^{Articles | October 22, 2026 12:00 am} Third Quarter 2026 Asset Management Regulatory Update

Table of Contents

• SEC Proposes New Regulation E-Delivery
• Rev. Rul. 2026-20: IRS Ruling on ETF Seeding Transactions Involving Sections 351 and 852(b)(6)
• SEC Division of Examinations Staff Issues Observations Regarding Investment Adviser Annual Compliance Reviews
• No-Action Relief for ETF Creation Baskets During Passive Concentration Exceedances
• SEC No-Action Letter Regarding Directed Voting Programs
• SEC Amends Its Quorum Rule to Allow a Single-Commissioner Quorum

SEC PROPOSES NEW REGULATION E-DELIVERY

On July 16, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) proposed Regulation E-Delivery (“Reg E-Delivery”), a new rule that, if adopted, would expand the ability of issuers, broker-dealers, investment advisers, and others (“Covered Entities”) to use electronic delivery (“e-delivery”) to satisfy information delivery requirements under the federal securities laws. Reg E-Delivery would permit, but not require, Covered Entities to use e-delivery as the default method for delivering required regulatory information, subject to certain conditions, in place of the current framework under which paper is effectively the default unless the recipient affirmatively elects e-delivery.

Background

The Commission’s current approach to e-delivery is governed by interpretive guidance issued in 1995, 1996, and 2000 (collectively, the “Existing E-Delivery Guidance”). That guidance is built around three factors: notice, access, and evidence of delivery, and identifies an investor’s informed consent as a principal means of satisfying the evidence-of-delivery factor. Because of the guidance regarding informed consent, issuers and market intermediaries generally deliver regulatory documents and reports in paper unless the recipient consents, or “opts in,” to delivery. As a result, paper delivery has remained the default for most required regulatory disclosures and reports.

The proposal reflects growth in internet use and investor polling by the SEC’s Office of the Investor Advocate finding that nearly 80% of U.S. investors prefer some form of e-delivery for financial disclosure documents that do not include personal financial information. Reg E-Delivery, if adopted, would be the Commission’s primary rule addressing e-delivery and would generally supersede the Commission’s current guidance-based framework.

Substance of the Proposal

Scope. Reg E-Delivery would be broad in scope. It would reach virtually every corner of the securities disclosure ecosystem:

Who delivers? “Covered Entities” would include public companies, registered investment companies, broker-dealers, investment advisers, and any other person required to deliver information under the federal securities laws.

What’s covered? “Covered information” would include fund prospectuses, shareholder reports, proxy statements, trade confirmations, Form CRS disclosures, Form ADV Part 2 Brochures, and other required disclosures—essentially any information required to be delivered under the federal securities laws, other than information delivered under Regulation Crowdfunding, Rule 15c2-11, and the security-based swap trade acknowledgment rule, each of which already has a tailored e-delivery framework.

Who receives? “Covered recipients” would include current or prospective customers, clients, investors, security holders, counterparties, or similar recipients of information.

Default E-Delivery Framework. Reg E-Delivery would reverse the current model. Rather than requiring affirmative consent before going electronic, Covered Entities could use e-delivery as the default. Whether or not a Covered Entity chooses default e-delivery, it could rely on Reg E-Delivery to satisfy its delivery obligations where three conditions are met:

Electronic address on file. The covered recipient has provided an electronic address to the Covered Entity.

Prominent disclosure. The Covered Entity has provided a prominent disclosure that it will send covered information to that electronic address.

No opt-out. The covered recipient has not opted out of e-delivery.

Delivery Methods. Reg E-Delivery contemplates two permissible methods of e-delivery, which depend on the nature of the covered information:

Direct Delivery: For covered information that does not include personal financial information (“PFI”), a Covered Entity could deliver covered information directly to a covered recipient’s electronic address.

