoke consent.
Still, Maxwell v. First National Bank of Omaha is interesting because debt collectors have not been subject to many ATDS lawsuits in recent years, especially in the Ninth Circuit, as the Supreme Court in Facebook, Inc. v. Duguid and Ninth Circuit (subsequently) in Borden v. eFinancial, LLC have both held that an ATDS must generate random numbers—although those definitions are strangely inconsistent.
In any case, this is a TCPA lawsuit against a debt collector for violating the ATDS provisions. For debt collectors, courts within the Ninth Circuit have found that debt collection attempts are incompatible with ATDS usage because debt collectors do not generate random numbers. See McDonald v. Navy Federal Financial Group, 2023 WL 5797724 (D. Nev. Sept. 7, 2023) (finding implausible plaintiff’s claim that she was contacted by a debt collector using an ATDS).
It will be interesting to see how the court treats Plaintiff’s TCPA ATDS claim in this action. It seems that the ATDS claim should be dismissed, but courts within this circuit have gone the other way in recent years—even for debt collectors.
SEC Charges Navy Capital in AML Failures: Say What You Do and Do What You Say
The US Securities and Exchange Commission (SEC) released a press release on January 15 announcing that it had charged Navy Capital Green Management, LLC, an investment adviser, with violations of the Investment Advisers Act of 1940 related to its Anti-Money Laundering (AML) policies and procedures.
Navy Capital agreed to a settlement offer in which they did not admit or deny the SEC’s findings and agreed to pay a $150,000 civil penalty, to cease and desist from committing any further violations, and to be censured. The charges against Navy Capital emphasize the SEC’s priority in ensuring registered investment advisers (RIAs) say what they do and do what they say.
Read the SEC’s press release here.
Currently, RIAs do not have any affirmative duties under AML rules and regulations. RIAs may implement AML policies and procedures voluntarily. If an RIA does implement AML policies, then it must ensure that it follows through with its own policies and procedures.
AML-Related Charges Against Navy Capital
The SEC charged Navy Capital with making misrepresentations related to Navy Capital’s AML policies and procedures in various investor and prospective investor materials, and for and failing to ensure that its written investor materials accurately represented its AML policies and procedures. More generally, Navy Capital represented to its investors and prospective investors that it would follow certain procedures to mitigate AML risks.
The SEC’s findings were based on the relevant period of October 2018 through January 2022 when Navy Capital was registered with the SEC. Throughout this period, Navy Capital represented to its investors and prospective investors that it voluntarily maintained robust AML policies and procedures in accordance with the USA Patriot Act, even though it was not required to do so. Navy Capital published these representations in its offering memoranda, subscription booklets and agreements, due diligence questionnaires, and internal compliance manual, which was provided to prospective investors upon request.
In several of the written investor materials, Navy Capital claimed that investment into the funds would not be complete until investors satisfied all of Navy Capital’s AML requirements. However, in several separate instances described in the SEC’s order, Navy Capital approved investments — against its own policies and procedures — without (1) obtaining documents identifying an investor’s beneficial ownership, (2) investigating reported police suspicions that a foreign entity investor’s money was possibly connected to money laundering schemes, (3) resolving contradictory beneficial ownership documents, and (4) sufficiently confirming the source of funds. Also, in violation of its own policies, Navy Capital accepted funds from bank accounts not held in the name of the subscribing investor and from investors that disclosed they had zero assets.
Applicable SEC Rules
The SEC ultimately found that Navy Capital violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. By way of background, Rule 206(4)-7 requires an investment adviser to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act. Rule 206(4)-8 makes it unlawful for any investment adviser of a pooled investment vehicle to “[m]ake any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or [o]therwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.”
The SEC held that Navy Capital misled investors about the level of risk they were taking by investing in Navy Capital’s funds.
New RIA AML Responsibilities
In August 2024, the Financial Crimes Enforcement Network (FinCEN) issued a rule that broadens the definition of “financial institution” as used in the Bank Secrecy Act to include RIAs and exempt reporting advisers (ERAs) (some exceptions apply). FinCEN’s new rule goes into effect on January 1, 2026, and will require all RIAs and ERAs under this rule to either implement an AML program, or if they already have one, to ensure their AML policies and procedures comply with the rule.
Briefly, the rule will require RIAs and ERAs to implement a risk-based and reasonably designed AML program, file certain reports with FinCEN, keep certain records, and fulfill certain other obligations applicable to financial institutions subject to the Bank Secrecy Act and FinCEN’s implementing regulations.
For more information on FinCEN’s new rule, see our recent client alert.
Key Takeaways
RIAs should note the distinction between SEC and FinCEN requirements. The SEC does not require RIAs to implement an AML policy. For SEC compliance, RIAs should ensure that they are abiding by their policies and procedures, particularly those that stand to impact funds raised from investors. However, for RIAs to comply with FinCEN rules, they will need to implement an AML policy according to the new rule by the effective date.
Additionally, although the new Administration has promised to repeal several SEC rules, the Trump Administration’s focus remains on repealing SEC rules related to environmental, social, and governance and crypto. At this time, it looks unlikely that any rules related to proper disclosure will be affected. FinCEN’s rule is also likely to be enforced. ArentFox Schiff attorneys are closely monitoring any developments that could impact the effectiveness of FinCEN’s new rule or could impact SEC compliance.
Listen to this article
Recovering Costs for Dealing with Fixed Charge Assets – Lessons for Practitioners and Security Holders (UK)
The decision handed down in Pagden and another v Ridgley [2024] EWCH 3047 (Ch) is a helpful clarification on whether agreed costs and expenses incurred by an office-holder in the context of dealing with assets which are subject to a fixed charge in an administration or liquidation, are capable of subsequent challenge under rule 18.34 of the Insolvency (England & Wales) Rules 2016 (SI 2016/1024) (the Rules).
Decision
ICCJ Greenwood held that pre-agreed costs and expenses of an insolvency practitioner (IP), which the fixed charge holder had agreed could be paid out of the proceeds of realisation of the relevant fixed charge asset do not constitute “remuneration” or “expenses” for the purposes of Rule 18.34, and are therefore not capable of challenge on the basis that they were “excessive” or fixed on an “inappropriate” basis.
This decision establishes (a) the importance of an IP agreeing with a fixed charge holder what costs and expenses they can recover out of fixed charge realisations at the outset – the expenses regime will not help, and relying on other equitable principles could potentially leave them out of pocket; and (b) once an agreement is in place, that a fixed charge holder has limited grounds to challenge agreed fees (although note our commentary below) and therefore they can be confident of recovering what they have agreed.
For fixed charge holders, the decision is a “note to self” that in agreeing fees with an IP for dealing with the fixed charge assets at the outset, there will be limited scope to challenge these after the sale has concluded, even if retrospectively such costs appear to be disproportionately high.
Background
The Respondent, Mr Ridgley, had been appointed administrator of Orthios Eco Parks (Anglesey) Limited and its subsidiary Orthios Power (Anglesey) Limited on 29 March 2022 (together, the Companies), in each case, by Mr Colin – the original security trustee acting on behalf of various secured parties.
