Produced water – the fluid that surfaces alongside oil and gas during extraction, typically carrying high concentrations of dissolved salts and minerals – has long been the industry’s largest waste stream and one of its most persistent cost centers. That is changing. A convergence of disposal constraints, treatment technology advances, legislative reform, institutional-scale capital deployment, and the strategic importance of critical minerals is transforming produced water from a disposal liability into a managed resource. Across multiple U.S. basins, produced water is now at the center of billion-dollar infrastructure transactions, first-of-a-kind treatment and mineral extraction projects, and a rapidly evolving regulatory landscape that cuts across state, federal, and Tribal jurisdictions.

This client alert surveys the current state of the U.S. produced water value chain – spanning the Permian Basin, DJ Basin, Smackover Formation, and beyond – and identifies the legal, regulatory, commercial, and transactional issues that energy companies, investors, landowners, midstream operators, technology providers, and critical minerals developers should be watching.

I. Scale of the Problem and the Opportunity

Every barrel of oil produced in the Permian Basin brings with it roughly three to five barrels of produced water, and in parts of the Delaware Basin those ratios can reach ten to one. At current production levels, the Permian alone generates more than 20 million barrels of produced water daily. New Mexico’s oil and gas operations generate nearly two billion barrels of produced water per year. In Colorado’s DJ Basin, by contrast, water-to-oil ratios are significantly lower – roughly one barrel of water for every eight barrels of oil – but freshwater consumption for completions is substantial, with the basin consuming approximately five billion gallons of fresh water in 2022 alone.

An estimated 50% to 60% of Permian produced water is currently recycled for use in hydraulic fracturing – the simplest and cheapest form of reuse. The remainder must be disposed of by injection into deep underground formations, and decades of injection have raised formation pressures, triggered seismicity concerns, and prompted regulatory restrictions that increasingly limit disposal capacity in core producing areas.

Advanced treatment technologies capable of converting produced water to higher-value uses – agricultural irrigation, industrial supply, aquifer recharge – exist but face a persistent cost gap. Disposal currently runs roughly $0.75 to $1.25 per barrel. Treatment for frac reuse costs a similar amount, whereas treatment to agricultural quality can run $2 to $4 per barrel, and treatment to drinking water standards $4 to $7 per barrel or more. Until that gap narrows through technology maturation, regulatory incentives, new co-product revenue streams such as mineral extraction, or a supply-and-demand shift that drives prices higher for treated water and equivalent alternatives, large-scale beneficial reuse beyond the oilfield will remain in the pilot and early-commercial phase.

Induced seismicity is likely to be a primary driver in closing that gap. Decades of high-volume saltwater injection have triggered measurable seismic events across the Permian, prompting the Texas Railroad Commission to impose volume reductions and geographic restrictions on injection wells in affected areas. Similar concerns have led the New Mexico Oil Conservation Division to tighten disposal oversight. These constraints are not temporary; as formation pressures continue to rise, the physical and regulatory capacity for disposal-as-usual is narrowing, strengthening the economic case for recycling, treatment, and beneficial reuse.

II. A National Regulatory Landscape in Flux

Produced water regulation is evolving rapidly – and divergently – across multiple states and at the federal level. Oil and gas operators, investors, and technology providers in Texas, New Mexico, Colorado, or on federal lands should closely track simultaneous developments in those states and Washington, D.C.

Texas. The Texas Supreme Court, in Cactus Water Services, LLC v. COG Operating, LLC (June 2025), held that produced water is oil-and-gas waste belonging to the mineral lessee absent an express contrary conveyance – resolving a longstanding ownership ambiguity that had clouded midstream contracting, surface-use agreements, and reuse project development.

The 89th Texas Legislature also enacted a suite of changes in 2025 that collectively represent the most significant produced water legislative package in the state’s history:

• SB 1145 transferred land-application permitting authority for treated produced water from the Texas Railroad Commission to the Texas Commission on Environmental Quality (TCEQ), which is expected to propose implementing rules in April 2026.
• HB 49 limits tort liability for entities involved in the treatment, transfer, or beneficial use of treated produced water, effective September 1, 2025, with exceptions for gross negligence, regulatory noncompliance, or intentional wrongful conduct.
• HB 4426 establishes permit durations and renewal procedures for commercial surface disposal facilities for produced water, setting a maximum 10-year permit term.

Despite these advances, significant legal questions remain. SB 1763, which would have clarified ownership of brine minerals within the mineral estate, stalled in the Senate Natural Resources Committee during the 2025 session. The resulting ambiguity over brine mineral ownership may hamper investment in lithium and other mineral extraction from produced water until the legislature or courts resolve the issue.

New Mexico. New Mexico is taking a more cautious approach. Governor Lujan Grisham signed the Strategic Water Supply Act (HB 137) in April 2025, creating a $75 million program to fund brackish water (naturally occurring saline groundwater, as distinct from produced water) treatment projects as part of the state’s 50-Year Water Action Plan. The legislature removed all produced water reuse provisions from the bill during the committee process, however, reflecting persistent concerns about the adequacy of treatment science and the risks associated with reuse of water from hydraulically fractured wells. The enacted version imposes a three-cent-per-barrel fee on produced water disposed of in the state, with revenue directed to the Strategic Water Supply Program Fund. The New Mexico Environment Department’s Water Quality Control Commission continues to develop rules for produced water reuse outside the oilfield, but the agency has expressed skepticism about permitting surface discharges of treated produced water, noting that the scientific basis for protective permitting does not yet exist for all relevant constituents. As of March 2026, New Mexico does not permit surface discharge of treated produced water.

Colorado. Colorado has taken the most prescriptive approach to produced water recycling of any major producing state. In March 2025, Colorado’s Energy and Carbon Management Commission (ECMC) adopted first-in-the-nation rules requiring operators to use an increasing percentage of recycled produced water in oil and gas operations: approximately 4% for developments permitted after January 1, 2026, increasing to 10% after January 1, 2030, with a mandatory 2028 rulemaking to set targets for 2034 and 2038 (defaulting to 20% and 35%, respectively, if no new rules are adopted). The rules also establish a recycled produced water credit trading system to enable compliance flexibility. These rules were informed by the Colorado Produced Water Consortium – a 31-member multi-stakeholder body established by Colorado HB 23-1242 – which published nine data-driven reports to the legislature and will continue to evaluate implementation. Air emissions from produced water handling remain a subject of active rulemaking, with a reporting framework expected in 2026.

Colorado’s regulatory framework for produced water is also shaped by the state’s unique “nontributary” groundwater classification. Under C.R.S. Section 37-90-137(7) and the Produced Non-tributary Ground Water Rules (2 CCR 402-17), the vast majority of oil-and-gas-producing geologic formations in Colorado – including nearly all in the DJ Basin – have been designated as nontributary based on comprehensive geologic mapping and determinations. Produced water withdrawn from nontributary formations can be used for oil-and-gas-related purposes (broadly construed) in the same geologic basin from which it was withdrawn without a Water Court decree, overlying landowner consent, Division of Water Resources well permit, or other standard approvals. This facilitates in-field recycling and oil and gas reuse but limits beneficial reuse for non-oilfield purposes (e.g., agriculture, municipal supply, or aquifer recharge), which generally requires landowner consent, payment, or additional water rights authorization.

Other States. Produced water management challenges are not confined to western basins. In the Appalachian Basin, Pennsylvania has effectively prohibited underground injection of oil and gas wastewater since the 1990s, forcing operators to truck produced water to disposal wells in Ohio or to centralized treatment facilities – a dynamic that has driven early investment in treatment technology but at significantly higher per-barrel costs. Wyoming and North Dakota permit produced water discharges and reuse under state-administered programs, and Utah has adopted regulations expanding reuse opportunities and limiting freshwater consumption for oil and gas operations. Practitioners operating across multiple basins should expect continued divergence in state approaches.

Federal. At the federal level, EPA Administrator Lee Zeldin announced in March 2025 that the agency will revise its effluent limitation guidelines (ELGs) for oil and gas extraction, consistent with the Trump Administration’s Unleashing American Energy Executive Order. The current ELGs date to the 1970s, and their modernization could significantly alter the federal framework for produced water management. The revision could also expand federal pathways for beneficial reuse and surface discharge of treated produced water. The timeline for a proposed rule, however, remains uncertain. Separately, the EPA’s National Water Reuse Action Plan continues to study oil and gas extraction wastewater management practices – work that could inform future federal guidance on treatment standards, monitoring protocols, and discharge criteria for produced water reuse projects.

III. Partnerships and Infrastructure: The Midstream Water Buildout

The produced water midstream sector is undergoing a wave of consolidation and infrastructure investment that mirrors the buildout of hydrocarbon gathering and processing systems over the past two decades.

The partnership between Texas Pacific Land Corporation (TPL) and WaterBridge illustrates the emerging model. In 2022, TPL – one of the largest landowners in West Texas – and WaterBridge – the largest U.S. produced water network operator – formed a Delaware Basin water development alliance covering a 64,000-acre contiguous area of mutual interest. By combining fragmented surface rights with midstream infrastructure and operating capability, they created a single counterparty for comprehensive water management across entire development areas.

WaterBridge’s infrastructure includes approximately 2,500 miles of pipeline and over 4.5 million barrels per day of handling capacity. Its Speedway pipeline – an 80-mile system moving water out of the most pressurized core areas of the Delaware Basin into peripheral formations with better disposal capacity – reflects a broader geographic shift in disposal strategy toward lower-pressure formations in Andrews County and eastern Loving County. WaterBridge handled 2.4 MMbbl/d of produced water in 2025 (up 15% year-over-year) and expects volumes of 2.5 MMbbl/d to 2.7 MMbbl/d in 2026. Phase I of Speedway is expected online mid-2026; a February 2026 open season is underway for Phase II, which would double capacity to 1 MMbbl/d by moving volumes from Eddy and Lea counties, New Mexico, to out-of-basin pore space. Executives have signaled a potential Phase III expansion and system looping, with CFO Scott McNeely stating “the short answer is yes” given strong demand (timing subject to Phase II commercial outcomes). The company also expects to begin construction in Q4 2026 on a new produced water infrastructure project tied to Devon Energy under a ten-year agreement with a 7.5-year minimum volume commitment starting April 2027.

Two landmark 2025 capital markets transactions confirmed that institutional investors now view produced water infrastructure as a distinct, investable asset class. WaterBridge completed an upsized IPO in September 2025, raising approximately $634 million (with full exercise of the underwriters’ option) at $20 per share (top of range) on the NYSE. Western Midstream Partners completed an approximately $2 billion acquisition of Aris Water Solutions in October 2025, combining over 1,600 miles of produced water pipeline. The combined system created what Western Midstream described as a fully integrated produced water value chain – spanning gathering, disposal, recycling, desalination, mineral extraction, and long-haul transport. These transactions signal that the produced water midstream sector is transitioning from a fragmented, operator-by-operator service model to a consolidated, infrastructure-backed platform business. That shift brings attendant legal demands – long-term commercial agreements, acreage dedications, pore space rights, surface access, and regulatory compliance across multiple agencies.

WaterBridge is also at the center of a significant regulatory enforcement dispute. In September 2024, the Texas Railroad Commission spent approximately $6.95 million to plug a Ward County well that experienced a produced-water blowout. The Texas Railroad Commission canceled the permit for a nearby WaterBridge disposal well – located half a mile from the blowout site, at a 1950s-era legacy well – and initiated proceedings to recover the plugging costs. WaterBridge disputes the findings, arguing that its well was properly permitted and operating within its permit limits, that causation has not been proved, and noting three other disposal wells within a two-mile radius as potential contributors. The company has called the action “unprecedented”; as of this writing, a hearing has not yet been scheduled. The case is significant for the broader midstream sector because it raises questions about operator liability for blowouts at legacy wells compromised by cumulative injection pressure from multiple operators – a dynamic likely to recur as formation pressures rise across the Delaware Basin.

IV. Treatment Technologies: From Pilot to Near-Commercial

Multiple treatment approaches are advancing through the pilot phase in the Permian and elsewhere. WaterBridge alone reported 10 to 12 treatment technology pilots underway in the Permian in 2025, evaluating both distillation and reverse osmosis approaches.

The most advanced near-commercial project is TPL’s Transmissive Water Services Phase 2 system, which combines freeze distillation (leveraging temperature differentials to separate clean water from brine) with reverse osmosis to achieve approximately 75% water recovery. The system has secured a surface-discharge permit from the Texas Railroad Commission, with a separate TCEQ discharge authorization pending. Construction paused in 2025 for additional testing and equipment enhancements. If approvals and construction proceed as currently planned, the system could begin treating approximately 10,000 barrels per day by mid-2026, with potential applications in agriculture and aquifer recharge.

A potentially significant new end-use is also emerging: data-center cooling and co-located power generation. Tetra Technologies is advancing its Oasis desalination platform – pre-treatment for contaminant removal, membrane-based desalination to reduce salinity from the Permian’s typical 130,000-150,000 mg/L to below 200 mg/L, and post-treatment polishing. Tetra executives describe the opportunity as “huge,” noting that one gigawatt of data-center and power-generation capacity can require 250,000-350,000 bbl/d of treated water. Larger installations require still more – in a basin that produces over 20 MMbbl/d of produced water daily amid limited fresh-water availability. An EOG pilot has run consistently since Q3 2025 with encouraging agricultural growth study results. According to Tetra, economics are converging as disposal costs rise and treatment costs decline.

Treatment technology selection depends heavily on the source water’s total dissolved solids (TDS), constituent chemistry, and intended end use. Produced water in the Delaware Basin can be five to eight times saltier than seawater, and also contains a complex mix of hydrocarbons, heavy metals, naturally occurring radioactive materials (NORM), and chemical additives from completions. Treating to agricultural or drinking water quality requires addressing constituents – many of which lack established federal or state toxicity standards – at costs that remain significantly above disposal.

PFAS (per- and polyfluoroalkyl substances) are another emerging concern. PFAS have been detected in produced water from multiple basins, and EPA’s evolving PFAS regulatory framework (including the 2024 National Primary Drinking Water Regulation for six PFAS compounds) may impose additional treatment requirements and liability exposure for produced water reuse projects. Rice University’s WaTER Institute has established a dedicated PFAS Alternatives and Remediation Center (R-PARC) focused on destruction and removal technologies for these persistent contaminants.