Statement of Availability: For covered information that includes PFI, a Covered Entity would be required to deliver a statement of availability (e.g., an email with a link to a website where the covered recipient can access the information). This method may also be used for covered information that does not include PFI. Where a statement of availability is used, the covered information would need to be posted on a website (other than a Commission filing system such as EDGAR) that satisfies certain requirements, including that the information remain available for at least three years (for information containing PFI) or one year (for information without PFI), unless the federal securities laws provide a different availability period, and that PFI be accessible only through a process reasonably designed to safeguard the information, such as the use of passwords. 

Disclosure Requirements. Covered Entities relying on Reg E-Delivery would be required to provide prominent disclosures to covered recipients explaining how to (1) obtain a paper version of covered information free of charge; (2) opt out of e-delivery and receive paper delivery; and (3) update the covered recipient’s electronic address. These disclosures would be required to direct covered recipients to a website where they can take these actions. Covered Entities would be required to send a requested paper copy free of charge within three business days and to promptly honor opt-out elections.

Additional Compliance Requirements. In addition to the conditions described above, Reg E-Delivery would require Covered Entities to adopt and implement written policies and procedures reasonably designed to identify and remediate failed e-delivery. Reg E-Delivery would include further requirements addressing timing, manner, and form of e-delivery, including that covered information be delivered separately from non-covered communications (such as marketing materials).

Transition Process. For covered recipients currently receiving paper, Covered Entities would be required to provide two written notices before switching to e-delivery: (1) an initial notice at least 180 days before the transition and (2) a follow-up notice 30 days before the transition.

Each notice would be required to explain the covered recipient’s right to opt out, request paper delivery, and update their electronic address. Notably, covered recipients retain the right to opt out of e-delivery at any time and receive paper free of charge. The proposal would also exempt electronic delivery made in compliance with Reg E-Delivery from the consent requirements of the E-SIGN Act.

Amendments to Existing Rules

To facilitate Reg E-Delivery, the Commission also proposed amendments to existing rules:

Rescission of Rule 30e-3. Rule 30e-3, which provides alternative means for registered closed-end funds and certain insurance company separate accounts to satisfy shareholder report delivery requirements through a notice-and-access model, would be rescinded. The Commission indicated that Rule 30e-3 would no longer be necessary because Covered Entities eligible to use Rule 30e-3 would instead rely on Reg E-Delivery.

Amendments to Regulations 14A and 14C, and Rule 14d-5. The Commission proposed several changes to conform the proxy and tender offer delivery rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to the Reg E-Delivery framework, including:

Elimination of the standalone paper Notice of Internet Availability of Proxy Materials. The current paper notice would be replaced by a statement of availability delivered electronically in accordance with Reg E-Delivery.

Removal of the 40-day advance deadline. The federal requirement to send paper notices at least 40 calendar days before a meeting would be removed; timing would align with general federal rules and state-law meeting requirements.

Electronic dissemination of third-party tender offer materials. Rule 14d-5 would be amended to permit e-delivery in accordance with Reg E-Delivery in place of mailing; stockholder lists provided to bidders would need to include electronic addresses, or the subject company would have to disseminate the materials itself.

Comment Period and Next Steps

The public comment period closed on September 21, 2026. The Commission proposed that any final rule become effective 60 days after its publication in the Federal Register, followed by a two-year compliance period. At the end of that compliance period, the 1995 and 1996 guidance would be rescinded, and only certain sections and examples of the 2000 guidance (principally those addressing telephonic consent, global consent, and PDF delivery) would be superseded; the remainder of the 2000 guidance would be retained, and Covered Entities would be required to comply with Reg E-Delivery. Going forward, funds, advisers, broker-dealers, and other market participants should monitor rulemaking and evaluate how the proposed transition to e-delivery as the default may affect their current delivery practices and investor communications.

REV. RUL. 2026-20: IRS RULING ON ETF SEEDING TRANSACTIONS INVOLVING SECTIONS 351 AND 852(B)(6)

On September 28, the Internal Revenue Service (“IRS”) released Revenue Ruling 2026-20 (the “Revenue Ruling”) on certain investment fund strategies involving exchange-traded funds (“ETFs”).