The secured debt of around £85.8m was secured by way of a fixed charge and mortgage over the Companies’ assets, including a 213-acre site (the Land) which was the Companies’ principal asset. Prior to the sale of the Land, Mr Colin and Mr Ridgley agreed under a costs realisation agreement (the CRA) that Mr Ridgley’s fees as the administrator for dealing with the fixed charge asset, and the costs of his agents and legal fees would be paid out of the proceeds of any realisation of the secured assets in priority to any distributions to be made under the fixed charges, as follows:
Mr Ridgley was to receive a fee equal to 5% of the sale proceeds from the fixed charge assets (primarily the Land) of up to £25m, and 15% of any proceeds in excess of £25m, and
Howes Percival LLP (Mr Ridgley’s solicitors) were to receive a fee equal to 1% of the sale proceeds up to £25m, and 5% of any proceeds in excess of £25m.
The Land was sold for £35m triggering a payment to Mr Ridgley of £2,765,000 and Howes Percival LLP of £755,000.
The Applicants raised a number of concerns about Mr Ridgley’s appointment. It was suggested that, among other things, the secured parties had not been consulted by Mr Colin prior to appointing Mr Ridgley as administrator, and that the CRA may not have been concluded in good faith or at arm’s length and appeared to benefit Mr Ridgley at the expense of the secured parties. Notably, those arguments had not been positively submitted in the applications before the Court and without more specifically stated allegations, adequate cross-examination and disclosure, the Court could only proceed on the assumption that the CRA has been validly made.
Scope of Rule 18.34
Before it could be considered whether or not the costs in this case could be challenged under Rule 18.34, it fell to the Court to determine whether such costs in fact constituted “remuneration” and/or “expenses” for the purposes of Part 18 of the Rules. It was held that they did not.
The Judge distinguished between (i) free assets of a company (i.e. unencumbered assets), which are the principal source of payment of expenses and debts for the insolvent company including for payment of the company’s general creditors, (ii) assets subject to a floating charge, which may to an extent be available for expenses, preferential debts and unsecured debts (if the prescribed part applies), and (iii) assets subject to a fixed charge, which are not available to pay remuneration without the fixed charge holder consent or a court order.
In short, ICCJ Greenwood concluded that Part 18 of the Rules only provided a code for determining office-holder remuneration insofar as it is an expense of the administration. The costs of dealing with the fixed charge asset sat outside of this regime and therefore the fixed charge holder had no standing to complain about the remuneration agreed under the CRA under Rule 18.34.
The case is a helpful reminder that an office-holder’s remuneration will not always constitute an “expense” which is to be borne out of the insolvent estate. For example, office-holders are entitled to have their costs and expenses associated with the administration of trust property met out of the trust property itself. Remuneration that does not fall within the expenses regime under Part 18 of the Rules may be recoverable pursuant to an agreement between the relevant creditor and the IP (as it was in this case), if the court makes an order under para 71 of Schedule B1 of the Insolvency Act 1986 (IA86) or under Berkley Applegate principles.
Commentary
Although on the facts in Pagden, the costs were not capable of challenge, one should not consider the door to such challenges to be entirely closed when it comes to challenging IP realisation costs for dealing with fixed charge assets:
In this case, the value of the Land was far lower than the secured debt and there was no real prospect of the fixed charge asset realisation producing a surplus (and indeed that was net result of the sale). It is possible to see a scenario where a fixed charge creditor may be paid in full, leaving a surplus that would then be available to floating charge or unsecured creditors who would then have a genuine interest in, or are impacted by, the fees that have been agreed with the IP for dealing with fixed charge assets. In cases, where there is likely to be a surplus, or the position is marginal, one could still see scope challenge.
The Applicants also had other bases for challenging the IP’s fees in this case. For example, they could have relied on paragraphs 74 or 75 of Schedule B1 of IA86 (challenge to administrator’s conduct of company and administrator misfeasance, respectively). Office-holders, being fiduciaries, are subject to fiduciary duties and also a common law duty of care.
CFPB Examinations Highlight Fair Lending Risks in Credit Scoring Models
Amid recent technological advances in artificial intelligence and machine learning, on January 17, 2025, the CFPB issued its Winter 2025 Supervisory Highlights: Advanced Technologies Special Edition. This edition of Supervisory Highlights delivers critical industry reminders regarding the balance between regulatory requirements and technological innovation. As an appropriate summation of the CFPB’s overarching worldview, the opening sentence of the Supervisory Highlights explains that “[t]here is no ‘advanced technology’ exception to Federal consumer financial laws.”
In the Supervisory Highlights, the CFPB highlighted instances where credit scoring models used by credit card lenders and auto lenders may result in violations of the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B. For instance, recent CFPB examinations identified disparities in applicant outcomes resulting from the use of credit scoring models in underwriting and pricing credit card applications. The CFPB found disproportionately negative outcomes for protected groups across multiple card products, and critically, examiners suggested that the development or implementation protocols of credit scoring models contributed to the disparities.
According to the Supervisory Highlights, to challenge a disparate impact claim, a financial institution must establish a legitimate business need for a neutral policy or practice that has an adverse impact on a member of a protected class that cannot reasonably be achieved by means that are less disparate in their impact (see12 CFR Part 1002 Supp. I Sec. 1002.6(a)-2). Here, CFPB analysts identified potential alternative credit scoring models that meaningfully reduced disparities while maintaining comparable predictive performance, suggesting that there may be appropriate and less discriminatory alternative credit scoring models that would meet an institutions’ legitimate business needs.
The CFPB’s examiners also noted that financial institutions failed to have adequate compliance management systems (CMS) capable of identifying and addressing these types of fair lending risks. To address these concerns, examiners directed institutions to develop enhanced testing protocols to identify less discriminatory alternative credit models. Examiners required institutions to not only test their credit scoring models but, in the event that testing revealed prohibited basis disparities, to document the specific business needs their credit scoring models serve.
Additionally, in a continuation of a multi-year trend in its messaging, the CFPB also reminded institutions that using “black box” algorithms does not exempt them from providing an applicant with a statement of specific reason(s) for an adverse action as required under ECOA and Regulation B. Examiners found that certain institutions did not sufficiently ensure compliance with adverse action notice requirements and directed the institutions to test the methodologies used to identify principal reasons in adverse action notices.
This special edition of Supervisory Highlights underscores the need for the industry to balance technological innovation with robust compliance frameworks — keeping in mind the impact of any technological advances on existing fair lending laws. To navigate the regulatory landscape, financial institutions should regularly assess their use of artificial intelligence and machine learning models to ensure compliance with applicable laws, including ECOA and Regulation B, and should perform adequate testing to ensure ongoing compliance.
Listen to this post
BlueCrest – The Court of Appeal Considers Condition B of the Salaried Members Rules
The Court of Appeal has remitted the case of BlueCrest Capital Management (UK) LLP (BlueCrest) v HMRC back to the First-tier Tribunal (FTT) regarding the application of the UK’s salaried members rules (the Rules) to certain members of BlueCrest, an asset manager engaged in the provision of hedge fund management services, following a finding that the FTT and the Upper Tribunal erred in law with regard to the interpretation of Condition B of the Rules.