Research efforts at Texas Tech University (through the Texas Produced Water Consortium), Texas A&M, and the University of Texas are evaluating advanced membranes, hybrid thermal-membrane systems, and treatment process trains targeting beneficial reuse quality. Rice University’s WaTER Institute – launched in January 2024 and building on a decade of work through the NSF-funded Nanotechnology Enabled Water Treatment (NEWT) Center – is pursuing a particularly ambitious research agenda. Its focus areas include beneficial disposition of produced waters from oil and gas fields, critical elements recovery from wastewaters, and advanced membrane and catalytic separation technologies designed to reduce the energy intensity and cost of fit-for-purpose treatment. Rice has also established the Center for Membrane Excellence (RiCeME) to advance separation technologies for energy and environmental applications, and its researchers are developing more efficient lithium extraction methods – work that sits squarely at the intersection of produced water treatment and critical mineral supply chains. The Department of Energy’s National Energy Technology Laboratory continues to fund research across multiple institutions. Colorado’s Produced Water Consortium has also separately evaluated analytical and toxicological methods for assessing treatment adequacy.

V. Lithium and Critical Mineral Extraction: A New Co-Product Revenue Stream

Strategic partnerships between landowners, midstream companies, and operators are expanding to include mineral extraction – particularly lithium, a critical input for EV batteries and energy storage listed on the USGS 2025 List of Critical Minerals – from briny waters, including produced water.

Smackover Formation (Arkansas and East Texas). The most advanced domestic lithium-from-brine plays are in the Smackover Formation, where lithium concentrations in natural brine exceed 300 ppm and have been measured above 600 ppm in some wells. ExxonMobil (through its subsidiary Saltwerx) has acquired brine rights to over 300,000 net acres, completed an eight-well appraisal drilling program, received Arkansas Oil and Gas Commission approval for a 56,245-acre brine production unit and a 2.5% lithium royalty rate, and is targeting first lithium production in 2027 under its Mobil Lithium brand. Equinor has partnered with Standard Lithium for direct lithium extraction (DLE) in the same formation. The Smackover play has also drawn entry from Chevron, TETRA Technologies, PotlatchDeltic, and Albemarle, among others.

Permian Basin. In the Permian, the massive aggregate volumes of produced water create a significant brine resource, but lithium concentrations are far lower (15-40 ppm). Element3, a Fort Worth-based extraction company, is commissioning the first commercial-scale DLE unit at Double Eagle Energy’s recycling facility, with first customer deliveries targeted for the first half of 2026. This is expected to be the first commercial lithium extraction from Permian produced water. The economic thesis is integration: where water is already being handled as part of oil operations, lithium extraction becomes an incremental co-product rather than a standalone venture, potentially improving the economics of both water handling and mineral supply.

Broader U.S. DLE Activity. California’s Salton Sea natural geothermal brine has attracted DLE investment from Occidental Petroleum (through a joint venture with All-American Lithium) and others, supported by DOE research. Nevada has seen DLE pilot activity by oilfield services firms including SLB (formerly Schlumberger).

Practitioners should note that lithium extraction from brine implicates a complex and still-developing web of legal issues. These include ownership of brine minerals (unsettled in Texas), unitization and royalty frameworks (newly established in Arkansas), federal land and Tribal consultation requirements where applicable, water rights and return-flow obligations, and environmental permitting for brine production and reinjection. Federal incentives add a further dimension: the Inflation Reduction Act’s Section 45X Advanced Manufacturing Production Credit applies to domestically produced critical minerals, and the Section 30D clean vehicle credit sourcing requirements incentivize U.S.-origin lithium – both of which may materially affect project economics and offtake structuring for DLE ventures.

VI. Legal & Transactional Issues for Practitioners

The produced water value chain implicates a wide range of practice areas. We highlight several that are particularly active.

Ownership and Property Rights. The Texas Supreme Court’s Cactus Water decision clarified that produced water belongs to the mineral estate absent express contrary language, but it did not resolve ownership of brine minerals, leaving ambiguity that affects commercial agreements for mineral extraction. Practitioners should review existing mineral leases, surface use agreements, and water handling contracts for produced water and brine mineral allocation language. In prior appropriation states such as Colorado and New Mexico, the interaction between produced water reuse and state water rights law raises additional questions – including whether treated produced water discharged to surface waters or applied to land creates new appropriation obligations, triggers return-flow requirements, or implicates existing senior water rights. In Colorado, the nontributary produced water framework adds a further layer of complexity, as reuse of nontributary produced water is generally restricted to oil-and-gas-related purposes absent landowner consent or other authorization. These issues are particularly acute where beneficial reuse projects propose to introduce treated produced water into watersheds or aquifers that are already over-appropriated.

Commercial Agreements. Produced water midstream agreements – water gathering, disposal, and recycling agreements with acreage dedications and volume commitments – are becoming increasingly complex, approaching the commercial sophistication of hydrocarbon midstream contracts. Pore space access and disposal rights, take-or-pay structures, treatment specifications, regulatory risk allocation, and mineral extraction rights are all subjects of active negotiation.

Regulatory Compliance. The multi-agency regulatory landscape – spanning the Texas Railroad Commission, TCEQ, the New Mexico Environment Department, the Colorado ECMC, EPA, state water agencies, and (where applicable) the Bureau of Indian Affairs and Tribal regulatory bodies – requires careful navigation. Permits for surface discharge, land application, subsurface injection, and beneficial reuse are governed by overlapping and sometimes conflicting state and federal requirements. The pending WaterBridge/Ward County enforcement proceeding (discussed in Section III) highlights emerging liability exposure for permitted disposal operations that may contribute to subsurface pressure buildup affecting nearby legacy wells. Practitioners should address this risk in disposal agreements and infrastructure transaction diligence.

Capital Markets and M&A. The WaterBridge IPO and Western Midstream/Aris acquisition establish produced water infrastructure as an institutional asset class. Expect continued M&A activity as operators pursue scale, integration, and pore space access across the full value chain. The Devon-Coterra all-stock merger, announced in February 2026 with a combined enterprise value of approximately $58 billion, is expected to close in Q2 2026, subject to regulatory approvals and shareholder votes, and could further reshape produced water contracting in the Delaware Basin, where, as analysts have noted, Coterra’s Franklin Mountain acreage overlaps WaterBridge’s Speedway system. Diligence for these transactions requires careful evaluation of disposal well capacity and induced seismicity risk, regulatory compliance posture, surface and pore space rights, and the adequacy of environmental and water rights arrangements.

Tort and Environmental Liability. Texas HB 49 limits tort liability for treated produced water beneficial use, but its exceptions (gross negligence, regulatory noncompliance, intentional misconduct) and effective-date limitations mean that liability risk has been reduced, not eliminated. Operators, landowners, and technology providers should assess the scope of these protections in the context of their specific operations and contractual risk allocation.

Financial Assurance and Insurance. Regulators are increasingly requiring financial assurance for produced water operations. New Mexico’s Strategic Water Supply Act mandates financial assurance for the life of any project receiving a program contract, and the Texas Railroad Commission’s bonding requirements for disposal wells remain under periodic review. Investors and lenders should evaluate the adequacy of existing bonding, insurance, and indemnification structures – particularly for long-lived disposal and treatment assets where decommissioning and remediation obligations may extend well beyond the operational period.

Tribal Consultation and Federal Lands. Where produced water operations, mineral extraction, or treatment projects involve federal lands or Tribal resources, consultation and compliance obligations under NEPA, the National Historic Preservation Act, the Endangered Species Act, and applicable Tribal regulatory frameworks add an additional layer of complexity. This is particularly relevant for DLE projects in formations that cross jurisdictional boundaries or involve split estates.

VII. What to Watch

• TPL Transmissive Phase 2B completion: mid-2026 target (following 2025 construction pause); the first near-commercial beneficial reuse project in the Permian.
• Element3 commercial lithium deliveries: targeted for first half of 2026; expected to be the first commercial lithium extraction from Permian produced water.
• TCEQ land-application rulemaking: rules expected April 2026; the most consequential near-term regulatory milestone for Texas beneficial reuse.
• EPA ELG revision: timeline uncertain; could reshape the federal framework for produced water discharge and reuse nationally.
• Colorado ECMC recycling mandate implementation: approximately 4% recycling requirement phases in for developments permitted after January 1, 2026, with air quality rulemaking to follow.
• New Mexico WQCC produced water rulemaking: continued development of rules governing reuse outside the oilfield; a key indicator of the state’s long-term position on beneficial reuse.
• ExxonMobil/Saltwerx first lithium production in Arkansas: targeted for 2027; the largest DLE project under development in the U.S.
• Continued M&A and infrastructure investment: midstream operators pursuing scale, integration, and pore space access across the full produced water value chain, with particular activity expected around disposal-constrained basins and integrated treatment/mineral extraction platforms.
• Brine mineral ownership legislation: whether Texas, Arkansas, or other states act to clarify ownership of minerals dissolved in produced water.
• Colorado nontributary produced water framework: potential evolution of limits on reuse beyond oil-and-gas purposes amid rising recycling requirements and beneficial reuse pilots.
• WaterBridge/Texas Railroad Commission Ward County enforcement proceeding: outcome of the still-unscheduled hearing and potential precedent on operator liability for cumulative injection pressure effects on legacy wells.
• WaterBridge Speedway Phase II/III and Devon project: sanctioning and mid-2026 ramp-up amid continued northern Delaware Basin takeaway demand.
• Data-center cooling demand: commercial progress on treated produced water desalination for cooling and power generation, including Tetra’s Oasis platform.

VIII. How We Can Help

Davis Graham’s Energy & Mining, Environmental, and Water Law groups advise clients across the full produced water value chain – from upstream operators and midstream infrastructure developers to landowners, technology providers, investors, and critical minerals companies. Our team brings particular depth to this space: decades of experience in western water rights and environmental permitting; hands-on transactional work in midstream energy, critical minerals, and carbon management; and recognized capabilities in Tribal engagement and consultation, federal lands, and NEPA and NHPA compliance for resource extraction projects. We counsel on transactions, regulatory compliance and permitting, water rights, commercial agreements, environmental and water rights litigation and enforcement, and Tribal and public lands matters related to produced water, brine mineral development, and beneficial reuse projects.

For more information or if we can be of assistance, please contact a member of the Clean Energy & Sustainability Group.

This alert is intended to provide a general overview of the legal, regulatory, commercial, and transactional considerations relevant to produced water management, beneficial reuse, and critical mineral extraction across the U.S. It does not constitute legal, financial, or investment advice, and the appropriate approach will depend on the specific facts, jurisdiction, and circumstances applicable to each project.

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An environmental self-audit is a systematic, documented, and objective evaluation of how well an organization, its management systems, and its equipment perform and comply with federal, state, and local environmental statutes, regulations, and permit provisions. When conducted properly, these detailed self-assessments can identify areas of non-compliance, inefficiencies, and opportunities for improvement before they become costly compliance issues. More broadly, environmental self-audits also lead to improved protection of human health and the environment.

Many states have environmental audit laws and policies that incentivize voluntary self-evaluation by offering benefits such as possible penalty reduction or avoidance and immunity from enforcement.[1] State programs vary in both scope and benefit—some apply broadly across all state agencies, while others target specific areas of regulation, such as hazardous waste enforcement only, for example. State-level audit protections, where available, apply only to violations of that state’s environmental laws and regulations, including certain programs where states have delegated authority to administer federal regulatory programs on behalf of the U.S. Environmental Protection Agency (EPA). Importantly, however, state audit protections typically do not provide immunity from federal enforcement. And, in some instances, EPA maintains an independent right of enforcement, even in the case of delegation.

EPA also maintains its own environmental self-audit policy applicable to violations of major federal environmental laws such as the Clean Air Act and Clean Water Act.[2] The agency’s policy, however, offers discretionary rather than guaranteed protection, and its availability can shift with changing presidential administration priorities. State programs historically have provided more predictable opportunities for companies to mitigate enforcement risk through self-audit.

The current presidential administration has signaled a preference for companies that take a proactive “find and fix” approach to environmental compliance, creating a favorable environment for self-auditing at the federal level.[3] This convergence of state audit protections and a receptive federal posture presents a unique opportunity for companies to leverage both state and federal audit programs, where applicable and appropriate, to identify and mitigate compliance issues across multiple environmental media. Given this alignment, environmental self-audits are an especially valuable tool for companies to deploy now.

A given self-audit approach will vary based on company resources, applicable laws, regulatory agencies, and compliance goals. Self-audits can be broad—covering facilities in one or more states—or they can be more targeted—reviewing specific equipment, certain facilities, or areas of particular environmental concern. A typical self-audit will include review of site conditions and operations, applicable regulatory and legal requirements, environmental permits, facility records and reporting, and other relevant company reports and information.

Effective self-audits require a multidisciplinary team that typically includes facility personnel, consultants and other subject matter experts, and legal counsel. This collaborative approach ensures comprehensive coverage of multiple regulatory areas while minimizing blind spots that single-discipline reviews can often miss. Including legal counsel in the multidisciplinary team may also offer additional legal protections for the work. Under some, but not all, state self-audit programs, audit findings are shielded by statutory privilege, preventing their use by government agencies or adverse parties in litigation, but when audits are also conducted at the direction of legal counsel, attorney-client privilege and attorney work-product protections can offer another layer of protection for companies that choose to voluntarily assess their compliance status.

Through systematic self-audit, a company’s compliance team can identify and correct common problems before they become subject to enforcement. The team can then use audit data and findings to build or enhance targeted environmental monitoring and management programs. This proactive approach minimizes future government enforcement by ensuring early identification and correction of environmental compliance issues before discovery by regulatory compliance inspectors.