The Revenue Ruling outlined the IRS’s analysis regarding the federal income tax characterization of certain multi-step seeding transactions that rely on the combination of Section 351 and Section 852(b)(6) of the Internal Revenue Code of 1986, as amended (the “Code”), involving seeding ETFs with appreciated assets followed by an in-kind distribution of those assets to an authorized participant (an “AP”).

By way of brief background, a newly formed ETF may be initially capitalized through an in-kind seeding transaction in which one or more investors contribute securities to the ETF in exchange for shares of the ETF. These in-kind contributions are often structured to qualify as tax-deferred transactions described in Section 351. Section 351 provides that a person contributing appreciated assets to a corporation in exchange for stock in the corporation does not recognize gain on such contribution if certain requirements are met. Among other things, the assets contributed by each contributor must constitute a “diversified portfolio” and persons contributing assets to the corporation as part of the plan must collectively own at least 80% of the corporation following the contributions.

Under Section 852(b)(6), a regulated investment company (“RIC”) (such as an ETF or open-end mutual fund) generally recognizes no gain or loss on an in-kind distribution of property to a shareholder in redemption of the shareholder’s stock upon demand. Accordingly, the redemption of the AP’s shares is intended to qualify for non-recognition treatment under Section 852(b)(6).

The facts of the ruling are as follows. As part of a plan, an investor transfers a portfolio of securities to a newly formed ETF. For federal income tax purposes, the ETF is a corporation that intends to qualify as a RIC under Section 851 and to be taxed under Subchapter M of the Code. When the investor makes the transfer, the securities are appreciated, and the transferred portfolio is diversified within the meaning of Treasury Regulation Section 1.351-1(c). Two further transactions take place under the same plan. First, the ETF issues shares to an AP in exchange for either securities consistent with the ETF’s investment thesis or cash that the ETF intends to use to buy such securities. Second, shortly afterward, the ETF redeems those shares in a transaction intended to qualify under Section 852(b)(6), paying the AP with securities the investor transferred to the ETF. Once the planned transactions are complete, the ETF holds a portfolio that is consistent with its investment thesis and materially different from the portfolio the investor transferred.

The Revenue Ruling addressed the issue of whether a transfer of securities to a newly formed ETF that is intended to qualify as a tax-free exchange under Section 351 should fail to so qualify if, as part of the same plan, some or all of the transferred securities are distributed under Section 852(b)(6) to redeem shares held by an AP.

Applying generally applicable principles of tax law, such as substance-over-form and step-transaction doctrines, the Revenue Ruling concludes that the investor’s transfer of assets to the ETF is “recharacterized to reflect the substance of the transactions carried out pursuant to the plan.” Accordingly, the ETF’s transitory ownership of the transferred securities is disregarded, and the investor is treated as exchanging with the AP, in a taxable transaction, the securities it contributed to the ETF that are used by the ETF to redeem the AP’s shares. As a result, the Revenue Ruling sets forth the position of the IRS that Section 351 and Section 852(b)(6) cannot be combined, under a prearranged plan, to achieve a non-taxable exchange of one portfolio for a materially different portfolio.

SEC DIVISION OF EXAMINATIONS STAFF ISSUES OBSERVATIONS REGARDING INVESTMENT ADVISER ANNUAL COMPLIANCE REVIEWS

On September 14, the staff of the SEC Division of Examinations (the “Staff”) issued a risk alert (the “Risk Alert”) summarizing what examiners observed from recent examinations of SEC-registered investment advisers’ annual reviews of their compliance programs, as required under Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Of note, the Risk Alert addresses investment advisers only. The Staff last released observations about registered fund annual compliance reviews under Rule 38a-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), in a separate risk alert dated November 4, 2024.