The Rules recharacterise certain members of a UK limited liability partnership (LLP) as employees (“salaried members”) rather than members of the LLP for income tax purposes. Condition B essentially prevents recharacterisation as an employee/salaried member if the LLP member in question has, in broad terms, significant influence over the affairs of the LLP. In this judgment, the Court of Appeal considered the interpretation of Condition B.
In summary, the Court of Appeal found that – contrary to the position of the FTT and the Upper Tribunal and to HMRC’s published guidance – significant influence for the purposes of this test needed to derive from the legal and contractual framework of the LLP and it was not enough that an LLP member had de facto influence, even if that de facto influence was significant. The Court of Appeal has asked the FTT to reconsider the case using this narrower interpretation. However, this decision itself might be appealed to the Supreme Court.
LLPs which rely on Condition B/significant influence for any of their members in relation to the Rules should be aware of this development but should also be aware that the case is likely to still have a long way to run.
Overview of the Rules and prior decisions of the FTT and Upper Tribunal
A high-level summary of the relevant aspects of the Rules under consideration in this decision is set out below, together with a summary of the previous decisions in this case. For more information on the background of the Rules and the FTT decision (June 2022) and the Upper Tribunal decision (September 2023), please refer to our Tax Talks blog posts as linked here: BlueCrest FTT Decision – Salaried Member Rules and Asset Managers – Insights – Proskauer Rose LLP and BlueCrest– the Upper Tribunal considers the salaried member rules – Insights – Proskauer Rose LLP.
For UK tax purposes, the general position is that members of UK LLPs are treated as self-employed partners who each carry on the business of the LLP. However, the Rules were introduced to prevent employment relationships being disguised through the use of LLPs to avoid payment of employment-related taxes. In short, the Rules set out three conditions, one of which must be satisfied (or strictly speaking “failed” because the conditions are drafted in the negative) in order for an LLP member to avoid being recharacterised as an employee/salaried member.
The FTT and Upper Tribunal in the BlueCrest case were both concerned with the application of Condition A and Condition B, two of the three conditions referenced above.
Condition A requires that at the beginning of the relevant tax year, it is reasonable to expect that more than 20% of the total amount to be paid by the LLP to an individual member in the next tax year would not be “disguised salary”. This includes fixed amounts, and amounts which are variable, unless these amounts vary by reference to the overall profits or losses of the LLP. So, to satisfy this condition, it must be reasonable to expect at the beginning of the tax year that at least 20% of the member’s pay will vary by reference to the overall profitability of the LLP.
Condition B is considered satisfied if the mutual rights and duties of the members and the LLP give the individual significant influence over the affairs of the LLP.
The FTT found that the BlueCrest senior investment managers had significant influence over the affairs of the LLP based on their financial influence over a material part of BlueCrest’s overall business, which was sufficient to disapply Condition B. This ran contrary to the elements of HMRC’s published guidance which suggested that Condition B required significant influence over the affairs of the LLP as a whole. In relation to Condition A, the FTT determined that all of the members’ remuneration was disguised salary, because bonuses were calculated by reference to individuals’ performance, not in relation to the profitability of the LLP.
The Upper Tribunal upheld the decision of the FTT, concluding on Condition B that the FTT was entitled to find that (i) the significant influence did not have to extend to all of the affairs of the LLP, as this was an unrealistic approach and would give rise to strange results for larger partnerships, and (ii) that HMRC’s argument that influence should be limited to managerial influence was attempting to read words into the statute. The FTT’s decision on Condition A was also upheld as bonuses were set initially without reference to the overall profitability of the LLP and so were disguised salary.
The Court of Appeal findings on Condition B and significant influence
HMRC argued that the Upper Tribunal made an error of law in its interpretation of Condition B by relying on the de facto position without regard first to what the rights and duties of the LLP members were as a matter of law, and that the decision of the Upper Tribunal should therefore be overturned.
The Court of Appeal agreed and confirmed that, on a proper construction, the test for significant influence was (i) whether the individual had influence over the affairs of the LLP, (ii) whether the source of that influence was the mutual rights and duties of the members of the LLP, in which case it was qualifying influence, and (iii) whether that qualifying influence was significant.
On the first point, influence over the affairs of the LLP, as interpreted by the Court of Appeal, was to be viewed as broader than influence over the business of the LLP and meant the affairs of the LLP generally viewed as a whole and in the wider context of its group. The definition of business in the relevant LLP Agreement should also be taken into consideration. The Court of Appeal considered that the Tribunals had been wrong to confine the test to parts of the affairs of the LLP without a focus on the decision making at a strategic level.
The main focus of the Court of Appeal in their decision related to the second point. The Court of Appeal held that Condition B requires the relevant influence to derive from the “mutual rights and duties” of the members of the LLP and the LLP itself based on the statutory and contractual framework applying to it. In practice, this would mean the influence must derive from the rights and duties of the members as set out in the LLP Agreement and, if not excluded by virtue of that LLP Agreement, the provisions of the LLP Regulations 2001.
Neither HMRC nor BlueCrest had made this argument in the FTT or Upper Tribunal. It had been raised by the Upper Tribunal but in the context of it being “common ground” between the parties that the FTT was entitled to consider the actual position and any de facto influence held by members in addition to the terms of the LLP Agreement. Despite this – and despite acknowledging that HMRC’s own guidance accepted the possibility that the influence in question could derive from the de facto position (an approach which still forms the basis of HMRC’s guidance in its Partnership Manual today) – the Court of Appeal held that it was incorrect to ignore the need for the influence to derive from the legal framework, i.e. the LLP Agreement and the LLP Regulations 2001 (if relevant).
Finally, in relation to the third point that any influence must be significant, the Court of Appeal held that BlueCrest and HMRC had been correct to present evidence on any de facto influence wielded by members, but this should have been used only to evaluate whether qualifying influence was significant.
In light of these points, the decisions of the FTT and Upper Tribunal were set aside and the case remitted to the FTT for consideration of the evidence in light of the correct statutory interpretation of the test.
The Court of Appeal also rejected BlueCrest’s procedural objection that HMRC had been allowed to rely on a new point of law. In doing so, the Court highlighted the public interest in taxpayers paying the correct amount of tax and ensuring justice is balanced with requirements of fairness and case management.
Cross Appeal by BlueCrest – Condition A: variable remuneration
Although the main focus of the case was on Condition B, BlueCrest appealed on whether the portfolio managers and supervisors of portfolio managers could avoid recharacterisation as salaried members by virtue of Condition A. The Court of Appeal upheld the decision of both Tribunals and confirmed they came to substantially the right conclusion.
The question under Condition A related to whether the definition of “disguised salary” was met. Portfolio managers and supervisors of portfolio managers had three elements of remuneration, one of which was a discretionary allocation akin to a bonus. BlueCrest argued that this had a real link to the profits of the LLP, though the bonuses were not computed by reference to the profit and losses of the LLP.
The Court of Appeal agreed with HMRC’s argument that, on the facts, the overall amount of profits of the LLP merely functioned as a cap on remuneration which was variable without reference to overall profits. Therefore, the Court upheld the Tribunals’ decisions that the individual members of the LLP, including portfolio managers and supervisors of portfolio managers, could not avoid recharacterisation as salaried members/employees by virtue of Condition A.