Enhanced environmental compliance can bolster a company’s reputation in the clean energy and sustainability industries, where stakeholders, and in some cases, shareholders, increasingly scrutinize environmental performance. In competitive markets, companies may be able to leverage a strong environmental compliance track record to outpace competitors. For example, Texas regulators have the discretion to expedite the permitting process and relax oversight for companies that engage in environmental audits.[4] This benefit provides a possible competitive advantage given that Texas leads in many energy technologies, including wind, solar, and battery storage. In many other states, a history of self-audit may improve a company’s credibility with regulators and ease relationships with enforcement and permitting agencies. Accordingly, companies that prioritize environmental audits position themselves for both regulatory success and market advantage in the evolving energy landscape.

Self-audits may also offer financial benefit through penalty avoidance. Under most federal and state audit laws, voluntarily disclosing and correcting a violation may eliminate or significantly reduce civil penalties. These penalties can otherwise amount to tens of thousands of dollars per day, per violation. Regulatory agencies frequently increase fines for repeat or knowing violations, and in some instances, agencies can bring criminal charges against companies and individuals with heightened culpability. Given these escalating penalty structures, self-disclosure of properly identified violations has the potential to provide significant financial benefit that often outweighs the cost of conducting the self-audit. Notably, some self-audit laws allow companies acquiring facilities through mergers and acquisitions to take advantage of audit incentives for noncompliance discovered during due diligence—making self-audits particularly valuable during or immediately after corporate transactions.

Self-audit benefits are heightened in the current political climate, where some state and federal officials have become critical of certain forms of energy, especially renewables. Penalty and privilege protections may help insulate companies if regulators engage in politically motivated enforcement actions targeting certain industries or companies.

Finally, beyond environmental regulation, improved compliance achieved through self-audit may also result in protection for companies in other regulatory areas. Environmental noncompliance has the potential to trigger employee complaints, enhanced customer or shareholder scrutiny, or enforcement from other agencies, such as the U.S. Occupational Safety and Health Administration, making environmental compliance a cornerstone of broader regulatory risk management.

In sum, environmental audits have the potential to offer companies a powerful combination of legal protection, financial savings, and competitive advantage—benefits that are increasingly valuable as energy markets expand and regulatory landscapes evolve. By proactively identifying and addressing compliance issues, companies have the opportunity to avoid costly penalties, shield sensitive findings under legal privilege, and demonstrate the environmental track record that investors, customers, and regulators increasingly demand.

For more information about environmental audits, state and federal self-disclosure programs, or how these tools can benefit your organization, please contact a member of the Environmental & Public Lands Group.

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[1] See, e.g., Colo. Rev. Stat. § 25-1-114.5; Tex. Health & Safety Code § 1101.001.

[2] https://www.epa.gov/compliance/epas-audit-policy.

[3] Memorandum from Craig J. Pritzlaff to OECA Office Directors and Deputies, Reinforcing a “Compliance First” Orientation for Compliance Assurance and Civil Enforcement Activities, U.S. Env’t Protection Agency (Dec. 5, 2025).

[4] See 30 Tex. Admin. Code § 60.3.

As interconnection queues swell and approval timelines stretch to five years or more, data center developers are increasingly turning to behind-the-meter generation to secure reliable power. While natural gas offers the fastest path, its carbon footprint clashes with net-zero commitments. Small modular reactors are emerging as a compelling carbon-free alternative. This article examines the current state of SMR deployment for data centers and the key regulatory considerations developers should keep in mind.

The Power Problem

American data centers consumed approximately 4% of total U.S. electricity in 2023, a figure projected to reach as high as 12% by 2028 as artificial intelligence workloads proliferate. A single large-scale AI training facility can demand 150-500 megawatts of continuous power. Yet FERC’s interconnection queues now contain over 2,600 gigawatts of proposed generation – more than twice the nation’s installed capacity – with average approval timelines stretching to five years.

These delays have driven data center developers toward behind-the-meter generation strategies: building or contracting for dedicated power sources that bypass the queue entirely. Natural gas is the fastest, most commercially proven option. But a 500 MW gas plant operating at 60% capacity factor emits roughly 1.5 million tons of CO₂ annually – a figure fundamentally at odds with the net-zero commitments that most major data center operators have made. Renewable behind-the-meter generation faces its own challenges: intermittency requires oversizing, storage, or backup, often making it more expensive and complex than gas.

This sustainability paradox – needing reliable power now while committing to decarbonization – is fueling serious interest in advanced nuclear technology, particularly small modular reactors (SMRs).

What SMRs Offer – and Where Things Stand

SMRs offer a potentially compelling package for data center power: carbon-free baseload generation, high projected capacity factors, compact site footprints relative to equivalent wind or solar installations, and modular factory fabrication that proponents contend will shorten construction timelines.

However, commercial SMR deployment remains in its early stages, and projected cost and timeline advantages have yet to be proven at scale. NuScale Power’s cancellation of the UAMPS Carbon Free Power Project in November 2023 – after years of development – illustrated the gap between aspiration and execution.

Several developers are nonetheless moving forward with data-center-focused plans. X-energy has partnered with Amazon, which anchored approximately $500 million in Series C-1 financing, targeting up to 5 GW of new nuclear capacity by 2039. NuScale has announced plans to deploy its NRC-certified SMR technology for data center operator Standard Power at two facilities in Ohio and Pennsylvania, targeting nearly 2 GW of clean energy for data center loads. And TerraPower broke ground on its 345 MW Natrium demonstration reactor at a retired coal plant in Kemmerer, Wyoming, in June 2024.

Realistic industry projections place first commercial SMR units in the early 2030s, though most industry observers suggest that mid-2030s is more likely for broad commercial availability.

The Regulatory Landscape

Developers considering SMR-powered data centers should anticipate navigating several overlapping regulatory regimes:

NRC Licensing. All commercial nuclear facilities require Nuclear Regulatory Commission licensing – a multi-year process addressing safety, security, environmental impacts, and design certification. This is the most significant timeline constraint for any SMR project.

FERC Jurisdiction. SMRs interconnected to the transmission system will likely trigger FERC jurisdiction over wholesale sales, consistent with the principles FERC has articulated in recent orders addressing co-located data center loads – including the November 2024 Talen Energy order and the December 2025 PJM co-located load order. However, radial-connected SMRs serving dedicated loads may avoid wholesale jurisdiction depending on how the arrangement is structured.

State Siting. States retain authority over siting and economic need for generation facilities, and the landscape varies considerably. Wyoming and Utah maintain nuclear-supportive regulatory environments – TerraPower’s Kemmerer project reflects Wyoming’s receptiveness. Colorado added nuclear to its statutory definition of “clean energy” in 2025, making it eligible for clean energy project financing. Texas has moved most aggressively, establishing a $350 million Texas Nuclear Development Fund in June 2025 – described by Governor Greg Abbott as the largest state-level nuclear commitment in the country – following its Advanced Nuclear Reactor Working Group’s release of a comprehensive deployment roadmap in November 2024.

Self-Supply Classification. SMRs purpose-built to serve data centers likely constitute self-supply exempt from utility regulation, provided sufficient ownership integration exists between the generation facility and the consuming load. How ownership and offtake arrangements are structured from the outset will be critical to maintaining this classification.

What Developers Should Be Doing Now

Although commercial SMR deployment is years away, the groundwork – site identification, NRC pre-application engagement, state regulatory positioning, and corporate partnership structures – requires significant lead time. A few practical considerations:

First, jurisdictional selection matters. Texas’s ERCOT market avoids FERC wholesale jurisdiction entirely and now offers dedicated nuclear funding. Wyoming’s minimal regulatory barriers and existing advanced nuclear presence create a supportive ecosystem. Developers should match jurisdictional frameworks to project characteristics and timelines early in the planning process.

Second, transaction structure determines regulatory outcomes. The recent FERC orders on co-located loads make clear that how ownership, interconnection, and power delivery are arranged dictates whether federal wholesale jurisdiction is triggered. Thoughtful structuring at the outset is far less costly than retrofitting a deal after the fact.

Third, regulators are increasingly attentive to large loads that island themselves from the grid. Developers planning SMR-powered data centers should consider voluntary grid support commitments – demand response, emergency generation, reliability contributions – that build goodwill and may prove decisive in siting proceedings.

Finally, the regulatory frameworks for SMRs serving dedicated loads remain largely undeveloped. Current rules assume grid-connected facilities selling to multiple customers. Developers and energy providers have a meaningful opportunity to help shape these emerging frameworks through comment proceedings and direct regulatory engagement – including the national rulemaking on large load interconnection that Secretary of Energy Chris Wright directed FERC to initiate in October 2025.

Davis Graham’s Clean Energy & Sustainability Group counsels clients across a broad range of clean energy matters, including project development, permitting, and regulatory compliance. Contact R.J. Colwell or a member of the group for guidance on structuring SMR-powered data center projects or navigating these evolving regulatory pathways.

1. Reflecting on your time at Davis Graham, what was the most valuable lesson you learned?
   • Figure out how to practice the way that works best for you. Take what you like from others, avoid what you don’t like, put all that together with your own strengths and weaknesses. I think “authenticity” is the applicable buzzword. 
2. What are some pro bono or community service experiences that have had a significant impact on your career? What did you learn from these opportunities, and how have they influenced your path?
   • The City Attorney’s trial advocacy program and the US District Court’s pro bono panel program. I learned from my mistakes. I learned to do more with less. I had a lot of fun. I gained experience that helped opened doors to work for paying clients. 
3. What is the biggest difference between working at Davis Graham and being Assistant General Counsel of a Fortune 500 company?
   • People. More people = more personalities, more complexity, more process, procedure, and politics, more time and effort spent figuring out how best to communicate with all the people. 
4. Who are some of the people at Davis Graham that had the greatest influence on you and why?
   • This question is a trap. See the first question and answer. There’s no better group of people to help you work towards being the best lawyer you can be. 

Table of Contents

• SEC Withdraws 14 Rule Proposals
• SEC Signals Expanding Retail Investor Access to Private Funds Through Certain Fund of Funds
• SEC Extends Compliance Deadline for Form N-PORT
• SEC Extends Compliance Deadline for Form PF
• SEC Charges Individual and His Advisory Firm with Fraud and Other Violations

SEC WITHDRAWS 14 RULE PROPOSALS

In June 2025, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) announced that it was withdrawing 14 rule proposals (the “Proposals”) issued during the prior administration. A table detailing each withdrawn Proposal and the applicable SEC division is listed below.

The final rule announcing the SEC’s withdrawal of the Proposals included that the Commission is withdrawing the Proposals because it no longer intends to issue final rules on the Proposals. In the event the Commission determines to pursue regulatory action in the areas covered by a Proposal, the Commission will publish a new proposed rule or other issuance.

Rule Name	Division
Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8	Corporation Finance
Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers	Trading and Markets, Investment Management
Safeguarding Advisory Client Assets	Investment Management
Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies	Investment Management
Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices	Investment Management
Outsourcing by Investment Advisers	Investment Management
Position Reporting of Large Security-Based Swap Positions	Trading and Markets
Volume-Based Exchange Transaction Pricing for NMS Stocks	Trading and Markets
Regulation Best Execution	Trading and Markets
Order Competition Rule	Trading and Markets
Regulation Systems Compliance and Integrity	Trading and Markets
Cybersecurity Risk Management Rule for Broker-Dealers, Clearing Agencies, Major Security-Based Swap Participants, the Municipal Securities Rulemaking Board, National Securities Associations, National Securities Exchanges, Security-Based Swap Data Repositories, Security-Based Swap Dealers, and Transfer Agents	Trading and Markets
Amendments Regarding the Definition of “Exchange” and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities	Trading and Markets
Regulation ATS for ATSs That Trade U.S. Government Securities, NMS Stock, and Other Securities; Regulation SCI for ATSs That Trade U.S. Treasury Securities and Agency Securities; and Electronic Corporate Bond and Municipal Securities Markets	Trading and Markets
Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail To Enhance Data Security	Trading and Markets

SEC SIGNALS EXPANDING RETAIL INVESTOR ACCESS TO PRIVATE FUNDS THROUGH CERTAIN FUND OF FUNDS

In remarks at the Practicing Law Institute’s SEC Speaks Conference held in Washington D.C. on May 19-20, 2025 (the “SEC Speaks Conference”), the staff of the SEC indicated that they have reconsidered a long-standing staff position that prevents certain closed-end funds from investing in private funds, opening the door for registered funds of private funds to be offered broadly to “retail investors.” Generally, retail investors are those who do not satisfy the “accredited investor” standard under Rule 501 of Regulation D under the Securities Act of 1933. The accredited investor test currently includes, among others, individuals who meet certain professional qualifications or have a net worth over US $1 million (excluding their primary residence) or income over US $200,000 (or US $300,000 if they file jointly with a spouse or partner) in each of the previous two years.

Since 2002, the SEC staff has taken the position that closed-end funds investing in underlying private funds (like hedge funds and private equity funds) must either: (1) limit such investments to no more than 15% of its assets or (2)(a) restrict sales of its own shares to investors that satisfy the accredited investor standard and (b) impose a minimum initial investment requirement of $25,000. Underlying private funds for these purposes are generally defined as investment companies but for the exclusions specified in sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940.

Historically, the staff’s position was enforced through the SEC’s registration statement review process. For certain closed-end funds investing in private funds, the SEC required this limitation in their registration statements to declare them effective.

In a speech at the SEC Speaks Conference on May 19, 2025, SEC Chairman Paul Atkins called for the SEC to reconsider the 23-year-old policy regarding investments by closed-end funds in private funds to expand retail access to private markets and “give all investors the ability to seek exposure to a growing and important asset class, while still providing the investor protections afforded to registered funds.” 

In contrast to Chairman Atkins’s speech, Commissioner Caroline Crenshaw’s remarks at the SEC Speaks Conference on May 19, 2025, highlighted the risks inherent in removing the private fund investment limitation policy for retail investors, stating that “private markets are inherently riskier, entail less disclosure, and require a higher tolerance for volatility and illiquidity,” and warning that “private markets are not designed for the average Main Street investor.”

SEC Director of Investment Management Natasha Vij Greiner participated in a panel discussion with senior SEC staff members the next day at the SEC Speaks Conference. During this discussion, she announced that starting May 19, 2025, the SEC staff will no longer provide comments during the registration statement review process seeking to limit the ability of retail investors to invest in registered closed-end funds that invest more than 15% of their net assets in underlying private funds. Director Greiner noted that the “decision was made based on the ever-evolving industry, and we hope that this shift will provide investors with new investment opportunities to the extent they align with their risk tolerance and investment objectives.”