Under the Compliance Rule, each adviser must adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder (together with the related compliance infrastructure, a “Compliance Program”), designate a chief compliance officer (“CCO”) responsible for administering those policies and procedures, and review the adequacy and effectiveness of its policies and procedures no less frequently than annually (an “Annual Review”). The Compliance Rule does not require that the CCO conduct the Annual Review, although in many cases the CCO will be tasked with the responsibility. As the Risk Alert notes, the Commission’s 2003 adopting release states that each Annual Review should consider (i) any compliance matters that arose during the previous year; (ii) any changes in the business activities of the adviser or its affiliates; and (iii) any changes in the Advisers Act or applicable regulations that might suggest a need to revise the adviser’s policies and procedures. The release also states that advisers should consider interim reviews between Annual Reviews in response to significant compliance events, changes in business arrangements, and regulatory developments.

To the extent that advisers create or use certain documents or other records in connection with the Annual Review, Rule 204-2(a)(17)(ii) under the Advisers Act (the “Recordkeeping Rule”) separately requires advisers to keep and maintain such records in a true, accurate, and current manner. Although the Compliance Rule does not require it, many advisers (or their CCOs) prepare, as a matter of best practice, a written annual report similar to the annual written report a registered fund’s CCO must provide to the fund’s board. An adviser that writes such a report into its own procedures must follow through, however. The Staff cited advisers whose policies required written Annual Review reports covering specified topics, yet no report was prepared.

Among other things, the Staff highlighted the following categories of issues identified in its examinations:

• Timeliness: The most basic failure the Staff found was that some advisers did not perform a review at least annually. Some advisers skipped years entirely, such as reviewing 2021 and 2023 but not 2022. Other advisers let review periods run beyond 12 months, including after CCO departures. Some advisers completed their first review 18 months after registration. The Staff explained that the 18-month window described in the adopting release was available only for the first Annual Review following the Compliance Rule’s October 5, 2004 compliance date, and that every later review must be performed at least annually. A more conceptual failure involved advisers that treated compliance training, or annual attestations that personnel follow firm policies, as satisfying the review requirement.

• Completeness of review procedures: The Staff found that certain advisers’ policies required the review to be documented and to include testing and validation, yet there was no written guidance on how to perform the tests, what factors to weigh in evaluating the results, or what level of documentation to keep. The Staff also observed compliance manuals that required certain practices, services, or operations to be assessed during the Annual Review in one section, while the review procedures themselves left those topics out, so the reviews did not cover them. In one example, the adviser’s identity theft policies called for annual testing, but the Annual Review omitted the topic.

• Consistency with written procedures: The Staff observed timely Annual Reviews that departed from the adviser’s own procedures. These reviews did not cover the defined review period or scope, did not use the specified workpapers, or skipped required tasks and tests. Some reviews assessed outdated policies and procedures that had been superseded before the review period began.

• Alignment of policies with practices: The broadest category of observations concerned the gap between what an adviser’s policies say and what the adviser actually does. The Staff found advisers whose reviews did not recognize that their policies failed to address, or did not match, actual practices. Some advisers had no policies at all for risk areas central to their business. Other advisers failed to account for business changes relevant to the review, for example by not informing the CCO of business or operational changes that could affect the review’s scope. The Risk Alert highlighted specific areas in which Annual Reviews failed to spot problems, including fee and expense billing, proxy voting, custody, marketing, regulatory filings, and oversight of third-party vendors.

• Documentation and corrective action: The Staff found that some advisers created documentation during their reviews, including test results and recommended corrective actions, but did not keep it in their books and records. Other advisers prepared no written report even though their policies required one, or only partly completed required checklists, workpapers, or templates. Each of these failures leads back to the Recordkeeping Rule requirement to keep true, accurate, and current records of the review. The Staff observed advisers that did not act on Annual Review recommendations to change compliance policies, disclosures, or business practices. The unaddressed recommendations included improving proxy voting disclosures, documenting client risk tolerances, and conducting more thorough best execution analysis and third-party due diligence on broker-dealers. In some cases, written Annual Review reports stated that corrective actions had already been taken, yet the issues persisted.