Conclusion
The Court of Appeal’s interpretation of what constitutes significant influence for the purposes of Condition B of the Rules is narrower than (i) the position set out in the prior judgments in this case and (ii) the relevant guidance in HMRC’s published manuals. This narrower interpretation ignores de facto influence which is not derived from the mutual rights and duties of the LLP member as set out in the LLP Agreement and, if not excluded by virtue of that LLP Agreement, the provisions of the LLP Regulations 2001.
The Court of Appeal have sent the case back to the FTT for the FTT to reconsider the case in light of this narrower interpretation. It is possible, and perhaps likely, that BlueCrest will decide to appeal the decision to the Supreme Court. In that case, if permission to appeal is granted, the next step would be for the Supreme Court to consider the points raised in this Court of Appeal judgment, rather than the FTT reconsidering the case. We will continue to monitor the proceedings until the final position is known.
LLPs which place reliance on Condition B and their members having significant influence may wish to refresh whether that position would still be appropriate if the narrower interpretation of the test applies, particularly if the members’ position under the salaried member rules relies solely on Condition B.
Court Finds Failure To Obtain Finance Lenders’ License Does Not Render Commercial Loan Unenforceable, Illegal Contracts
The California Financing Law provides that “[n]o person shall engage in the business of a finance lender or broker without obtaining a license from the commissioner.” Cal. Fin. Code § 22100(a). The CFL further provides that if any provision of the CFL is “willfully violated in the making or collection of a loan, whether by a licensee or by an unlicensed person subject to this division [i.e., the CFL], the contract of loan is void, and no person has any right to collect or receive any principal, charges, or recompense in connection with the transaction”. That is is a very draconian result. However, it is important to note that the legislature placed this statute in Article 2, Chapter 4 of the CFL which concerns consumer loan penalties. Commercial loans, as defined in Section 22502, are not subject to Article 2, Chapter 4. Cal. Fin. Code § 22001(c).
Nonetheless, commercial borrowers will from time to time attempt to claim that their loans are illegal contracts based on the unlicensed status of their lenders. See Court Of Appeal Finds No Private Right Of Action Against Unlicensed Lender. In a recent ruling, U.S. District Court Judge William H. Orrick has also rejected the argument that a commercial loan from an unlicensed lender is an unenforceable, illegal contract:
The context in which the defendants’ argument is offered is of no consequence; its defect is that the defendants have not shown that the California Financial Code provides for the voiding of unlicensed commercial loans in the manner that the defendants describe. That Side failed to register as a licensed lender in California does not render the Restated Agreements illegal.
Side, Inc. v. Off. Partners New York, LLC, 2025 WL 81576 (N.D. Cal. Jan. 13, 2025). In support of this ruling, Judge Orrick cites two earlier federal court decisions: Cent. Valley Ranch, LLC v. World Wide Invs., LLC II, 2012 WL 217685, report and recommendation adopted, 2012 WL 487046 (E.D. Cal. Feb. 14, 2012) and WF Capital, Inc. v. Barkett, 2010 WL 3064413 (W.D. Wash. Aug. 2, 2010).
Corporate Transparency Act Reporting Remains Voluntary
This Corporate Advisory provides a brief update on recent litigation regarding the Corporate Transparency Act (CTA) and its reporting requirements. It is not intended to, and does not, provide legal, compliance or other advice to any individual or entity. For a general summary of the CTA, please refer to our prior CTA Corporate Advisories from November 8, 2023, and September 17, 2024. Please reach out to your Katten attorney for assistance regarding the application of the CTA to your specific situation.
As of January 24, 2025, the Corporate Transparency Act’s (CTA) reporting requirements remain voluntary. On January 23, 2025, the Supreme Court of the United States (SCOTUS) issued an order that granted the US government’s motion to stay the nationwide injunction issued by the US District Court of the Eastern District of Texas in the case of Texas Top Cop Shop, Inc. v. McHenry (formerly Texas Top Cop Shop, Inc. v. Garland). This headline appeared to have the effect of reinstating the CTA’s reporting requirements and deadlines. However, such SCOTUS order does not appear to impact a separate stay issued against the enforcement of the CTA’s reporting rules issued by the US District Court of the Eastern District of Texas in Smith v U.S. Department of the Treasury. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has interpreted the SCOTUS ruling similarly. Specifically, FinCEN noted: “On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop.” Accordingly, the CTA’s reporting requirements remain on hold, and reporting companies are not currently required to file Beneficial Ownership Information Reports with FinCEN, and FinCEN has stated that reporting companies are not subject to liability if they fail to file Beneficial Ownership Information Reports with FinCEN while the Smith order remains in force.
Note that this SCOTUS order relates solely on the nationwide injunction and was not a ruling on the constitutionality of the CTA.
The Supreme Court order is available here.
The FinCEN alert is available here.
Our updated CTA Corporate Advisory providing background on the Texas Top Cop Shop case is available here.
The Inside Basis: Potential Pitfalls of F-Reorganizations [Podcast]
On this episode of The Inside Basis, host Randy Clark discusses some common issues in F-reorganizations involving S-corporations, a popular structural approach used in private equity transactions.
Carried Interest and Co-Investment Plans: A Primer for Asia-Based Private Fund Managers
This publication is issued by K&L Gates in conjunction with K&L Gates Straits Law LLC, a Singapore law firm with full Singapore law and representation capacity, and to whom any Singapore law queries should be addressed. K&L Gates Straits Law is the Singapore office of K&L Gates, a fully integrated global law firm with lawyers located on five continents.
Management team participation in the performance of the funds they manage—through carried interest and co-investment plans—has long been a regular feature for private equity, real estate, venture capital, and other private funds in the US funds industry. Increasingly in recent years, many Asia-based private fund managers have implemented similar programs.
Fund manager carried interest and co-investment plans offer several advantages, including (a) attracting and retaining top talent, (b) providing “skin in the game” to align participant interests with the interests of the manager and external investors, (c) maximizing upside potential for participants while reducing the out-of-pocket costs and downside risk of higher fixed compensation, (d) fostering a long-term commitment by participants to the manager, and (e) potential tax efficiencies, as further discussed herein.
This article summarizes the key characteristics of fund manager carried interest and co-investment plans from the perspective of an Asia-based manager, including structuring alternatives, key terms and market practice, and tax and regulatory considerations.
Comparison of Carried Interest and Co-Investment Plan Components
Under a “carried interest plan,” each participant shares in the carried interest (i.e., profit distributions) distributed by one or more of the manager’s funds without necessarily needing to make a passive investment. On the other hand, under a “co-investment plan,” the fund manager typically requires each participant to make a passive investment in one or more of the funds managed by the manager, thereby entitling participants to a return of capital and any profits from such investment(s).
Many managers combine the elements of a “co-investment plan” and a “carried interest plan” into a single plan, so that participants would both (a) make a passive investment in one or more of the manager’s funds, thereby benefiting from the investment returns; and (b) hold a right to receive a portion of the carried interest distributed in respect of such fund(s).