Without the above investment requirements imposed by accredited investor limitations, retail investors may gain greater access to private market exposure as the new staff position expands the universe of products that may be offered to retail investors who do not satisfy the accredited investor criteria.

Without the above minimum investment and accredited investor requirements, retail investors may gain greater access to private market exposure as the new staff position expands the universe of closed-end fund products and offerings available to them.

SEC EXTENDS COMPLIANCE DEADLINE FOR FORM N-PORT

In August 2024, the SEC adopted amendments to Form N-PORT. Form N-PORT is generally used by a mutual fund or certain exchange-traded funds (other than a money market fund or a small business investment company) to file monthly portfolio holdings risk metrics, and other data about the fund’s operations. The amendments require registered funds to file Form N-PORT on a monthly basis, rather than quarterly.

In April 2025, the SEC extended the compliance deadline for the Form N-PORT monthly filing requirement. For registered funds with $1 billion or more in assets as of the end of their most recent fiscal year, the filing deadline was extended from November 17, 2025 to November 17, 2027. For smaller funds (funds with less than $1 billion in assets as of the end of their most recent fiscal year), the filing deadline was extended from May 18, 2026 to May 18, 2028.

The compliance deadline may be further revised following the review process mandated by the January 2025 executive order by President Trump. Under the executive order, federal regulations that are not yet effective are to be paused to “[review] any questions of fact, law, and policy that the rules may raise.”

The compliance deadline for reporting requirements under Form N-CEN, however, has not been extended. Registered investment companies must file Form N-CEN on an annual basis, and the form includes basic fund information including the fund’s structure, service providers, and compliance practices.

The new reporting requirements under Form N-CEN, which were adopted by the SEC mandate the disclosure of liquidity service providers. Such disclosure must include the providers’ name, identifying information, the location and the asset classes for which they supply liquidity classifications, and a specification of whether the provider is affiliated with the fund or adviser. The compliance deadline for these new reporting requirements is November 17, 2025.

SEC EXTENDS COMPLIANCE DEADLINE FOR FORM PF

In June 2025, the SEC, together with the U.S. Commodity Futures Trading Commission, voted to extend the compliance deadline for amendments to Form PF. Certain investment advisers to private funds must file Form PF with the SEC and the data (which includes information about the structure, activities, and risk profiles of private funds) is used for the purpose of monitoring systemic risk in the financial system.

The amendments to Form PF were adopted on February 8, 2024, and the original compliance deadline was March 12, 2025. The compliance deadline was previously extended to June 12, 2025. The deadline was further extended to October 1, 2025.

SEC CHARGES INDIVIDUAL AND HIS ADVISORY FIRM WITH FRAUD AND OTHER VIOLATIONS

In March 2025, the SEC announced that it filed charges against an individual (“Defendant 1”) and his investment advisory firm (“Defendant 2” and together with Defendant 1, the “Defendants”) in connection with the operation of a mutual fund (the “Fund”).

According to the SEC’s complaint (the “Complaint”), since the Fund’s inception in 1998 until February 27, 2020, the Fund’s statement of additional information (the “SAI”) disclosed that the Fund had a fundamental investment policy that the Fund may not invest more than 25% of its total assets in securities of companies principally engaged in any one industry (the “Concentration Policy”), which could not be changed without the approval of a majority of the outstanding voting securities of the Fund. The Complaint noted that while the Fund’s SAIs filed in 2021, 2022, and 2023 reflected that the Fund’s Concentration Policy was subject to a 50% limit, the Defendants did not obtain shareholder approval to change the Fund’s Concentration Policy.

In 2018 and 2019, the SEC’s Division of Examinations (“EXAMs”) examined the trust, of which the Fund was a series (the “Trust”). At the close of the examination, EXAMs staff sent Defendant 1 a deficiency letter (the “Deficiency Letter”) detailing certain deficiencies and weaknesses identified by EXAMs staff, including that the Fund had violated its 25% Concentration Policy and used inconsistent industry classifications in different reporting periods. According to the Complaint, the Deficiency Letter also included that EXAMs staff had reviewed minutes of a meeting of the Board of Trustees of the Trust (the “Board”) indicating that the investment advisory agreement and administration contract between the Trust and Defendant 2 were “pre-approved” as of October 1, 2018, but that no documentation accompanied the minutes to substantiate the Board’s renewal of the contracts.

From 2019 to 2021, the SEC’s Division of Enforcement investigated the Defendants, focusing on many of the topics covered by the Deficiency Letter. Without admitting or denying the Commission’s findings, the Defendants consented to the entry of an order in 2021 (the “2021 Order”) that found that the Defendants violated the Concentration Policy between July 2017 and June 2020 by concentrating more than 25% of the Fund’s total assets in one industry, and in doing so, Defendants committed fraud and breached fiduciary duties to the Fund (among other securities law violations). The Complaint alleges that Defendants continued to invest more than 25% of the Fund’s total assets in a single company and in a single industry during certain periods after the 2021 Order.

The Complaint further alleges that between November 24, 2021 through at least June 23, 2024, the Defendants engaged in two sets of misconduct with respect to the Board, including that (a) the Defendants failed to provide or withheld key information from the Board, including information “reasonably necessary for the Board to evaluate the terms of [the firm’s] advisory contract,” which was not put to a vote and which Defendant 1 misrepresented in the Fund’s filings, and misleading the Board about the Defendants’ past securities law violations and (b) that Defendants hired an accountant to audit each series of the Trust, without first obtaining Board approval, as required by the Investment Company Act.

As further detailed in the Complaint, the SEC is requesting the court to enter a final judgment: (i) permanently enjoining the Defendants and their agents, servants, employees and attorneys and all persons in active concert or participation with any of them from violating, directly or indirectly, certain federal securities laws, (ii) ordering the Defendants disgorge all ill-gotten gains they received directly or indirectly, with pre-judgment interest thereon, as a result of the alleged violations under certain sections of the Exchange Act and Investment Company Act of 1940, (iii) ordering the Defendants to pay civil monetary penalties; and (iv) and any other and further relief the court may deem just and proper.

UPCOMING CONFERENCES

2025
Date	Host*	Event	Location
8/20	MFDF	Director Discussion Series – Open Forum	Columbus, OH
9/3	MFDF	The Audit Committee Chair’s Guide to Balancing Duties and Emerging Issues	Columbus, OH
9/8-10	ICI/IDC	ETF Conference	Nashville, TN
9/10	MFDF	Series Trust Funds – Compliance and Board Reporting	Webinar
9/11	MFDF	In Focus: Board Oversight of DEI in Current Landscape	Virtual
9/16	MFDF	MFDF 15(c) White Paper Webinar Series: Part 4 – Enforcement Action Takeaways	Webinar
9/23	MFDF	Latest in Closed-End Funds Litigations	Webinar
9/24	MFDF	Fixed Income Insights: Navigating Market Trends & Opportunities	Webinar
9/29	MFDF	Risk Management Essentials for RICs and Boards	Webinar
10/1	MFDF	Diligent – Tools for Fund Board Book	Webinar
10/5-8	ICI/IDC	Tax and Accounting Conference	Palm Desert, CA
10/14	MFDF	Essential Strategies in Board Oversight of Operational Risk Management	Webinar
10/15	MFDF	Series Trust Funds – Effective Board Relationship with Advisers	Webinar
10/27-29	ICI/IDC	Fund Directors Conference	Scottsdale, AZ
11/5	MFDF	In Focus: Audit Committee Chair	Virtual
11/13	MFDF	Mutual Fund CCO Compensation: The MPI Annual Survey Update	Webinar
11/20	ICI/IDC	2025 Closed-End Fund Conference	New York, NY

2026
Date	Host*	Event	Location
1/26-28	MFDF	2026 Directors’ Institute	Naples, FL
2/3-5	ICI/IDC	2026 ICI Innovate	Houston, TX
3/5	MFDF	2026 Fund Governance & Regulatory Insights Conference	Washington, DC
3/22-25	ICI/IDC	Investment Management Conference	Palm Desert, CA
4/29 – 5/1	ICI/IDC	Leadership Summit	Washington, DC
4/29 – 5/1	ICI/IDC	Fund Directors Workshop	Washington, DC
9/15-17	ICI/IDC	ETF Conference	Nashville, TN
9/27-30	ICI/IDC	Tax and Accounting Conference	Marco Island, FL
10/25-28	ICI/IDC	Fund Directors Conference	Scottsdale, AZ
11/10	ICI/IDC	Closed-End Fund Conference	New York, NY

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

© 2025, 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.

CONTACT US
Peter H. Schwartz
Alena Prokop
Stephanie Danner
Martine Ventello
Mackenzie Coupens

The Colorado General Assembly’s First Regular Session convened on January 8, 2025, and adjourned on May 7, 2025, with over 650 bills introduced. The 2025 General Assembly considered a number of environmental and energy-focused legislation, some of which Governor Polis signed into law and some of which were either vetoed or failed to advance. A number of bills passed both houses and await signature or veto. Below is a summary of notable legislation.

Bills Signed Into Law

• HB25-1040 – Adding Nuclear Energy as a Clean Energy Source. This legislation, sponsored by Reps. Alex Valdez (D) and Ty Winter (R) and Sens. Dylan Roberts (D) and Larry Liston (R), amends the statutory definition of clean energy to include nuclear energy under state law, making it eligible for clean energy project financing and allowing qualifying utilities to use it to meet the state’s 2050 clean energy target. Governor Polis signed the bill into law on March 31, 2025.
• HB25-1077 – Backflow Prevention Devices Requirements. The bill, sponsored by Reps. Tisha Mauro (D) and Rick Taggart (R) and Sens. Nick Hinrichsen (D), removes licensure requirements for individuals who inspect, test or repair backflow devices.  Under current law, individuals who install, remove, inspect, test or repair backflow protection devices are subject to licensure requirements for plumbers. The legislation exempts individuals engaged in the business of inspecting, testing, or repairing backflow prevention devices from licensure requirements but retains the licensure requirements for individuals engaged in the installation or removal of the devices. The purpose of the legislation is to provide more flexibility for qualified professionals while maintaining standards for public water system protection and is a response to confusion and compliance issues under the prior version of the law. Governor Polis signed the bill into law on March 28, 2025.

Enrolled Bills

• HB25-1165 – Geologic Storage Enterprise and Geothermal Resources. The bill, sponsored by Reps. Amy Paschal (D) and Matt Soper (R) and Sens. Cleave Simpson (R) and Cathy Kipp (D), creates the geologic storage stewardship enterprise in the Department of Natural Resources to manage geologic storage of carbon dioxide in the state, including plugging, abandoning and reclaiming geologic storage facilities. The stewardship will collect fees from operators of geologic storage facilities in the state and require them to pay annual stewardship fees for each ton of carbon dioxide they inject into geologic storage in the state. The bill also identifies how long-term stewardship of geologic storage locations will be managed. Finally, the bill updates laws concerning underground geothermal resources, including by exempting certain geothermal operations from needing a well permit from the state engineer and clarifying that the authority to regulate shallow geothermal operations is shared by the state engineer and the state board of examiners. The bill was enrolled on April 11, 2025.
• HB25-1269 – Building Decarbonization Measures. The bill, sponsored by Reps. Jenny Willford (D) and Alex Valdez (D) and Sens. Matt Ball (D) and Cathy Kipp (D), updates energy performance standards for certain buildings, including a requirement to meet 2040 performance standards and revising civil penalties for violations. The bill also creates a decarbonization enterprise to provide financial assistance, technical assistance, and other programmatic assistance to covered building owners to effectively and efficiently implement building decarbonization measures, including energy efficiency measures, electrification measures, energy upgrades, and participation in utility on-bill repayment programs. The enterprise is authorized to impose and collect from covered building owners an annual building decarbonization fee to cover the enterprise’s costs in providing the financial, technical, and programmatic assistance. The bill was enrolled on May 7, 2025.
• SB25-054 – Mining Reclamation and Interstate Compact.  The bill, sponsored by Sens. Cleave Simpson (R) and Jeff Bridges (D) and Reps. Matthew Martinez (D) and Karen McCormick (D), amends the Colorado Mined Land Reclamation Act and the Colorado Land Reclamation Act for the Extraction of Construction Materials to contemplate the expedited issuance of reclamation-only permits on less than 5 acres and updates restrictions and requirements concerning financial assurance for mine reclamation projects.
• SB25-182 – Embodied Carbon Reduction. The bill, sponsored by Sens. Matt Ball (D) and Cleave Simpson (R) and Reps. Kyle Brown (D) and Ron Weinberg (R), add embodied carbon improvements to the list of new energy improvements that are eligible for property-assessed clean energy financing provided by the Colorado new energy improvement district. An embodied carbon improvement is one or more installations or modifications to real property using eligible materials that result in the reduction of the installation’s or modification’s embodied emissions. The bill also modifies the industrial clean energy tax credit so that embodied carbon investments are greenhouse gas emissions reduction improvements. An embodied carbon investment is one that results in a 15% or greater reduction in cradle-to-gate embodied emissions of eligible materials when compared to the eligible materials’ cradle-to-gate baseline. The bill was sent to the Governor for signature.
• SB25-305 – Water Quality Permitting Efficiency. The bill, sponsored by Sens. Barbara Kirkmeyer and Jeff Bridges (D) and Reps. Shannon Bird (D) and Rick Taggart (R), aims to improve the efficiency of Colorado’s water quality permitting process by requiring CDPHE to streamline permit reviews, address backlogs, and provide greater transparency to permittees. It mandates rulemaking deadlines for timeframes on permit actions, allows for third-party technical assistance when applications are delayed, and ensures financial considerations for local governments when imposing new water treatment requirements. The bill also reallocates and appropriates millions in state funds to support these initiatives and adjusts related budget items accordingly.