The Risk Alert signals that the Staff views the Annual Review as a substantive requirement rather than a formality. Advisers should anticipate that the Staff will evaluate whether the review was timely, methodical, faithful to the adviser’s own procedures, matched to actual business practices, fully documented, and followed by effective remediation. The Staff often finds gaps by comparing problems it observes in an adviser’s core business areas with that adviser’s Annual Reviews and written policies. Advisers should also expect that because the Recordkeeping Rule requires true, accurate, and current records of the review, an Annual Review that the adviser cannot document may be treated, at least during an examination, as functionally equivalent to not having conducted an Annual Review at all. Because the Staff routinely requests Annual Review materials as part of the examination process, advisers should keep a complete, retrievable file for each review year that includes the report, workpapers, test results, and evidence of remediation.

NO-ACTION RELIEF FOR ETF CREATION BASKETS DURING PASSIVE CONCENTRATION EXCEEDANCES

On July 27, the staff of the Division of Investment Management (the “Division”) issued a no-action letter to the Investment Company Institute addressing how ETFs may continue creation unit activity when such activity causes an ETF to passively exceed its disclosed industry concentration policy. The request that prompted the Division’s no-action letter asked for relief under Sections 13(a)(3) and 34(b) of the 1940 Act.

Under the 1940 Act, a registered fund must disclose its policy on concentrating in an industry or group of industries, and Section 13(a)(3) of the 1940 Act bars a registered investment company from departing from its stated policy on concentrating without approval by a majority of its outstanding voting securities. Additionally, Section 34(b) of the 1940 Act makes it unlawful for any person to make an untrue statement of a material fact (or to omit any fact necessary to prevent the statements from being materially misleading) in a registration statement, report, or other document filed or transmitted under the 1940 Act.

The request highlighted a handful of reasons for requesting no action under Sections 13(a)(3) and 34(b) of the 1940 Act, including the following:

1. Under longstanding SEC staff positions reflected in Form N-1A, a fund “concentrates” if it invests more than 25% of its total assets in a single industry or group of industries. Changes in market value can push an ETF’s holdings in one industry above 25% of its total assets, even when the ETF has a stated policy not to concentrate. The request described this kind of exceedance as passive and caused by factors outside management’s control.
2. ETFs differ from traditional mutual funds in that they issue shares in creation units through APs who deliver creation baskets, and ETFs generally cannot control when creations happen. As a result, a creation order can add to an industry position that is already in passive exceedance, at a time the portfolio manager would not choose.
3. Accepting a pro rata basket is not an investment decision by the manager, and it leaves shareholders’ proportional exposure to the industry unchanged apart from market movements. Cash-in-lieu purchases capped at pro rata amounts are also not a manager’s choice, because the need for cash-in-lieu usually comes from operational issues such as small lots or limits on in-kind transfers. Without no-action relief, ETFs could have to (i) change basket composition or substitute assets in ways that hurt shareholders or (ii) pay the significant cost of a shareholder vote to change the concentration policy.

Considering the facts and representations set forth in the request, the Division’s response letter indicated that it would not recommend enforcement action to the Commission if, during a passive exceedance, an ETF:

1. receives a pro rata creation basket that includes investments in the affected industry;
2. uses cash received in place of a basket component in that industry to buy that security, up to the amount a pro rata basket would have delivered; or
3. receives a non-pro rata basket in which the industry’s weighting matches what a pro rata basket would have had.

The relief applies to both actively managed and index-based ETFs; however, the staff of the Division clarified that its views and opinions are fact-specific and different circumstances could lead to a different outcome.