Participant Co-Investment Plans vs Limited Partner Co-Investment Rights
The term “co-invest” often has a different meaning in the context of a participant plan as compared to a third-party limited partner (LP)’s co-investment right in a fund. A third-party LP’s “co-investment right” in a fund typically confers on the LP, which will separately hold exposure to a fund’s portfolio investments through its capital commitment to the fund, the option to invest additional capital into specific portfolio investments of the fund. This allows the LP to increase its exposure to certain investments of choice.
In contrast, the term “co-investment” in the context of a participant plan (and as used generally in this article) often refers to a participant’s passive investment in a fund (i.e., its capital commitment), which typically exposes the participant to the performance of all of the fund’s portfolio investments. Similarly, many managers use the term “GP co-invest” to describe the capital commitment (i.e., the “sponsor commitment”) of a general partner (GP) or its affiliates to a fund. Market practice varies on this point, as further discussed in “Fund-Wide vs Deal-by-Deal Participation” below.
Structuring Alternatives
A carried interest and co-investment plan could be structured as either (a) an equity arrangement, where participants hold equity in the vehicle that receives carried interest (the Carry Vehicle); or (b) a contractual arrangement, under which participants are contractually entitled to receive payments of cash based on a fund’s performance.
In an equity arrangement, a participant would subscribe for an interest in a designated Carry Vehicle, which could be either the GP of the relevant fund or another entity established for the specific purpose of receiving the fund’s carried interest and making the team’s investment to the fund. Any such specially formed entity typically would invest into the fund as an LP and would be known as a special limited partner (SLP). A participant’s co-investment pursuant to an equity arrangement typically would also form a part of the GP’s required “sponsor commitment” to the fund.
It can be simpler and less costly to run a carried interest and co-investment plan through the GP entity itself, rather than through an SLP. That being said, using an SLP is more common for established managers because (a) a fund’s GP has unlimited liability for the fund’s obligations, while an SLP (as an LP of the fund) does not; (b) admitting plan participants into an SLP (rather than the GP) allows the manager to keep the economics of the plan separate from the “control”/decision-making rights and function of the GP; (c) a manager may wish to structure the SLP differently (e.g., in a different jurisdiction) from the fund and the GP for administrative or other reasons; and (d) while a new GP should be established for each successive fund, some managers will continue to use the same SLP for multiple funds.
Alternatively, a manager could structure the plan as a contractual arrangement (rather than an equity arrangement) between the manager and each participant, whereby each participant holds a contractual right to receive an amount of cash as determined by reference to the timing and amounts of carried interest or other amounts distributed by the fund. A contractual approach is generally lower cost and administratively more convenient, as a participant’s contractual rights could be memorialized in the participant’s standard employment or consulting agreement, or a simple letter agreement, rather than requiring full-form documentation for an equity interest in a vehicle. However, in certain jurisdictions (including Hong Kong and Singapore), a contractual approach would likely be less tax efficient, as further discussed in “Tax Considerations” below.
Key Terms and Market Practice
A manager should consider the following key terms when structuring a carried interest and co-investment plan:
Source of Funding for Co-Investment
A key aspect of a co-investment plan is the source of funding for each participant’s co-investment, typically among the following options:
The “Standard” Cash Approach
Each participant funds the co-investment out of pocket in the form of capital contributions over time, in the same manner as other investors in the relevant fund(s). This is the simplest approach, but it also could be burdensome for participants and the manager. For example, for a participant with a modest commitment, it may be inconvenient to fund many small capital calls. With this in mind, a common variation would be for each participant to make periodic cash contributions (e.g., quarterly or annually) independent of the fund’s normal capital call schedule.
The “Deemed Loan” Approach
The manager extends a loan to the participant representing all or a portion of the participant’s investment amount. Under this approach, the loan is typically repaid to the manager out of future distributions in priority over payments to the participant until the loan is fully repaid. It is also possible for the loan to be “nonrecourse,” such that the loan is subject to repayment only out of distributions, and the participant would not be required to pay in any capital, even if distributions are insufficient to pay out the loan. Of course, this nonrecourse approach would add more downside risk to the manager.
The “Free Share” Approach
The manager would fund a participant’s co-investment amount on the investor’s behalf, potentially representing a key component of the participant’s compensation package. This approach could align incentives between a manager and a participant by more efficiently tying compensation to fund performance than cash compensation. In addition, vesting conditions could further incentivize the participant to remain with the firm. However, in addition to manager-funded contributions being taxable to the co-investor, this approach also could reduce the likelihood of favorable tax treatment on the participant’s carried interest. See “Tax Considerations” below.
In any case, participants in a co-investment plan will typically be entitled to receive a share of the fund distributions equal to their pro rata interest in the relevant fund(s) in the same manner as other investors, either directly from such fund(s) or indirectly through the Carry Vehicle.
Fund-Wide vs Deal-by-Deal Participation
As noted above, participation in a co-investment plan would typically provide for exposure to the entire portfolio of each relevant fund (i.e., fund-wide exposure) in the same manner as any other passive investor in the fund. However, some co-investment plans—particularly for larger managers—provide participants the option to increase their exposure to specific portfolio investments (i.e., deal-by-deal exposure).
External investors typically would prefer that any participant’s co-investments be fund-wide (and not deal by deal) to reduce conflicts of interest and the perception that a participant could “cherry-pick” exposure only to the best investments. LPs are particularly concerned because the participants typically include the deal team members with the greatest access to information on each investment.
A manager should separately consider whether participation in carried interest would be on a “fund-wide” or “deal-by-deal” basis, though a “fund-wide” approach is much more common for most types of managers. In the case of a fund-wide participation, a participant’s share of the carried interest would be based on the aggregate carried interest of the fund, regardless of which investments such participant has been involved with. In the case of a deal-by-deal participation, a participant would share in carried interest that is allocable to specific investments.
Key factors driving this decision include (a) the size of the firm and the depth of its infrastructure, (b) the number of participants in the program, and (c) whether or not participants are responsible for only specific deals or a fund’s entire portfolio.
A fund-wide program can better incentivize each participant’s efforts toward the performance of the entire fund, whereas deal-by-deal exposure can allow a manager to incentivize each deal team more efficiently. A fund-wide program is easier to manage administratively than a deal-by-deal program, which requires allocating carried interest (calculated with reference to the entire portfolio across deals) across investments and tracking each participant’s exposure separately. Further, actual carried interest distributions are typically backloaded due to a fund’s standard “distribution waterfall,” which can make it prohibitively difficult to determine how much carried interest to allocate to early dispositions until later in the fund’s life. Some managers will offer a hybrid program whereby participants have exposure to all investments and, in some cases, may have additional exposure to specific investments.
Carry Points
A participant’s right to share in carried interest of a fund is typically quantified in terms of “points,” which correspond to a specified percentage of the overall carried interest distributions with respect to the applicable fund(s) or the specific investments in such fund(s).
Market practice varies widely on the portion of the overall carried interest share to be allocated to the pool of participants, on the one hand, and the founder or institutional manager, on the other hand. Key factors typically include the size and type of a firm, the region or country it is based in, and the firm’s organizational structure and culture. For example, state-owned firms or larger firms would often adopt a more conservative approach to profit sharing, resulting in a lesser carry share allocated to participants. In many cases, firms that offer lower fixed compensation (e.g., new managers that may not yet generate significant management fees) often would look to carried interest allocation as a significant element of the participant’s overall compensation arrangement.