Bills That Failed

• HB25-1099 – Water Quality Data Standards. The bill, introduced by Reps. Tisha Mauro (D) and Rick Taggart (R) and Sen. Nick Hinrichsen (D), would have required the Water Quality Control Commission to issue, on or before January 1, 2027, written guidance specific to the development of total maximum daily loads (“TMDLs”) (i.e., the daily maximum amount of a pollutant from all sources that is allowed to enter state water so that an applicable water quality standard is met).  The bill also would have required the Colorado Department of Public Health and Environment to determine, on or after January 1, 2028, a TMDL for state waters using credible data. The bill did not make it out of the House Committee on Energy and Environment. The bill was enrolled by the House on April 11, 2025.
• HB25-1119 – Require Disclosure of Climate Emission. The bill, introduced by Rep. Manny Rutinel (D), would have required entities doing business in Colorado that have a total revenue exceeding $1 billion in the preceding calendar year to disclose information concerning greenhouse gas emissions. The bill did not make it out of the Committee on Energy and Environment.
• HB25-1241 – Public Accessibility of Emissions Records. The bill, introduced by Reps. Bob Marshall (D) and Lorena Garcia (D) and Sens. Lisa Cutter (D) and Cathy Kipp (D), would have required stationary sources to maintain and make publicly available records that help the public determine whether the owner or operator is in compliance with air quality standards.
• SB25-117 – Reduce Transportation Costs Imposed by Government. The bill, introduced by Sen. Scott Bright (R), would have repealed certain transportation-related fees, including road use fees, fees on short-term vehicle rentals, passenger per-ride fees on car shares, and the waste tire enterprise fee on purchase of new motor vehicle and trailer tires.
• SB25-137 – Greenhouse Gas Credits for Water Quality Projects. The bill, introduced by Sen. Cleave Simpson (R), concerned eligibility for the greenhouse gas credit trading program for water quality green infrastructure projects that create greenhouse gas credits. The bill did not make it out of the Senate Committee on Transportation and Energy.

Renewable energy in the U.S. (and around the globe) is booming. Over the past decade, renewable energy generation across the country—primarily driven by solar, wind, and geothermal—has more than tripled. The U.S. Energy Information Administration, an agency of the Department of Energy, projects renewables deployment to grow to 59 gigawatts and account for more than a quarter of U.S. electricity generation in 2025. Although it is yet to be seen how the Trump Administration’s policies and actions will ultimately impact renewable energy in the U.S., it is safe to say that development of wind, solar, geothermal, and other renewable energy projects will continue to grow.

However, even though renewable energy in the U.S. is surging, fewer than one-fifth of proposed renewable energy projects actually reach commercial operation, according to research from the Lawrence Berkeley National Laboratory and several other sources. Project cancellations and delays can result in millions of dollars in sunk costs and a plethora of other wasted resources. Two of the leading causes of project disruptions, delays, and cancellations are: (1) onerous local regulation and permitting requirements; and (2) community opposition. Other hurdles include interconnection issues, shortage of skilled labor, lack of funding, and environmental restrictions.  But the first two enumerated are the most common and most difficult to predict and navigate. Below is a brief summary of these two crucial and ever-evolving topics, as well as several key considerations, strategies, and tips every developer should understand and employ when navigating these issues.

Local Control and Controversy

The majority of states, including Colorado, give principal jurisdiction over siting and permitting of renewable energy projects—mainly wind, solar, and battery storage—to local authorities. In Colorado, the primary use or development permit usually will be obtained from the County government, which comes in the form of a conditional use permit (“CUP”), special use permit (“SUP”), or what is known as a “1041 Permit.”[1] The requirements for approval and regulations applicable to renewable energy projects under local laws differ from county to county and state to state. And in some instances, usually wind facilities, a project may span several counties or even states. This local permitting process (aside from any other permitting and approval requirements) can take many months to years to complete.

Local governments generally view their authority and jurisdiction very broadly, sometimes demanding more than the law requires or allows. Over the last several years, this legal overstepping on the part of local governments—which may have little to no experience in the development and regulation of renewable energy projects—appears to be increasing in frequency and extent. Two primary examples are:

1. Assessment of excessive permit or impact fees. Counties more frequently are assessing impact fees in the hundreds of thousands, millions, and even tens of millions of dollars. This is done by assessing a dollar amount per megawatt (“MW”) (e.g., $10,000/MW) or a percentage (e.g., 1-2%) of total construction costs for a project. These fees—which are not tied to the actual impacts of a project—often are legally indefensible on multiple grounds, including running afoul of U.S. Supreme Court case law on unconstitutional takings.[2]
   
2. Unreasonable permit conditions and project requirements. Such permit conditions can take many forms, such as overly burdensome and unjustified mitigation measures, unlawful funding and reimbursement provisions, and requiring developers to construct or fund infrastructure or community improvements unrelated to the permitted project, among a variety of other things (e.g., requiring that all or most of hired labor have a permanent zip code within the county).

The burdensome, complex, time-consuming, and costly local permitting process is a primary impediment to renewable energy project success in Colorado and beyond, resulting in significant project delays and frequent project cancellations.

Community Opposition

The above-mentioned permitting process heightens public awareness of renewable energy projects and, more importantly, includes a legally prescribed public notice and participation component. This includes public notice, comment and hearing requirements, which provides the public an opportunity to submit written comments to the government and to speak out at public hearings. The public—as well as permittees and other stakeholders (e.g., environmental groups and tribes)—also can file administrative or judicial challenges to approved projects and permits after they are issued.[3]   

At the local level, community involvement, influence and impact can be magnified, particularly in smaller communities (where renewable energy projects often are sited). And although public support for renewable energy historically has been favorable, recent surveys and reports indicate that community opposition and controversy is “widespread and growing” (which the author of this article can confirm from direct experience).[4] Community opposition can result in significant project delays, more stringent permit requirements, scaled down projects, and even project abandonments.

Considerations, Strategies, and Tips to Navigate These Impediments and Maximize Project Success

Local control and community input will always be present and will continue to present challenges to renewable energy developers and project proponents. But that doesn’t mean developers are simply at the mercy of County governments and vocal residents. On the contrary, early identification and consistent execution of a strategic and calculated approach to project development can avoid significant pitfalls and help ensure project success.    

Some valuable considerations, strategies, and tips include:  

• Fully Understand the Regulatory Universe.  It is imperative that developers fully understand the regulatory landscape governing a project from inception to decommissioning—on the local, state, federal, and tribal levels. This includes a forecast of potential regulatory changes and policy shifts, such as permitting reforms at the state level (which is occurring in Colorado) and moratoriums, among other things. Understanding all permitting, regulatory, and other requirements from the outset allows developers to identify and address potential bottlenecks and hurdles (or even deal breakers) early on. It is best to put this in writing at project inception, such as through a comprehensive permitting and regulatory memorandum or matrix, which should be regularly updated.

• Build a Comprehensive Team. Project proponents should build a comprehensive team early on in the development process, consisting of in-house representatives, appropriate consultants, and outside legal counsel, among others. Although this may be more resource intensive, it ensures the right people are involved early on to identify and evaluate significant project issues and hurdles and avoids hasty onboarding when issues do come up, which can lead to missteps and mistakes.

• Coordination with Local Authorities. Early, frequent, and transparent communication and coordination with local regulators is key. The goals here are to establish rapport, define a comprehensive permitting strategy and timeline, and identify issues and challenges. Working collaboratively with the local government often results in a more streamlined and favorable process and outcome.

• Community Engagement. As with the local government, early, often, and significant community engagement is of vital importance. Identifying and addressing community input and concerns early on can minimize significant issues and opposition during the development and permitting process. When the community feels like they are heard and involved—rather than kept in the dark or misled—project opposition can be minimized or avoided altogether. In addition, community engagement can garner substantial support for a project, which can have significant positive impacts on the development and permitting process.

• Be Prepared to Seek and/or Defend Against Legal Recourse. Legal challenges to renewable energy projects are on the rise, by both project proponents and opponents.[5] Throughout the entire process, developers should provide and maintain a robust record of proof, compliance, objections, positions, etc. to, among other things, support any claims or defenses in potential legal challenges. Similarly, developers should continually evaluate any legal claims they may assert or need to defend against in relation to their projects with in-house and outside counsel.

Again, local regulatory challenges and community opposition often are inevitable.  But employing the above strategies can help streamline the process, minimize challenges and disputes, and set developers up for successful project completion.

---

[1] A “1041 Permit” obtained under “1041 Regulations” refers to a specific permitting process, authorized by House Bill 1041 and codified at C.R.S. §§ 24-65.1-101 to -108, allowing local governments to regulate development activities that have statewide impacts or are considered to be of state interest.  The 1041 statute allows local governments to regulate—in almost any way they see fit—projects like major water and sewage systems, highways, and “major facilities of a public utility,” the latter of which has been interpreted to include wind, solar, battery storage, and other renewable energy facilities.  As an alternative to a CUP, SUP, or 1041 Permit, developers can enter into a development agreement with the local government, but this mechanism is less frequently used to authorize and regulate renewable energy projects.

[2] See, e.g., Sheetz v. County of El Dorado, 601 U.S. 267 (2024).

[3] See, e.g., C.R.C.P. 106(a)(4) (authorizing individuals and entities to challenge decisions that are judicial or quasi-judicial in nature made by a governmental body or official).

[4] See, e.g., Eisenson, et al., Opposition to Renewable Energy Facilities in the United States: June 2024 Edition, Sabin Center for Climate Change Law (June 2024).

[5] See, e.g., Davis Graham Osage Wind Update; Kiowa County Sued Separately by Invenergy & Northern Cheyenne Tribe Threatening Renewable Energy Projects (Apr. 26, 2024).

Table of Contents

• SEC Updates the Marketing Rule FAQs
• SEC Announces Cyber and Emerging Technologies Unit
• SEC Delays Names Rule, Form PF, and Form SHO Compliance Dates
• SEC Issues No-Action Letter and CD&Is on Rule 506(c) Offerings

SEC UPDATES THE MARKETING RULE FAQS  

The Marketing Rule (Rule 206(4)-1 under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”)) was adopted in December of 2020 and became effective on May 4, 2021.  The Marketing Rule created a single rule governing investment advisor marketing by replacing the then-existing rules on advertising and cash solicitation. The Marketing Rule regulates advisers’ marketing communications to seek to prevent fraudulent, deceptive, or manipulative practices in marketing and advertisements.

Since the Marketing Rule’s adoption, many investment advisors have had interpretative questions about compliance with the rule. In response, the Securities and Exchange Commission (the “SEC”) staff (the “Staff”) provided from time to time responses to frequently asked questions (“FAQs”) about the rule. The Staff continues to update these FAQs, with the most recent update being released on March 19, 2025. These Staff’s interpretations and clarifications are not binding on the SEC, nor do they modify the existing obligations and statutes; they are only intended to assist investment advisers in navigating the Marketing Rule.

Extracted Performance

When displaying extracted performance (defined in the Advisers Act as the performance results of a subset of investments extracted from a portfolio), the Marketing Rule generally requires the net performance of one investment or a group of investments from a private fund or other portfolio to be shown alongside the gross performance. However, the Staff has indicated that they would not recommend enforcement, and advisers may present gross performance alone, if the following conditions are met:

• the extracted performance is clearly identified as gross performance;
• the extracted performance is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
• the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance; and
• the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance is calculated.

Portfolio or Investment Characteristics

The Staff has recognized that calculating net versions of portfolio characteristics such as yield and volatility can be impractical. Accordingly, the Staff has advised that it would not recommend enforcement if an adviser presents gross characteristics without net equivalents, provided they follow the following specific disclosure and comparison requirements:

• the gross characteristic is clearly identified as being calculated without the deduction of fees and expenses;
• the characteristic is accompanied by a presentation of the total portfolio’s gross and net performance consistent with the requirements of the rule;
• the total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the gross characteristic; and
• the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the characteristic is calculated.

Compliance with General Prohibitions of Rule 206(4)-1(a) and Sections 206(1) and 206(2) of the Advisers Act

The Staff reiterated that advertisements must still comply with the general prohibitions of the Marketing Rule itself and Sections 206(1) and 206(2) of the Advisers Act (which make it unlawful for an investment adviser to (i) employ a scheme to defraud clients or (ii) engage in a transaction or practice which operates as a fraud or deceit to clients, in each case through the use of mail or any means of interstate commerce).

SEC ANNOUNCES CYBER AND EMERGING TECHNOLOGIES UNIT

On February 20, 2025, the SEC announced the creation of the Cyber and Emerging Technologies Unit (the “CETU”), which will focus on “combatting cyber-related misconduct and to protect retail investors from bad actors in the emerging technologies space.” The CETU will replace the SEC’s current Crypto Assets and Cyber Unit.

The Press Release announcing the CETU’s formation included that the CETU will combat misconduct related to securities transactions in the following priority areas:

• Fraud committed using emerging technologies, such as artificial intelligence and machine learning;
• Use of social media, the dark web, or false websites to perpetrate fraud;
• Hacking to obtain material nonpublic information;
• Takeovers of retail brokerage accounts;
• Fraud involving blockchain technology and crypto assets;
• Regulated entities’ compliance with cybersecurity rules and regulations; and
• Public issuer fraudulent disclosure relating to cybersecurity.

SEC DELAYS NAMES RULE, FORM PF, AND FORM SHO COMPLIANCE DATES

Names Rule

On March 14, 2025, the SEC announced a six-month extension of the compliance date for amendments to Rule 35d-1 under the Investment Company Act of 1940 (the “1940 Act”) and related Form N-PORT reporting requirements (collectively, the “Names Rule Amendments”). The compliance date was extended from December 11, 2025 to June 11, 2026 for fund groups with net assets of $1 billion or more as of the end of their most recent fiscal year, and from June 11, 2026 to December 11, 2026 for fund groups with less than $1 billion in net assets as of the end of their most recent fiscal year.

Continuously offered funds, including open-end funds, generally update their prospectuses annually to comply with the requirement of the Securities Act of 1933 (the “Securities Act”) that information in a fund’s registration statement is no more than sixteen months old. Under the original compliance date requirements, if a fund’s annual update to its registration statement was due prior to the initial compliance date, the fund would have to either (i) comply early to include accurate disclosure regarding the fund’s 80% investment policy in that annual amendment, or (ii) incur the cost of an off-cycle amendment on or before the compliance date. Consequently, the SEC modified the operation of the compliance date to allow for existing open-end funds to comply with the Names Rule Amendments at the time of the effective date of its first annual prospectus update on or following the applicable compliance date.

