In a direct rebuke to the U.S. Securities and Exchange Commission (“SEC”), the U.S. Court of Appeals for the Fifth Circuit has vacated the new SEC rules for Private Funds adopted by the SEC in August 2023.

The vacated rules were consolidated into a single Private Funds rule upon the adoption of five new rules plus ancillary amendments to existing rules under the U.S. Investment Advisers Act of 1940 (the Advisers Act). The Private Funds rule represented the most significant regulatory development for Private Fund Advisers since the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Background

The SEC had attempted to accomplish several things with the new Private Fund rule: (i) introduce a harmonized standard for quarterly reporting; (ii) mandate an annual audit requirement for fund financial statements; (iii) require either valuation or fairness opinions for adviser-led secondaries; (iv) mitigate several “prohibited activities” through additional consent or disclosure requirements; and (v) address preferential treatment of certain investors within funds by either outright prohibition and/or disclosure requirements. The rule also included ancillary books and records requirements, as well as an amendment providing that the annual review required under Rule 206(4)-7 for all registered investment advisers (RIAs) be in writing.

The reforms described in (iv) and (v) above would have applied broadly to all Investment Advisers, including exempt advisers, not just RIAs.

Fifth Circuit Decision

In invalidating the rule, the Fifth Circuit ruled that the SEC had exceeded its authority under Section 211(h) of the Advisers Act, which gives the SEC authority to promulgate rules prohibiting or restricting sales practices, conflicts of interest and compensation schemes for broker-dealers and investment advisers that the SEC deems contrary to the public interest and the protection of investors. The Fifth Circuit held that Section 211, as a whole, applies only to “retail customers,” a term that specifically excludes private fund investors. Going back to the Goldstein case, and reinforced by the Dodd-Frank Act, courts have found that under the Advisers Act, Private Fund Advisers are generally deemed to provide investment advice only to the private fund itself, and not to the fund’s investors, who are not considered advisory clients.

The Fifth Circuit’s broad holding that Section 206(4) fails to authorize the SEC to require disclosure and reporting was perhaps more surprising than its holding limiting Section 211(h) to retail customers, and its reading of Section 206(4) may call into question the basis for existing rules. The SEC has enacted many of its key Advisers Act compliance requirements under its Section 206(4) authority, including requirements governing custody, political contributions, and compliance policies and procedures. Most recently, since November 2022, the marketing rule (Rule 206(4)-1) mandates a number of disclosure requirements as to RIA advertising, including through endorsements and testimonials.

Looking Ahead

While the ruling is a victory for Fund Sponsors, the SEC’s Department of Examinations included Private Fund Advisers as a continued focus of their examination program. Accordingly, many of the principles of Investor protection underlying the Private Funds rule may continue to be areas of focus of SEC review, including the pro rata sharing of fees and expenses, conflicts in Adviser-led secondaries, and presentation of performance information.

California recently enacted two bills — SB 699 and AB 1076 — amending and adding to Section 16600 of the California Business and Professions Code to broaden the scope of California’s already expansive prohibitions on post-employment non-compete agreements and to add consequences for violations.

The regulation has sweeping implications for businesses with employees located in California.

AB 1076 Notice Requirement

AB 1076 requires employers to notify employees that any noncompete agreements or noncompete provisions in their employment contract are void in California. The notice must be written and delivered to the employee’s last known postal address and email address. Employers must notify applicable employees by February 14, 2024. Failure to provide notice constitutes a violation of the UCL Bus. & Prof. Code §§ 17200, et seq., and civil penalties of up to $2,500 per violation may be imposed on noncompliant employers.

Who Is Bound by AB 1076?

Employers with any connection to California – a California presence or California employees – should be prepared to comply with AB 1076. Employers bound by AB 1076 include, but are not limited to:

• employers with a California presence must notify employees who are California residents
• employers with a California presence must notify employees who are not California residents
• employers with no California presence must notify employees who are California residents

The notice requirement applies even if the noncompete provision was enforceable in another state at the time it was executed, such as in the case where an employee signed an enforceable noncompete agreement outside California but has since relocated to California without signing a new agreement compliant with California law.