In addition to the founders, carry participants typically include senior officers and investment professionals. Some carried interest plans include a broader range of personnel, such as consultants (e.g., venture partners), junior investment professionals, and potentially even administrative and clerical staff. By carefully considering all available factors, managers can allocate carry points in a manner that incentives peak performance while maintaining a collaborative team environment.
Dilution of Carry Points
Participants in a carried interest plan may be subject to dilution in respect of their share of the carried interest, often subject to limits. Some carried interest plans permit a manager to issue additional points in the future without limitation (i.e., an unlimited pool), which would allow for limitless dilution. However, it is also common for a carried interest plan to establish a fixed number of carry points, such that (a) a portion would be issued to initial participants, and (b) a “reserve pool” (i.e., a portion of the initial fixed number of carry points) would remain available for the manager to issue to existing or new participants.
Any carried interest distributions attributable to carry points in the reserve pool that have not been allocated to participants would typically be for the benefit of the principal(s). In addition, any carry points that are forfeited (due to failure to vest or other reasons, as described in “Vesting of Carry Points” below) would be added back to the reserve pool.
Some carried interest plans provide for two classes of interests: one for founders and other senior executives, and another for rank-and-file team members. In such cases, carry points that are attributable to rank-and-file team members often would not be subject to dilution.
Key interests to balance when considering dilution are (a) the manager’s need for flexibility to scale and bring on new talent, and (b) the participants’ desire for certainty as to their percentage interest in the fund’s carried interest. As carry points are typically allocated fund by fund, a manager with multiple funds or frequent successor funds may have more flexibility to manage this issue over time.
Vesting of Carry Points
Carry points are often subject to “vesting,” permitting participants to retain their points and receive the corresponding carried interest distributions only if they remain involved with the manager or the fund over a particular span of years (i.e., vesting period). Accordingly, vesting arrangements are designed to align participants with the long-term performance of the fund(s) that they manage. While vesting terms (or similar provisions) are standard for carried interest plans, co-investments would not be subject to vesting unless funded by the manager (such that the participant has not put capital at risk).
Vesting provisions are typically structured as follows:
For-Cause Departure
If a participant is required to depart involuntarily and for cause, the participant will typically forfeit all vested and unvested carry points.
Voluntary Departure or Involuntary Departure Without Cause
If a participant departs voluntarily or involuntarily without cause, the participant typically would be entitled to retain any vested carry points but would forfeit any unvested carry points.
Death or Permanent Disability
In the unfortunate event of a participant’s death or permanent disability, the participant (or his or her estate) would typically retain all vested carry points, and all or a portion of any unvested carry points might be deemed vested and retained.
The duration and schedule of vesting periods vary significantly across funds. Conceptually, the vesting period should correlate with the time during which a participant contributes meaningfully to the establishment and ongoing operations of the fund and its investments. Arguably, this period often spans from the start of the fund’s marketing activities to its liquidation date. However, many carried interest plans provide for a vesting period commencing at a fund’s initial closing and ending around the end of the fund’s investment period.
While some vesting schedules provide for “straight line” vesting, whereby entitlements vest in equal instalments over time, other arrangements (e.g., cliff vesting) are also common. For example, some funds would provide for 15% vesting over the first four years (i.e., 60% total), followed by 20% vesting over each of years five and six (i.e., the remaining 40%).
In lieu of a vesting arrangement, some carried interest plans provide for a buy-back mechanism, giving the manager an option to repurchase a participant’s carry points (and, potentially, co-investment) based on a preagreed formulation upon certain triggering events (e.g., the participant ceases to be involved in the management of the relevant portfolio investments).
Restrictive Covenants
Participants in carried interest and co-investment plans are often subject to restrictive covenants that are similar to those commonly included in employment or consulting agreements, typically including (a) noncompete and nonsolicitation provisions, often surviving for six to 12 months following termination of employment; (b) nondisparagement provisions, which prohibit participants from speaking negatively about the firm or its management; and (c) confidentiality obligations. Nondisparagement and confidentiality restrictions often remain in effect for years.
A breach of these restrictive covenants would typically be a “cause” event that, as discussed above, would trigger forfeiture of all vested and unvested carried interest, among other consequences. Even a former participant who had previously ceased to be involved with the manager and the fund on good terms could forfeit any retained carried interest upon subsequent violation of any such restrictive covenant. In addition, such a breach often triggers an option for the manager to repurchase any co-investment interest held by the participant.
Discounts on Management Fee and Carried Interest for Participant Co-Investments
Many managers reduce, or waive entirely, the amount of management fee and carried interest to be borne by the participants in respect of their co-investments, taking the view that it is beneficial for the fund and the manager to have greater team participation. Some larger managers will follow a hybrid approach, offering reduced/waived fees and carried interest for participants for only the funds they are involved in, or only up to a certain investment size.
Compliance With Fund Documents and LP Side Letters
Fund investors will often expect to see provisions in a fund’s governing agreement (e.g., a limited partnership agreement (LPA)) or may proactively request side letter provisions, which restrict or otherwise influence certain dynamics of a carried interest and co-investment plan, as follows:
Minimum Sponsor Commitment
A fund’s LPA typically will require that the manager and its related persons make capital commitments to the fund of at least a specified percentage of the fund’s aggregate commitments. The minimum is often in the range of 1%–5% but could be higher depending on the type of fund and the extent to which the manager is also viewed as a capital partner. A key benefit of a carried interest and co-investment plan is that participant co-investments typically would count toward this minimum sponsor commitment amount.
Clawback Guarantees
A fund’s LPA typically will provide that if the fund receives more carried interest than it should have, measured over the fund’s lifespan, the carried interest recipient(s) must return any excess (net of taxes) for distribution to the fund’s LPs. Often, the LPA will also require that the fund’s GP require each indirect recipient of carried interest to guarantee such recipient’s portion of this obligation. Accordingly, many carried interest plans will require each participant to agree to a “back-to-back” guarantee with respect to such participant’s share of the carried interest.
Change-of-Control Provisions
Some investors in the market will ask the fund’s GP to agree that one or more named persons—or categories of related persons—continue to hold the right to receive a minimum (e.g., 50% or 75%) of the carried interest, in addition to maintaining decision-making control over the GP itself. Such provisions, including whether specific carried interest plan participants would be considered part of this permitted control group, need to be accounted for when budgeting for the future allocation (or transfers) of carried interest rights under the plan.
Anchor Investor Rights
Some investors in the market, in consideration of making a large investment in the fund (e.g., 20% or more of the manager’s first fund), will request to share in a portion of the carried interest borne by all of the fund’s other investors. Similar to the change-of-control provisions described above, a manager will need to account for any such anchor investor allocation when budgeting for future allocation (or transfers) of carried interest rights under the plan.
Tax Considerations
In many jurisdictions, including Hong Kong and Singapore, the tax treatment of income derived by participants from carried interest and co-investment plans can vary based on the structure of such plans and the specific circumstances.
While income in consideration of services is taxable in Hong Kong and Singapore, capital gains are not taxable in Hong Kong or Singapore (unlike in the United States, where capital gains are taxed at a reduced rate).