Existing closed-end funds that rely on Rule 8b-16(b) will be required to be in compliance at the time of the transmittal of its first annual report to shareholders on or following the applicable compliance date. Existing business development companies not engaged in continuous offerings will be required to be in compliance at the time of the filing of its first annual report on Form 10-k on or following the compliance date.

Form PF

On January 29, the SEC and Commodity Futures Trading Commission (the “CFTC”) announced that the original March 12, 2025 compliance date for the amendments to Form PF adopted on February 8, 2024 (the “Form PF Amendments”) was extended to June 12, 2025.

SEC-registered investment advisers with private funds generally file reports on Form PF, a confidential form, and advisers that are also registered with the CFTC as commodity pool operators or commodity trading advisers, at different times depending on the types of private funds they advise and their assets under management, including on an annual or quarterly basis. Some advisers file on a quarterly basis for quarterly reporting funds and then subsequently amend that filing to report about their annual reporting funds. The Form PF Amendments include different questions and require reported data to be computed differently than under the current Form PF requirements.

As the original compliance date was after the fourth quarter of 2024 filing deadline for many quarterly funds, but before the 2024 annual filing deadline for many annual reporting funds, the SEC’s final rule extending the compliance date (the “Form PF Extension”) noted that the original compliance date would cause additional burdens on certain advisers if 2024 data is reported on both versions of Form PF. The Form PF Extension included, as an example, that many private fund advisers with annual and quarterly filing obligations would have to submit 2024 data on the two different versions of Form PF (submitting an initial filing on the current Form PF to report data for the fourth fiscal quarter of 2024 for their quarterly reporting funds, and then submitting an amendment on the Final Form PF for their annual reporting funds with 2024 fiscal year data). As a result, the SEC determined to extend the compliance deadline to mitigate the administrative and technological burdens and costs associated with the original compliance date.

Form SHO

On February 7, 2025, the SEC announced a temporary extension from compliance with Rule 13f-2 under the Securities Exchange Act of 1934 (“Rule 13f-2”) and from reporting on Form SHO. As a result, filings on initial Form SHO reports from institutional investment managers that exceed certain thresholds will be due by February 17, 2026 for the January 2026 reporting period. The original compliance date was January 2, 2025, with institutional investment managers reporting information for the January 2025 reporting period.

Under Rule 13f-2, institutional investment managers that exceed certain thresholds are required to file Form SHO within 14 calendar days of the end of each calendar month to disclose information regarding certain equity securities. The SEC will then publish, on an aggregated basis, certain information regarding equity securities reported by institutional investment managers on Form SHO. The SEC provided the temporary exemption to allow institutional investment managers time to complete implementation of systems builds and to test and work with the Staff to address any operational and compliance questions regarding Form SHO reporting.

SEC ISSUES NO-ACTION LETTER AND CD&IS ON RULE 506(c) OFFERINGS

On March 12, 2025, the SEC’s Division of Corporation Finance issued a no-action letter (the “No Action Letter”) on the investor verification requirements for issuers relying on Rule 506(c) of Regulation D of the Securities Act. On the same day, the SEC published two new Compliance and Disclosure Interpretations (“C&DIs”) related to questions surrounding the investor verification requirement of Rule 506(c).

Regulation D under the Securities Act contains several safe harbors for private offerings under Section 4(a)(2), which exempts from the Securities Act’s registration requirements “transactions by an issuer not involving any public offering.” Before its amendment in 2013 pursuant to the Jumpstart Our Business Startups Act (the “JOBS Act”), the Rule 506 safe harbor permitted sales to an unlimited number of “accredited investors” and up to 35 non-accredited investor purchasers as long as the issuer satisfies enumerated conditions, including refraining from engaging in general solicitation and advertising. Under the JOBS Act amendments, the SEC bifurcated the Rule 506 exemption into Rule 506(b) and Rule 506(c). The old version of the Rule (prohibiting general solicitation or advertising) was preserved as Rule 506(b), and Rule 506(c) was adopted to contain the modifications required by the JOBS Act. Accordingly, Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that (i) all purchasers in the offering are accredited investors; (ii) the issuer takes “reasonable steps” to verify purchasers’ accredited investor status and (iii) certain other conditions in Regulation D are satisfied. Rule 506(b) does not have a specific verification requirement.

Rule 506(c)(2)(ii) includes a list of “non-exclusive and non-mandatory” steps an issuer might take to satisfy the investor verification requirement, including reviewing tax documents, brokerage or bank statements, or obtaining written confirmations or representations from certain third parties (e.g., an attorney, accountant, broker or investment adviser). However, these methods are examples of “safe harbor” procedures, and the issuer is not required to employ any specific steps to verify accredited investor status.  

The “reasonable steps” verification activities outside the safe harbor can present operational challenges, increased administrative burdens, and leave uncertainties as to whether sufficient steps to verify investors were taken. As a result, Rule 506(c) has been limited in application despite its potential to access a much wider audience for capital raising through general solicitation.

The new guidance issued by the SEC Staff in the No Action Letter provides a potentially useful alternative Rule 506(c) verification process that issuers must undertake to verify a purchaser’s accredited investor status. In the No Action Letter, the SEC agreed that, when accepting investments from certain types of investors, absent an issuer’s knowledge of contrary facts, an issuer may reasonably conclude that it has taken “reasonable steps” to verify the investor’s accreditation if:

• Investors must make a minimum investment of at least $200,000 for natural persons and at least $1,000,000 for legal entities;
• The issuer obtains written representations from investors confirming the following:
  • The investor is an accredited investor under Rule 501(a); and
  • The investment is not financed by third parties for the specific purpose of making the investment; and
• The issuer does not have actual knowledge contradicting these representations.

In connection with the No Action Letter, the Staff also published two new C&DIs.

New C&DI Question 256.35 addresses what other methods an issuer can use that will satisfy the requirement to take reasonable steps to verify accredited investor status if the issuer does not undertake the safe-harbor steps described under Rule 506(c)(2)(ii). The SEC Staff responds by reiterating its existing guidance in that the determination of what steps are reasonable is based on an objective, “principles-based” analysis of the particular facts and circumstances but notes that the factors that issuers should consider under this facts and circumstances analysis, among others are: “(i) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (ii) the amount and type of information that the issuer has about the purchaser; and (iii) the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.”

New C&DI Question 256.36 addresses whether the terms of a Rule 506(c) offering, in particular a high minimum investment requirement, would be enough to satisfy the verification requirement where the issuer (i) has no actual knowledge that any purchaser is not an accredited investor and (ii) has confirmed with each purchaser that its investment is not being financed, in whole or in part, by a third party. In addition to reiterating the existing guidance noted above, the SEC Staff responds by citing the No Action Letter and language from Rule 506(c)’s adopting release, which states that if a purchaser can meet a high investment amount requirement, “the likelihood of that purchaser satisfying the definition of an accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.”

UPCOMING CONFERENCES

2025
Date	Host*	Event	Location
4/29	MFDF	Developments in Registered Funds	Denver, CO
4/30 – 5/2	ICI/IDC	Leadership Summit	Washington, DC
4/30 – 5/2	ICI/IDC	Fund Directors Workshop	Washington, DC
5/6	MFDF	Update on Fund Industry Claims Trends: An Insurer’s Perspective	Webinar
5/7	MFDF	MPI’s Annual Survey of Investment Firm Profitability and Economies of Scale	Webinar
5/22	MFDF	Mutual Fund Director Compensation: The MPI Annual Survey	Webinar
6/17	MFDF	Current Landscape of Securities Lending	Webinar
6/18	MFDF	MFDF Spotlight – Fund Director Independence	Webinar
6/24	MFDF	Director Discussion Series – Open Forum	Virtual
7/9	MFDF	Director Discussion Series – Open Forum	Chicago, IL
9/8-10	ICI/IDC	ETF Conference	Nashville, TN
9/23	MFDF	Latest in Closed-End Funds Litigations	Webinar
10/5-8	ICI/IDC	Tax and Accounting Conference	Palm Desert, CA
10/27-29	ICI/IDC	Fund Directors Conference	Scottsdale, AZ
11/13	MFDF	Mutual Fund CCO Compensation: The MPI Annual Survey Update	Webinar
11/20	ICI/IDC	2025 Closed-End Fund Conference	New York, NY

2026
Date	Host*	Event	Location
1/26	MFDF	2026 Directors’ Institute	Naples, FL
2/3-5	ICI/IDC	2026 ICI Innovate	Houston, TX
3/5	MFDF	2026 Fund Governance & Regulatory Insights Conference	Washington, DC
3/22-25	ICI/IDC	Investment Management Conference	Palm Desert, CA
4/29 – 5/1	ICI/IDC	Leadership Summit	Washington, DC
4/29 – 5/1	ICI/IDC	Fund Directors Workshop	Washington, DC
9/14-16	ICI/IDC	ETF Conference	Nashville, TN
9/27-30	ICI/IDC	Tax and Accounting Conference	Marco Island, FL
10/25-28	ICI/IDC	Fund Directors Conference	Scottsdale, AZ
11/10	ICI/IDC	Closed-End Fund Conference	New York, NY

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

© 2025, 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.

CONTACT US
Peter H. Schwartz
Alena Prokop
Stephanie Danner
Martine Ventello
Mackenzie Coupens

Table of Contents

• SEC Announces Charges Against Institutional Investment Managers in Connection with 13F and 13H Reporting Violations
• SEC Adopts Reporting Enhancements for Registered Investment Companies and Provides Guidance on Open-End Fund Liquidity Risk Management Programs
• Recordkeeping Enforcement
• Marketing Rule Enforcement

SEC ANNOUNCES CHARGES AGAINST INSTITUTIONAL INVESTMENT MANAGERS IN CONNECTION WITH 13F AND 13H REPORTING VIOLATIONS

On September 17, 2024, the Securities Exchange Commission (the “SEC”) announced settlements with eleven institutional investment managers for failing to timely report on Form 13F. Two managers were also charged with failing to file as “large traders” on Form 13H.

Under Section 13(f)(1) of the Securities Exchange Act of 1934 (“Exchange Act”), institutional investment managers that exercise investment discretion over $100 million or more in Section 13(f) securities are required to file quarterly reports listing positions via Form 13F, due within 45 days after the end of the calendar quarter. Section 13(f) securities are equity securities of a class described in Section 13(d)(1) of the Securities Exchange Act. A list of the Section 13(f) securities – called the Official List of Section 13(f) Securities – is available shortly after the end of each calendar quarter on the SEC’s website. For Section 13(f) purposes, an “institutional investment manager” is an entity that either invests in, or buys and sells securities for its own account, or any a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. An institutional investment manager exercises investment discretion if: (i) the manager has the power to determine which securities are bought or sold for the account(s) under management, or (ii) the manager makes decisions about which securities are bought or sold for the account(s), even though someone else is responsible for the investment decision. A manager also has investment discretion with respect to all accounts over which any natural person, company, or government instrumentality under its control exercises investment discretion. Forms 13F filed with the SEC are available to the public on the SEC’s website.

Under Exchange Act Section 13(h) and Rule 13h-1, any person that directly or indirectly exercises investment discretion over transactions in NMS securities that equal or exceed (i) 2 million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month must identify themselves as a “large trader” to the SEC via an initial Form 13H “large trader” filing, after which a Large Trader Identification Number is issued for purposes of notifying broker-dealers for which the person has an account. Following an initial filing, large traders must submit an annual filing within 45 days of the end of each full calendar year. If any information on Form 13H becomes inaccurate, a large trader must file an amended Form 13H promptly after the end of the calendar quarter in which the information became inaccurate. An “NMS Security” is defined in Rule 600(b)(46) and refers, in general, to exchange-listed equity securities and standardized options but does not include exchange-listed debt securities, securities futures, or open-end mutual funds, which are not currently reported pursuant to an effective transaction reporting plan. Unlike Form 13F, Form 13H is not publicly available.

The Form 13F and 13H violations stemmed from failures on the part of the managers to make the required Form 13F and Form 13H filings over extended periods, many of whom had failed to make quarterly filings for years.

Nine managers agreed to pay more than $3.4 million in combined civil penalties. Two of the eleven managers were not required to pay any civil penalties in recognition that they self-reported their non-compliance with the Form 13F filing requirements and received cooperation credit. Similarly, the two managers were not ordered to pay a civil penalty or separate fine in relation to their failure to file Form 13H as both managers self-reported their own the Form 13H failures and otherwise cooperated with the SEC’s investigations.

SEC ADOPTS REPORTING ENHANCEMENTS FOR REGISTERED INVESTMENT COMPANIES AND PROVIDES GUIDANCE ON OPEN-END FUND LIQUIDITY RISK MANAGEMENT PROGRAMS

On August 28, 2024, the SEC adopted amendments to Form N-PORT, the form on which registered investment companies, including open-end funds, registered closed-end funds, and exchange-traded funds (collectively, “funds”), report certain portfolio holdings and related information.

Currently, funds are required to file Form N-PORT reports with the SEC on a quarterly basis within sixty days after quarter end. Only the third month in a quarter is made publicly available, with the first and second months remaining confidential. The Form N-PORT amendments will require funds to file reports on Form N-PORT on a monthly basis within thirty days after the end of the month to which they relate and make funds’ monthly reports publicly available sixty days after the end of each month. The SEC’s release announcing the adoption of the amendments states that these changes are intended to give the SEC timelier information to conduct oversight of an “ever-evolving fund industry” and to provide investors information to make more informed investment decisions.

The SEC did not adopt proposed amendments that would have required funds to present portfolio holdings in accordance with Regulation S-X more frequently than is currently required. Additionally, the SEC did not adopt proposed amendments that would have required funds to report information regarding funds’ use of swing pricing or liquidity classifications, noting that the SEC is not adopting the amendments to the underlying rules at this time.