SEC NO-ACTION LETTER REGARDING DIRECTED VOTING PROGRAMS

On September 29, the staff of the Division issued a no-action letter (the “MFDF Letter”) to the Mutual Fund Directors Forum (“MFDF”) that allows registered investment companies (each, a “Fund”) to implement voluntary directed voting programs (each, a “Directed Voting Program”). Under such a program, retail shareholders would have the ability to give revocable standing voting instructions that would require the Fund to vote their shares in accordance with the recommendation of the Fund’s board of directors (“Board”) (including all of the fund’s independent directors).

The MFDF Letter defines a “retail” shareholder as “any person that has, or is entitled to have, voting authority with respect to the shares of a Fund by virtue of owning beneficially and/or of record such shares, regardless of whether the person owns their shares via a bank, broker, or other financial intermediary.”

A Fund’s Board, including all of the independent directors, would be required to approve the Directed Voting Program prior to its implementation and, at least every three years, reexamine the Directed Voting Program and reapprove it only upon determining that the Directed Voting Program remains in the best interests of shareholders. The MFDF Letter clarifies that a Directed Voting Program may not apply to contested director elections or changes to the Fund’s investment advisory agreement with its primary investment adviser that require a shareholder vote (“Exclusions”).

Shareholders would be required to opt-in to the program and would have two choices for the kinds of matters to which the instructions would apply: (1) all matters, except the Exclusions; or (2) all matters, except (i) the Exclusions; (ii) Fund mergers that, under any of the 1940 Act and its rules, applicable state law, the Fund’s organizational documents, or applicable exchange listing standards, require approval of the Fund’s shareholders; and (iii) adoption of, or changes to, a Fund’s Rule 12b-1 Plan that result in an increase in 12b-1 fees (Items (2)(ii) and (iii), together, the “Opt-Out Items”). Shareholders would have the ability to opt out of the Directed Voting Program at any time and would receive annual reminders of their enrollment in the program and their standing voting instruction. Additionally, any shareholders that have elected for their standing voting instructions to apply to all matters except the Exclusions would receive an additional reminder before any meeting involving an Opt-Out Item, to provide such shareholders an additional opportunity to opt out of the Directed Voting Program or override their instruction prior to any meeting involving an Opt-Out Item.

Because votes for which a Fund has received a standing voting instruction would be cast on the same day that the Fund files a definitive proxy statement or definitive registration statement on Form N-14 for an upcoming meeting, a cancellation of the standing voting instruction would only apply to future meetings. Shareholders could, however, override a standing voting instruction by voting using the proxy for that meeting.

SEC AMENDS ITS QUORUM RULE TO ALLOW A SINGLE-COMMISSIONER QUORUM

On September 30, the Commission adopted an amendment to its quorum rule, 17 CFR 200.41. Under the amendment, a single commissioner can form a quorum on a matter if all other sitting commissioners are disqualified from the matter. This change is intended to give the Commission more flexibility and finality in its rulemaking and other actions.

The Exchange Act does not set a quorum requirement; however, the SEC’s long-standing practice of a three-member quorum became a formal rule in 1995. That rule let two commissioners act on a matter where disqualifications left only two commissioners available, but, at the time, the SEC decided not to allow a one-commissioner quorum. The SEC has now changed course, pointing to past periods when it had fewer than three commissioners and to cases in which multiple commissioners have been disqualified from a matter.

With the new amendment, three commissioners will generally still constitute a quorum, with two exceptions:

1. If only one or two commissioners are in office, that number is a quorum.
2. If the number of commissioners in office, minus those disqualified from a particular matter, is two or one, that number is a quorum for that matter.

The amendment lowers the risk that vacancies or recusals will delay SEC action on rulemakings, exemptive applications, and other matters. It also helps support the finality of actions taken when few commissioners are available.

*Host Organization Key: Mutual Fund Directors Forum (“MFDF”), Independent Directors Council (“IDC”), and Investment Company Institute (“ICI”)

© 2026, Davis Graham & Stubbs LLP. All rights reserved. This newsletter does not constitute legal advice. The views expressed in this newsletter are the views of the authors and not necessarily the views of the firm. Please consult with your legal counsel for specific advice and/or information.

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