Accordingly, returns derived from a Hong Kong or Singapore participant’s passive investment (i.e., co-investments funded by the participant) generally should not be taxable in Hong Kong or Singapore (as applicable), though co-investments funded by the manager rather than by the participant (via a deemed loan or free share approach) could raise unique tax issues. Similarly, carried interest often takes the form of a return on investment, the income of which could potentially be treated as capital gains.
Under a contractual approach where a participant holds a contractual right to share in the carried interest, any such distributions would likely be deemed income constituting compensation for services—rather than as return on investment—which would be taxable in Hong Kong and Singapore. An exception for Hong Kong participants is that carry returns allocated to them may be exempt from salaries tax under Hong Kong’s tax concession regime for carried interest, provided the relevant conditions are met. Singapore, however, does not have any similar tax concession regime.
In addition, the timing of granting carried interest rights to a participant (e.g., before or after (a) the fund has made investments, (b) appreciation in value of investments, and (c) distributions) can affect the tax analysis. Managers and participants should also consider the relationship between any vesting provisions and the relevant tax treatment.
The considerations described above similarly impact how carried interest is taxed in Japan, although a manager should discuss any specific Japan tax issues with its Japan tax advisor.
In any case, it is important for both managers and participants to consult with their tax advisors to ensure compliance with local regulations while maximizing the tax efficiency of their carried interest and co-investment plans, taking into account the applicable jurisdiction(s) and the specific facts and circumstances.
Regulatory Considerations
Depending on the structure of the carried interest and co-investment plan, regulations governing the licensing of fund managers and the offering of plan interests may apply in certain jurisdictions. For example, each of Hong Kong, Singapore, and Japan have licensing rules and investor suitability tests that can apply with respect to carried interest and co-investment plan participants depending on the specific circumstances. These rules would not necessarily limit a manager from inviting participants into a plan, but they should be considered on a case-by-case basis with advisors.
Conclusion
As the private funds sector in Asia continues to grow, understanding the nuances of structuring carried interest and co-investment plans is crucial for managers to implement effective team incentive programs. By navigating key terms and tax considerations effectively, managers can establish robust incentive structures to retain top talent, align participant interests with the manager’s long-term goals, and drive growth in an increasingly competitive market.
Is the Future of Digital Assets in the United States Bright Again?
Yes, indeed! What Brad Garlinghouse of Ripple Labs called “Gensler’s reign of terror” ended with Securities and Exchange Commission (SEC) Chair Gary Gensler’s resignation upon President Donald Trump’s inauguration. Paul Atkins, who has co-chaired the Token Alliance, spoke of the need for a “change of course” at the SEC and will be given charge of the SEC when he is confirmed as its new Chairman.
While the greatest deliberative body takes time to exercise its constitutional role of advice and consent, President Trump and Acting SEC Chairman Mark Uyeda are moving ahead at lightning speed, each taking action in the first week of the new administration. The long-awaited paradigm shift in regulation for digital assets is here and the market likes what it sees, with Bitcoin now trading near an all-time high and the total market capitalization of digital assets topping the US$3 trillion mark. Projects are once again being funded in—and development teams are returning to—the United States.
The day after his inauguration, President Trump signed an Executive Order, Strengthening American Leadership in Digital Finance Technology, aiming to “support the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors of the economy.” This comes on the heels of a newly announced Crypto Task Force at the SEC, dedicated to developing a comprehensive and clear regulatory framework for digital assets, including “crypto” assets.
The Executive Order
In his Executive Order, President Trump points to the crucial role that the digital assets industry plays in the innovation and economic development of the United States, declaring it to be the policy of his administration to:
Protect and promote public blockchain networks, mining and validating, and self-custody of digital assets.
Protect and promote the U.S. dollar by promoting stablecoins worldwide.
Provide regulatory clarity and certainty built on technology-neutral regulations, including well-defined jurisdictional regulatory boundaries.
President Trump’s 2025 Executive Order revokes former President Biden’s 2022 Executive Order regarding crypto assets and orders the Secretary of the Treasury to likewise revoke all prior inconsistent Treasury policies.
Most significantly, the Executive Order establishes the “President’s Working Group of Digital Asset Markets” to be chaired by the “Special Advisor for AI and Crypto,” Silicon Valley venture capitalist David Sacks, who is sometimes called the “Crypto Czar.” Its Executive Director will be “Bo” Hines of North Carolina. The Working Group will consist of specified officials (or their designees) such as the Secretaries of the Treasury, Commerce, and Homeland Security, the Attorney General, the Director of Office, Management and Budget, the Homeland Security Advisor, and the Chairs of the SEC and the Commodities and Futures Trading Commission (CFTC).
The Working Group has been charged to hit the ground running:
By February 22, 2025, the Treasury, DOJ, SEC and other relevant agencies included in the Working Group shall identify all regulations, guidance documents, orders, or other items that affect the digital assets sector. In other words, what has the federal government done so far?
By March 24, 2025,each agency shall submit recommendations with respect to whether each identified regulation, guidance document, order, or other itemshould be rescinded or modified, or, for items other than regulations, adopted in a regulation.
By the end of last week, the SEC had already rescinded Staff Accounting Bulletin 121, an especially troubling piece of guidance that the SEC never approved and that Congress had sought to overturn but former President Biden retained. SAB 121 required crypto custodial banks to carry customer assets on their balance sheets—something required for no other asset. Upon rescinding SAB 121, SEC Commissioner Hester Pierce tweeted, “Bye, bye SAB 121! It’s not been fun.” Another piece of SEC guidance that might be on the chopping block is the so-called “Framework for ‘Investment Contract’ Analysis of Digital Assets,” which has confounded the digital assets industry since it was first adopted.
By July 22, 2025, the Working Group shall submit a report to the President recommending i that advance the policies established in the order. In particular:
The Working Group will propose a federal regulatory framework governing the issuance and operation of digital assets, including stablecoins, in the United States. The Working Group’s report shall consider provisions for market structure, oversight, consumer protection, and risk management.
The Working Group will have significant choices to make in this regard: Will it back the “FIT 21” bill that has already been approved by the U.S. House of Representatives, or will it seek to chart a different course? Will it back a merger of the CFTC with the SEC? How will it reconcile the desire to support technology innovation with national security interests and investor protection?
The Working Group will evaluate the potential creation and maintenance of a national digital asset stockpile and propose criteria for establishing such a stockpile, potentially derived from cryptocurrencies lawfully seized by the federal government through its law enforcement efforts. In this regard, President Trump might be seen as having backed off his earlier promise to create a Bitcoin reserve in the United States, as it is now being considered rather than proposed for immediate adoption. The word “Bitcoin” does not appear even once in the Executive Order.
President Trump’s Executive Order also prohibits the establishment, issuance, or promotion by federal agencies of Central Bank Digital Currencies (CBDCs) within the United States or abroad, terminating any ongoing plans or initiatives related to the creation of a CBDC within the United States. The libertarians who dominate appointments in the financial services sector of the administration are strongly opposed to CBDCs, viewing them as a threat to personal liberty.
In issuing this Executive Order, President Trump fulfilled his campaign promises relating to crypto assets. In a July 27, 2024, address to the Bitcoin 2024 Conference in Nashville, he promised to “end Joe Biden’s war on crypto.” He promised:
To “fire Gary Gensler,” who resigned upon Trump’s inauguration.