The SEC also adopted amendments to Form N-CEN. Specifically, funds subject to Rule 22e-4 under the Investment Company Act of 1940 (the “Investment Company Act”) will be required to report certain information about the service providers used to fulfill liquidity risk management program requirements. A fund will be required to: (i) name each liquidity service provider; (ii) provide identifying information, including the legal entity identifier, if available, and location, for each liquidity service provider; (iii) identify if the liquidity service provider is affiliated with the fund or its investment adviser; (iv) identify the asset classes for which that liquidity service provider provided classifications; and (v) indicate whether the service provider was hired or terminated during the reporting period.

Additionally, the SEC provided guidance related to certain aspects of open-end fund liquidity risk management program requirements. Rule 22e-4 under the Investment Company Act (the “Liquidity Rule”) requires open-end funds to adopt and implement liquidity risk management programs and requires (i) the assessment, management, and periodic review of a fund’s liquidity risk; (ii) classification of the liquidity of a fund’s portfolio investments into one of four categories (“highly liquid,” “moderately liquid,” “less liquid,” and “illiquid”) with at-least-monthly reviews of classifications; (iii) determination and periodic review of highly liquid investment minimums (“HLIMs”); (iv) limitation of the amount of illiquid investments held by a fund; and (v) board oversight. The guidance includes that the SEC staff (the “Staff”) observed instances where funds were not prepared to review liquidity classifications intra-month in response to changes in market, trading, and investment specific considerations.

As stated in the SEC’s guidance, the Liquidity Rule requires funds to adopt and implement policies and procedures reasonably designed such that a fund can conduct the required intra-month review of classifications if there are changes in the market, trading, and investment specific considerations. The guidance states that funds should consider reviewing classifications if changes in portfolio composition are reasonably expected to materially affect one or more investment classifications. The guidance further states that funds should consider classifying new investments intra-month if acquiring a particular investment is expected to materially change the liquidity profile of a fund, particularly changes that may cause a shortfall below a fund’s HLIM or cause the fund to exceed the Liquidity Rule’s limitations on illiquid investments.

As part of a fund’s determination as to whether to classify an investment as “highly liquid” or “moderately liquid,” funds are required to consider the time in which it expects an investment to be convertible to cash without significantly changing the investment’s market value. The guidance notes that the Staff has observed international funds considering the time in which an investment would be convertible to a different currency other than U.S. dollars as the relevant period for determining when an investment is convertible to cash and funds that have classified any currency as “highly liquid” regardless of the amount of time it would take to convert to U.S. dollars. Among other items, the guidance includes that funds should not base liquidity determinations in an international jurisdiction on the ability to sell, dispose of, or settle an investment into the local currency without also considering the ability to convert that local currency into U.S. dollars. The guidance also included information related to funds with established HLIMs.

The amendments to Form N-PORT and Form N-CEN will become effective on November 17, 2025. Funds will be required to comply with the amendments as of the effective date, except that groups with less than $1 billion in net assets will have until May 18, 2026 to comply with the Form N-PORT amendments.

RECORDKEEPING ENFORCEMENT

The SEC has continued its focus on compliance with recordkeeping requirements in connection with off-channel communications through the use of personal devices. In this quarter alone, the SEC brought four enforcement actions against various registered investment advisers, broker-dealers, municipal advisors, and rating agencies for failure to comply with the recordkeeping provisions of the federal securities laws, resulting in approximately $531 million in penalties.

Section 17(a)(1) of the Exchange Act and Section 204 of the Investment Advisers Act of 1940 (“Advisers Act”) authorize the SEC to issue rules requiring broker-dealers and investment advisers keep certain records, for prescribed periods, for the protection of investors. The rules adopted under Section 17(a)(1) of the Exchange Act, including Rules 17a-4 and 17a-3, impose minimum recordkeeping requirements based on a prudent broker-dealer standard. These requirements include preserving original communications received and copies of communications sent relating to the broker-dealer’s business for specified periods of time. The rules adopted under Section 204 of the Advisers Act, including Rule 204-2, require that advisers preserve original communications received and copies of communications sent that relate to (i) advisers’ recommendations and advice, (ii) receipt or delivery of funds, (iii) the placing of orders to purchase or sell securities, or (iv) securities recommendations.

In October 2022, the Staff initiated a risk-based investigation into whether investment advisers were properly maintaining communications required to be preserved under the Advisers Act. As a result, on August 14, 2024, the SEC announced charges against 26 broker-dealers, investment advisers, and dually registered broker-dealers and investment advisers for (i) widespread failures to maintain and preserve electronic communications through unapproved off-channel communication methods, and (ii) failure to supervise personnel with respect to preventing and detecting recordkeeping violations.

Four of the twenty-six firms charged agreed to pay a penalty of $50 million each for failures to maintain records of off channel communications sent and received by firm personnel in violation of both Exchange Act Rule 17a-4(b)(4) and Advisers Act Rule 204-2(a)(7). 

With respect to one firm (“Firm 1”) certain communications sent from and to personnel were required to be preserved under the Advisers Act because they either related to (i) advisory recommendations or advice, or (ii) the investment adviser’s receipt or delivery of funds or securities. Of the communications that were not preserved, one identified example was text messages on unapproved platforms with recommendations to buy or sell securities of specific companies. The personnel at three other firms (“Firm 2,” and “Firm 3,” and “Firm 4,” respectively, and together with “Firm 1” the “Firms”) each sent and received off-channel communications that were records required to be maintained under Exchange Act Rule 17a-4(b)(4) and/or Advisers Act Rule 204-2(a)(7). The SEC’s orders with respect to these firms included that each firm did not maintain or preserve the substantial majority of these written communications, and that each Firm’s failures were firm wide. With respect to Firms 2 and 3, the SEC’s orders state that the failures involved personnel at various levels of authority throughout the relevant organization. With respect to Firm 4, the personnel involved with such failures included financial advisors who, together with other personnel they supervised, were responsible for generating some of the highest levels of revenue for Firm 4 within the relevant period described in the order (since 2019). As a result of these findings, each Firm was required to pay a civil penalty and obtain compliance consultants.

Of the twenty-six firms charged in the same enforcement action, three of the firms self-reported their violations which resulted in significantly lower penalties. The firms will pay a combined civil penalty of $392.75 million, and each firm has begun implementing improvements to their recordkeeping policies.

This quarter, the SEC also conducted three other enforcement actions resulting in significant penalties:

• On September 24, 2024, the SEC announced charges against twelve firms, including broker-dealers, investment advisers, and one dually registered broker-dealer and investment adviser, for recordkeeping failures. The firms were required to pay combined civil penalties of $88.225 million.
• On September 17, 2024, the SEC charged twelve municipal advisors for failures to preserve electronic communications, and the firms were required to pay combined penalties of $1.3 million.
• On September 3, 2024, the SEC charged six nationally recognized statistical rating organizations (NRSROs) for recordkeeping violations pursuant to Section 17(a)(1) of the Exchange Act and Rule 17g-2(b)(7) thereunder, resulting in combined civil penalties of more than $49 million.

The recent focus by the SEC on recordkeeping violations and the steep combined civil penalties highlight the importance of maintaining and implementing strict recordkeeping policies. However, the SEC places value on both self-reporting and cooperation with SEC investigations. Therefore, in the event of a known violation, self-reporting violations and cooperation with investigations may lessen the impact of such violations.

MARKETING RULE ENFORCEMENT

On September 9, 2024, the SEC announced settlements with nine SEC-registered investment advisers for alleged violations of Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”) in connection with SEC’s ongoing enforcement sweep of investment adviser compliance with the Marketing Rule.

The Marketing Rule underwent significant amendments in 2020, and compliance with the rule became mandatory for all registered investment advisers on November 4, 2022. The September 2024 announcement follows the SEC’s announcement of its second set of settled enforcement cases against five advisory firms in April 2024, following a previous announcement of settled enforcement cases against nine advisory firms in September 2023.

The SEC’s settlements alleged that the nine advisers distributed advertisements that included untrue or unsubstantiated statements of material fact in violation of the Marketing Rule’s principles-based general prohibitions for all advertisements (the “General Prohibitions”) or advertised testimonials, endorsements, or third-party ratings that could not be substantiated or lacked required disclosures.

In addition to the Marketing Rule’s provisions regarding particular aspects of advertisement, the General Prohibitions provide that advertisements may not, among other things, (i) include an untrue statement of a material fact or omit a material fact necessary to make the statement made, in the light of the circumstances under which it was made, not misleading; or (ii) include a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC. To establish a violation of the General Prohibitions of the Marketing Rule, the SEC only needs to demonstrate simple negligence on the part of the adviser and does not need to prove scienter.

Per the SEC’s orders, one adviser disseminated an advertisement on its public website describing it as a member of an organization that did not exist. Relatedly, the SEC also alleged that four advisers had falsely advertised their advice as being free from customer conflicts without providing any context for the claim. However, the SEC cited the various material conflicts of interest disclosed in the advisers’ Form ADV Part 2A brochures as the unreasonable basis for believing the advisers could substantiate such claims.

Under the Marketing Rule, registered investment advisers are prohibited from including any “testimonial” or “endorsement” in an advertisement unless the investment adviser clearly and prominently makes certain disclosures, including that the testimonial was given by a current client or private fund investor, the endorsement was given by a person other than a current client, that cash or non-cash compensation was provided for the testimonial or endorsement (as applicable), and any material conflicts of interest resulting from the investment adviser’s arrangement with such person giving the testimonial or endorsement. Likewise, investment advisers are prohibited from including any third-party rating in an advertisement unless the investment adviser clearly and prominently discloses the date on which the rating was given and the period of time upon which the rating was based, the identity of the third party that created and tabulated the rating, and, if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.

Per the SEC’s order, one adviser’s website displayed select testimonials from individuals expressing a positive view of the adviser; however, the quotations presented included one “testimonial” from a person who was no longer a client of the firm and another purported testimonial from a person who the firm was unable to verify had ever been a client. Relatedly, some of the advisers were also alleged to have used misleading third-party ratings from industry rankings such as Reuters, Barron’s, and The Financial Times by omitting the required information about the timing and the nature of awards.

The nine advisers agreed to pay $1,240,000 in combined civil penalties.

UPCOMING CONFERENCES

2024
Date	Host*	Event	Location
11/12	ICI/IDC	Closed-End Fund Conference	New York, NY
11/6	MFDF	Director Discussion Series – Open Forum	Denver, CO
11/7	MFDF	Digital Assets in the Fund Space	Webinar
11/12	ICI/IDC	2024 Closed-End Fund Conference	New York, NY
11/12	MFDF	ETF Share Class	Webinar
11/13	MFDF	Director Discussion Series – Open Forum	Los Angeles, CA
11/14	MFDF	Director Discussion Series – Open Forum	San Francisco, CA
11/18	MFDF	AI and Fund Compliance	Webinar
11/19	MFDF	The Power of Custom In-Kind Baskets	Webinar
11/21	MFDF	Mutual Fund CCO Compensation: The MPI Annual Survey Update	Webinar
12/4-5	ICI/IDC	Foundations for Fund Directors	Virtual
12/10	MFDF	BDC Board Service 101	Webinar
12/11	MFDF	ETF Product Trends: Board Implications	Webinar
12/18	MFDF	Visually Mapping Board Composition: Skills Matrices in Fund Board Rooms	Webinar

2025
Date	Host*	Event	Location
1/7	MFDF	2024 Fair Valuation Pricing Survey: Building and Strengthening the Valuation Operating Model	Webinar
1/9	MFDF	MFDF 15(c) White Paper Webinar Series: Part 2 – Board Processes	Webinar
1/27-29	MFDF	Directors’ Institute	Carlsbad, CA
2/3-5	ICI/IDC	ICI Innovate	Huntington Beach, CA
2/10	MFDF	Director Discussion Series – Open Forum	Stuart, FL
2/11	MFDF	Director Discussion Series – Open Forum	Naples, FL
3/6-7	MFDF	Fund Governance & Regulatory Insights Conference	Washington, DC
3/16-19	ICI/IDC	2025 Investment Management Conference	San Diego, CA
4/2	MFDF	Director Discussion Series – Open Forum	Atlanta, GA
4/15	MFDF	Director Discussion Series – Open Forum	Boston, MA
4/30 – 5/2	ICI/IDC	Leadership Summit	Washington, DC
4/30 – 5/2	ICI/IDC	Fund Directors Workshop	Washington, DC
7/9	MFDF	Director Discussion Series – Open Forum	Chicago, IL
10/5-8	ICI/IDC	Tax and Accounting Conference	Palm Desert, CA
10/27-29	ICI/IDC	Fund Directors Conference	Scottsdale, AZ

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

© 2024, 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.

CONTACT US
Peter H. Schwartz
Alena Prokop
Stephanie Danner
Martine Ventello
Mackenzie Coupens

Table of Contents

• Marketing Rule Compliance Risk Alert and Enforcement
• Private Fund Adviser Rules Vacated by Fifth Circuit
• Securities and Exchange Commission v. Jarkesy
• SEC Adopts Rule Amendments to Regulation S-P to Enhance Protection of Customer Information
• SEC Spring 2024 Regulatory Agenda

MARKETING RULE COMPLIANCE RISK ALERT AND ENFORCEMENT

On April 17, 2024, the Division of Examinations (the “Division”) of the Securities Exchange Commission (the “SEC”) issued a Risk Alert regarding the Staff of the Division (the “Staff”) observations preliminary observations from examinations investment advisers’ compliance with amended Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”). The Risk Alert paid particular attention to the Marketing Rule’s seven principles-based general prohibitions for all advertisements (the “General Prohibitions”).

The Staff provided details on the following critical deficiencies related to the application of the Marketing Rule’s General Prohibitions:

• The Staff observed advertisements that included statements of material fact that appeared untrue or could not be substantiated. The Staff highlighted, among other examples, advertisements: (1) referencing specific investment mandates of the advisers in advertisements when there were no such mandates (e.g., ESG); (2) claiming that investment processes were validated by professional institutions when they were not; and (3) misrepresenting the advisers’ client base, such as describing the adviser as a “private fund adviser” when the firm did not advise any private funds.
• The Staff observed advertisements that omitted material facts necessary to make the statements not misleading in light of the circumstances under which they were made. The Staff highlighted, among other examples, advertisements that: (1) recommended certain investments (e.g., on podcasts or websites) without disclosing the conflicts of interest attributed to the compensation paid to or received by the advisers for such recommendations; (2) represented performance information that did not provide adequate disclosure regarding the share classes included in the performance returns; (3) claimed that the advisers achieved above average performance results without clarifying that the advisers did not yet have clients or performance track records; and (4) included third-party ratings that (i) implied that the Adviser was the sole top recipient of certain awards when the awards went to multiple recipients or the adviser was not the top recipient and (ii) failed to disclose that the adviser or that adviser personnel nominated fellow employees for awards.
• The Staff observed advertisements that included only the most profitable investments or specifically excluded certain investments without providing sufficient information and context to evaluate the rationale, such as investments that were written off as losses or were lower-performing investments.