Employees who require notification under AB 1076 include current employees and former employees who were employed after January 1, 2022, and signed an employment agreement containing a non-compete provision, customer nonsolicitation provision, or other similar provision.

Staying at the forefront of Artificial Intelligence (AI) technological advancements is imperative and It’s critical that your organization start thinking about how to strategically integrate AI into every facet of your business. If you don’t start exploring and exploiting AI innovations throughout your organization, your competitors will beat you there.

Generative AI isn’t just another new AI buzzword; it’s a strategic necessity and it continues to have major implications for individual and organizational productivity.

Despite the lack of a formal regulatory framework and “Safe AI” governing its use, Generative AI is gaining wide acceptance across virtually every operational group including Accounting, Administration, Customer Support, Sales/Marketing, HR, IT, Procurement, and Legal.

ChatGPT remains the best-known and most widely used Generative AI tool among professionals with various activities aimed at reducing service desk workloads and automating routine tasks which explains its growing prevalence. The vast majority of global firms have ongoing research projects investigating the potential of using Generative AI to reduce their service desk workloads using large language models that affect everything from how a new employee gets onboarded to resolving complex IT issues while providing transparency and detailed records of all interactions and automated resolutions.

AI chatbots have also sparked significant skepticism as their responses have sometimes been found lacking in accuracy and thoroughness. Human oversight remains indispensable, ensuring that AI tools like ChatGPT are used as supplements rather than replacements for issue and service resolution.

Professionals who embrace Generative AI technologies will very likely be replaced by professionals who don’t.

As more content is made with Generative AI, it has led to brand safety, fraud, and content transparency issues. So, data governance and regulation compliance will become even more crucial.

The intent of both governments and businesses is clear: protect people from fraud and deception via AI.

The AI platform that balances cutting-edge experiences with unwavering data protection will lead the industry and achieve wide adoption.

AI innovations promise a future where service is more personalized, efficient and accessible, ultimately leading to better outcomes. Time will tell.

Artificial Intelligence (AI) isn’t just a buzzword; it’s a strategic necessity and set to upend nearly every industry, To stand out in this landscape, digital transformation leaders should know how to develop a well-structured AI strategy.

ChatGPT and Large language models (LLMs) will continue to have major implications for individual and organizational productivity. In the fast-paced and competitive corporate world, staying at the forefront of technological advancements is imperative. As your team starts experimenting with ChatGPT and Generative AI technologies, executives must educate people on what AI can — and more importantly can’t — do well. For example, while AI is excellent at spotting patterns, aggregating information, and making predictions, it’s not yet capable of generating truly original insights. With this in mind, encourage your managers to evaluate whether AI’s capabilities match with a task and proceed accordingly. For example, it could help people process a lot of information quickly or generate a rash of new ideas.

Generative AI can even offer advice to help people make a difficult decision, provided it’s been trained on relevant data. But emphasize to your managers and employees that they shouldn’t use Generative AI to create meaningful work products without human review/approval. The most important thing to stress at this early stage is that Generative AI’s outputs are only as good as its datasets and algorithms—and those aren’t always reliable.

There is no denying that kindness at work motivates and fosters teamwork that over-achieves team goals. But how do you promote a culture of caring and generosity on your team?

First, take the lead. People are highly attuned to the behaviors of high-status team members; when you give compliments to your employees, they’re likely to emulate your behavior.

Second, set aside time during Zoom meetings for a “kindness round,” in which team members can acknowledge and praise each other’s work. This doesn’t need much time — even just a few minutes is plenty of time to boost morale and social connection.

Finally, consider small, peer-nominated spot bonuses to allow people to recognize their colleagues’ work. If you have a limited budget, a gift card or a small gift can show appreciation which goes a long way. It’s your job as a leader to set a tone of kindness on your team. These small gestures can have a big impact.

Remember, it’s never a perfect day to do something for someone who can never repay you.