To “immediately shut down Operation Chokepoint 2.0,” which he is carrying out in his order to Department of the Treasury.
To appoint the aforementioned Working Group.
To defend the right to self-custody.
To ban CBDCs.
In the first week, we are seeing that, at least thus far, promises made are promises kept.
SEC Crypto Task Force
On the SEC side, Commissioner Hester Pierce, known as “Crypto Mom,” will head the Crypto Task Force that will work to develop a “sensible regulatory path that respects the bound of the law.” The SEC under former President Biden used “regulation by enforcement” rather than “regulation by rulemaking and interpretation” to regulate the crypto asset industry. President Trump’s SEC has already signaled the “course correction” that Paul Atkins called for before the election. Both Commissioners Peirce and Uyeda worked for Atkins in his prior stint as an SEC Commissioner. Others have observed that the Atkins-Peirce-Uyeda “triumvirate” might be the most powerful cohort of Commissioners that the SEC has ever seen.
The SEC announcement states that the Task Force will be focused on developing clear regulatory lines, realistic paths to registration, sensible disclosure frameworks, and deploying enforcement resources judiciously. The Task Force plans to hold future roundtables and is asking for public input as well.
The day that the SEC Task force was announced, Foley & Lardner submitted suggestions to the SEC for roundtable topics. Our suggestions included:
What Securities Act registration exemptions should be adopted to broaden market access to digital assets? An example might be the “safe harbor” that Commissioner Peirce proposed and refined, only to have it ignored by the Gensler SEC.
What guidance should the staff have given that it has failed to give? What guidance should be withdrawn? There has been no guidance about how Regulation S applies to digital asset offerings, to point out one shortcoming. The staff might have given guidance, but Chairman Gensler prohibited it, adopting the view that the SEC does not give legal advice.
What needs to change for you to “come in and register” if you are a token “issuer”? Plainly the system is broken now, as those who have tried to register were delayed indefinitely and ultimately conceded defeat. Others, seeing this, never even tried.
What needs to change for you to “come in and register” if you are a token “dealer” or “exchange”? These questions are paramount for crypto exchanges that do business in the United States and have been sued by the SEC for failing to register.
What needs to change for you to “come in and register” your crypto brokerage firm? What more can be done for you to “come in and register” your crypto fund? How can the SEC facilitate trading in securities tokens and other tokenized assets? How can the SEC better collaborate with the CFTC regarding digital assets? What legislation should the SEC recommend for adoption by Congress? All these questions, and more, need to be addressed by the SEC, engaging the public as the answers are determined. In each case, the SEC would act consistently with its statutory mandate to protect securities investors and assure fair and orderly markets.
Next Steps
Foley has offered to assist the SEC in its consideration of these questions and expect to be involved in some capacity along the way. Likewise, we expect to make submissions to the President’s Working Group. If you would like to be represented in that process to make sure that your views are considered, please reach out to either of the authors. We are engaging with the House Financial Services Committee and the Senate Banking Committee in addition to the Trump Administration, the SEC, and the CFTC.
Similarly, if you have a development team or a product and are looking to access the U.S. digital asset markets lawfully, we are standing by to help.
President Trump Issues Executive Order on Crypto as SEC Signals Enforcement Shift
On January 23, 2025, President Trump issued an executive order entitled “Strengthening American Leadership in Digital Financial Technology,” establishing his Administration’s policy “to support the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors of the economy” (the “EO”).
The EO sets out five high-level policy objectives:
protecting the lawful use of blockchain networks, participation in mining and validation, and self-custody of digital assets without unlawful censorship;
promoting dollar-backed stablecoins;
ensuring fair and open access to banking services;
providing “regulatory clarity” for digital assets based on “well-defined jurisdictional regulatory boundaries;” and
prohibiting Central Bank Digital Currencies (“CBDC”).
As an initial matter, the EO rescinds Executive Order 14067 issued by President Biden on March 9, 2022, which, among other things, placed “the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” The EO also rescinds the Department of the Treasury’s “Framework for International Engagement on Digital Assets,” issued on July 7, 2022. A press release regarding the framework stated that it set forth steps for international cooperation on digital assets while respecting core U.S. democratic values, protecting consumers, ensuring interoperability, and preserving the safety and soundness of the global financial system. A White House statement accompanying the EO asserts the framework “suppressed innovation and undermined U.S. economic liberty and global leadership in digital finance.”
In terms of affirmative directives, the EO accomplishes the following:
Establishes a Working Group on Digital Asset Markets to be chaired by a Special Advisor for AI and Crypto and include the Chairman of the Securities and Exchange Commission, the Chairman of the Commodity Futures Trading Commission, the Attorney General, and the Secretary of the Treasury, among seven other top officials.
Directs the Working Group to (1) identify regulations, guidance documents, and orders pertaining to the digital asset industry within 30 days, (2) submit recommendations regarding rescission, modification, or regulatory adoption of those items within 60 days, and (3) submit a report to President Trump recommending regulatory and legislative proposals to (a) establish a Federal framework for the issuance and operation of digital assets, including stablecoins, and (b) evaluate the potential creation and maintenance of a national digital asset stockpile.
Prohibits development of CBDCs, which the EO states “threaten the stability of the financial system, individual privacy, and the sovereignty of the United States,” underscoring that “any ongoing plans or initiatives at any agency related to the creation of a CBDC within the jurisdiction of the United States shall be immediately terminated, and no further actions may be taken to develop or implement such plans or initiatives.”
The accompanying White House statement highlights several key objectives of the Trump Administration in this space, including making “the United States the center of digital financial technology innovation by halting aggressive enforcement actions and regulatory overreach that have stifled crypto innovation under previous administrations,” and ensuring that “regulatory frameworks are clear” and the “growth of digital financial technology in America . . . remain[s] unhindered by restrictive regulations or unnecessary government interference.”
Also on January 23, 2025, the Securities and Exchange Commission (“SEC”) rescinded accounting guidance issued in 2022 entitled “Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users.” The guidance called upon certain regulated entities custodying digital assets on behalf of others to account for them as liabilities “to reflect [their] obligation to safeguard the crypto-assets held for [their] platform users.”
Two days earlier, the Commission issued a press release announcing that Acting SEC Chairman, Mark Uyeda, had launched a crypto task force “dedicated to developing a comprehensive and clear regulatory framework for crypto assets.” The press release stated that, “[t]o date, the SEC has relied primarily on enforcement actions to regulate crypto retroactively and reactively, often adopting novel and untested legal interpretations along the way. Clarity regarding who must register, and practical solutions for those seeking to register, have been elusive. The result has been confusion about what is legal, which creates an environment hostile to innovation and conducive to fraud.” It added that the task force’s focus will be to “help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.”
These executive actions exhibit a shift from the prior Administration consistent with President Trump’s promise at the Bitcoin 2024 conference to make the U.S. the “crypto capital of the planet.” While it remains to be seen whether this will be pursued through shifts in enforcement prerogatives, rulemaking, or legislation, it appears that the crypto industry can expect a more amenable U.S. regulatory environment moving forward.