The Staff’s observations also focused on adviser compliance with the Marketing Rule–related aspects of Form ADV, Advisers Act Rule 206(4)-7 (the “Compliance Rule”), and Advisers Act Rule 204-2 (the “Books and Records Rule”).

• The Staff observed advisers using outdated language in their Form ADVs referencing provisions of the prior Cash Solicitation Rule (Advisers Act Rule 206(4)-3), inaccurately indicating that no referral arrangements existed, and omitting material terms and compensation of referral arrangements on Form ADV, Part 2A, Item 14.
• While the Staff noted that many advisers had adopted compliance policies and procedures that included processes to comply with the Marketing Rule, there were observed instances where advisers’ policies and procedures were not reasonably designed or implemented to address compliance with the Marketing Rule, which resulted in gaps for preventing violations of the Marketing Rule, highlighting policies and procedures that: (1) failed to address applicable marketing channels utilized by the advisers, such as websites and social media and (2) were updated to reflect the Marketing Rule but were not implemented (e.g., policies that required net of fees performance to be included with any performance advertisement but practices of including only gross performance in advertisements).
• The Staff observed Marketing Rule-related Books and Records Rule deficiencies, noting that advisers did not maintain copies of information posted to social media and did not maintain documentation to substantiate claims included in advertisements.

The Risk Alert follows shortly after the SEC announced a second set of settled enforcement cases against five registered investment advisers, after previously announcing a set of settled enforcement cases against nine advisory firms in September 2023. The SEC’s recent settlement orders alleged that the five firms advertised hypothetical performance to the general public on their websites (i) without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience, (ii) without ensuring that the hypothetical performance was not misleading or misrepresentative, and (iii) without substantiating the performance figures presented in their advertisements.

PRIVATE FUND ADVISER RULES VACATED BY FIFTH CIRCUIT

On June 5, the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) vacated the entirety of the private fund rules (the “Private Fund Rules”) adopted by the SEC in August 2023 (please see our prior alerts for a description of the Private Fund Rules’ provisions) holding that in adopting the Private Funds Rules the SEC exceeded the statutory authority of section 211(h) and section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”).

While, the SEC has not yet indicated whether it will appeal the decision (among its other options, the SEC can file a petition for certiorari seeking review before the U.S. Supreme Court within 90 days) private fund advisers should still prepare for the possibility that certain aspects of the Private Fund Rules will surface as investor requests in negotiations, in future SEC examination and enforcement activities, and in industry best practices.

SECURITIES AND EXCHANGE COMMISSION V. JARKESY

On June 27, 2024, the U.S. Supreme Court (“Supreme Court”) issued its decision in Securities and Exchange Commission v. Jarkesy, ruling that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. Accordingly, the SEC may no longer pursue civil monetary penalties through administrative proceedings.

By way of background, the SEC may bring an enforcement action in one of two forums. It can file suit in federal court (an “Article III Court”), or it can adjudicate the matter “in-house” in an administrative enforcement action before an SEC-appointed Administrative Law Judge (“ALJ”) or the Commissioners, whose decision is nevertheless ultimately subject to Article III judicial review. Unlike proceedings in Article III Courts where the defendant is entitled to a jury trial presided over by an Article III judge, and for which the Federal Rules of Evidence and Civil Procedure apply, administrative proceedings are not subject to the Federal Rules, and the ALJ or Commission serves as factfinder. However, administrative proceedings can, depending on the circumstances, be timelier and more cost-effective than Article III Court review (for both the government and defendants). The SEC’s use of in-house administrative proceedings is a relatively recent practice, as before passing the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, the SEC could only seek civil penalties in federal court.

George Jarkesy Jr. (“Jarkesy”) established two hedge funds, with his firm Patriot28, LLC (“Patriot28”), as the investment adviser, managing $24 million in assets from over 100 investors. In 2011, the SEC investigated Jarkesy and Patriot28 and, according to the SEC’s allegations, found that Jarkesy and Patriot28 misled investors and brokers by misrepresenting investment strategies, lying about the identity of the fund’s auditor and prime broker, and overvaluing the funds’ claimed value to collect larger management fees. In 2013, the SEC initiated an administrative enforcement action against Jarkesy and Patriot28, alleging various violations of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Section 206 of the Advisers Act. In 2014, Jarkesy challenged the SEC’s administrative proceedings in the U.S. District Court for the District of Columbia, citing constitutional infringements, but both the district court and the U.S. Court of Appeals for the D.C. Circuit denied the injunction, finding that the district court lacked jurisdiction. After an evidentiary hearing by an ALJ, Jarkesy was found guilty of securities fraud, and the SEC then ordered Jarkesy to pay a civil penalty of $300,000, with Patriot28 forced to disgorge $685,000 in ill-gotten gains. Jarkesy was also barred from various securities-related activities.

Jarkesy sought review of the ALJ’s decision by the SEC. While that petition was pending, the U.S. Supreme Court decided Lucia v. SEC, holding that SEC ALJs were officers of the United States subject to the Appointments Clause and were improperly appointed. Jarkesy, however, had waived his right to a new hearing.

The SEC affirmed the ALJ’s fraud findings, imposed penalties, and rejected Jarkesy’s argument that it had utilized “unconstitutionally delegated legislative power” to pursue the case in an administrative proceeding rather than in an Article III court. It also rejected Jarkesy’s argument that the proceedings violated his Seventh Amendment right to a jury trial.

He then filed a petition for review in the U.S. Court of Appeals for the Fifth Circuit, which reversed and remanded, finding that the SEC’s administrative proceedings suffered from three significant constitutional defects: (1) that it deprived Jarkesy of his Seventh Amendment right to a jury trial; (2) that Congress “unconstitutionally delegated legislative power to the SEC by failing to provide it with an intelligible principle by which to exercise the delegated power”; and (3) that statutory removal restrictions on ALJs violated Article III. The SEC petitioned for certiorari, which the Supreme Court granted, and the Court heard oral argument on November 29, 2023.

In a 6-3 majority (the “Majority”) opinion by Chief Justice Roberts, the Supreme Court decided the case solely on Seventh Amendment grounds, holding that the SEC’s imposition of civil monetary penalties for securities fraud through administrative proceedings violated Jarkesy’s right to a trial by jury for all “suits at common law.” The Supreme Court did not take up other constitutional issues raised by the Fifth Circuit.

The Majority of the Supreme Court first reasoned that because claims for securities fraud violations (such as fraudulent and misleading statements) target the same conduct prohibited by common law fraud, such actions constitute a “suit at common law” to which the Seventh Amendment applies. Next, focusing on the SEC’s desired remedy — civil penalties — the Majority reasoned further that because civil penalties are a punitive form of monetary relief traditionally awarded in courts of law, such penalties constitute a prototypical common-law legal remedy and, therefore, also implicate the Seventh Amendment. A defendant would, therefore, be entitled to a jury trial on action for securities fraud unless the “public rights” exception to Article III jurisdiction applied.

Broadly, the Supreme Court’s “public rights” exception allows Congress to “assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment.” The Majority concluded that the “public rights” exception did not apply because the SEC’s action was a “matter of private rather than public rights” based upon historical precedent (the anti-fraud provisions of the federal securities laws are modeled on historical common-law fraud claims), thereby making “adjudication by an Article III court . . . mandatory.” The Majority rejected SEC’s position that public rights are necessarily involved where a government agency brings suit under a statutory grant of authority, reasoning that the action did not fall within any of the distinctive areas involving governmental prerogatives where the Court’s jurisprudence had concluded that a matter might be resolved outside of an Article III Court without a jury.

Accordingly, the Court concluded that Jarkesy and Patriot28 were entitled to a jury trial in an Article III Court.

Although it may appear relatively narrow in scope on its face, the legal and practical ramifications of the decision– will be significant for the SEC and other federal agencies that impose penalties through administrative proceedings. For any action that is akin to a “suit at common law” and where the remedy sought is one that traditionally “could only be enforced in court of law,” the Jarkesy ruling strongly supports that the defendant has a right to a jury in an Article III Court.

SEC ADOPTS RULE AMENDMENTS TO REGULATION S-P TO ENHANCE PROTECTION OF CUSTOMER INFORMATION

On May 16, 2024, the SEC adopted amendments to Regulation S-P, which governs the treatment of consumers’ nonpublic personal information by certain financial institutions. Regulation S-P requires (i) brokers, dealers, investment companies, and registered investment advisers to adopt written policies and procedures that address administrative, technical, and physical safeguards to protect customer records and information (the “safeguards rule”) and (ii) the proper disclosure of consumer report information in a manner that protects against unauthorized access to or use of such information (the “Disposal Rule”). The Disposal Rule also applies to SEC-registered transfer agents.

The amendments to Regulation S-P (the “Amendments”) define customer information for any covered institution (excluding transfer agents) as any record containing nonpublic personal information about a customer of a financial institution, whether in paper, electronic or other form, that is in the possession of a covered institution or that is handled or maintained by the covered institution or on its behalf. This information is “customer information” regardless of whether it pertains to individuals with whom the covered institution has a customer relationship or to the customers of other financial institutions where such information has been provided to the covered institution.For transfer agents, customer information is any record containing nonpublic personal information identified with any natural person, who is a securityholder of an issuer for which the transfer agent acts or has acted as transfer agent, that is handled or maintained by the transfer agent or on its behalf.

Pursuant to the Amendments, covered institutions will be required to develop, implement, and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information. In particular, a covered institution’s incident response program will be required to have written policies and procedures to assess the nature and scope of any incident that involves unauthorized access to or use of customer information and identify the systems and types of customer information that may have been accessed or used without authorization. The incident response program must also take appropriate steps to contain and control the incident to prevent further unauthorized access or use.

In addition, the Amendments require covered institutions to notify individuals whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization. Covered institutions will be required to provide this notice as soon as practicable, but no later than 30 days after the institution becomes aware that unauthorized access or use has occurred or is reasonably likely to have occurred. Notice is not required where the institution determines that the customer information has not been, and is not reasonably likely to be, used in a manner that would result in substantial harm or inconvenience. The notice provided to affected individuals must include details regarding the incident, the breached data, and how the affected individual can respond to protect themself.

With respect to service providers used by covered institutions, covered institutions will be required to establish, maintain, and enforce written policies and procedures reasonably designed to require oversight, including through due diligence and monitoring of service providers, and ensuring that affected individuals receive any required notices.

The effective date of the Amendments is August 2, 2024. The compliance date for larger entities is December 3, 2025, while the compliance date for smaller entities is June 3, 2026. “Larger entities” means: (i) investment companies that, together with other investment companies in the same group of related investment companies, have net assets of $1 billion or more as of the end of the most recent fiscal year; (ii) registered investment advisers with $1.5 billion or more in assets under management; and (iii) all broker-dealers and transfer agents that are not small entities under the Securities Exchange Act for purposes of the Regulatory Flexibility Act.

SEC SPRING 2024 REGULATORY AGENDA

On July 8, 2024, the SEC released its Spring 2024 Regulatory Agenda (the “Regulatory Agenda”). The Regulatory Agenda includes fifteen rules in the proposed rule stage and nineteen rules in the final rule stage. Those in the final rule stage include rules with respect to enhanced disclosures by certain investment advisors and investment companies regarding ESG investment practices; cybersecurity risk management for investment advisers, registered investment companies and business development companies; outsourcing by investment advisers; and Regulation Best Execution.

Rules in the “proposed rule stage” include, among others, rules with respect to Regulation D and Form D improvements; safeguarding advisory client assets; open-end fund liquidity risk management programs; investment company fund fee disclosure and reform; and exchange-traded products.

UPCOMING CONFERENCES

2024
Date	Host*	Event	Location
9/22–25	ICI/IDC	Tax and Accounting Conference	Boca Raton, FL
10/8 & 10	ICI/IDC	Securities Law Developments Conference	Virtual
10/21–23	ICI/IDC	Fund Directors Conference	Chicago, IL
11/12	ICI/IDC	Closed-End Fund Conference	New York, NY
09/26	MFDF	In Focus – The Role of Risk in Effective Board Decision-Making and Corporate Governance	Virtual
10/8	MFDF	Distribution 101 for Fund Boards	Webinar
10/15	MFDF	Continuing Regulatory Impacts on Fund Boards	Naples, FL
10/16	MFDF	Director Discussion Series – Open Forum	Kansas City, MO
11/6	MFDF	Director Discussion Series – Open Forum	Denver, CO
11/7	MFDF	Digital Assets in the Fund Space	Webinar
11/13	MFDF	Director Discussion Series – Open Forum	Los Angeles, CA
11/14	MFDF	Director Discussion Series – Open Forum	San Francisco, CA

2025
Date	Host*	Event	Location
1/27-29	MFDF	Directors’ Institute	Carlsbad, CA
2/3-5	ICI/IDC	ICI Innovate	Huntington Beach, CA
3/6-7	MFDF	Fund Governance & Regulatory Insights Conference	Washington, DC
3/16-19	ICI/IDC	Investment Management Conference	San Diego, CA
4/30 – 5/2	ICI/IDC	Leadership Summit	Washington, DC
4/30 – 5/2	ICI/IDC	Fund Directors Workshop	Washington, DC
10/5-8	ICI/IDC	Tax and Accounting Conference	Palm Desert, CA
10/27-29	ICI/IDC	Fund Directors Conference	Scottsdale, AZ

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

© 2024, 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.

CONTACT US
Peter H. Schwartz
Alena Prokop
Stephanie Danner
Martine Ventello
Mackenzie Coupons