^{Articles |} First Quarter 2026 Asset Management Regulatory Update

Table of Contents

• SEC Proposes Amendments to Form N-PORT Reporting Requirements
• SEC Proposes Expanded “Small Entity” Definitions for Purposes of the Regulatory Flexibility Act
• Federal Court Dismisses Shareholder Suit Against Mutual Fund Directors for Failure to Auto-Convert Money Fund Share Classes
• SEC Orders Adviser to Pay $900,000 for Principal Trade Pricing Failures During Market Disruption
• SEC Division of Enforcement Announces Updates to Enforcement Manual 

INVESTMENT COMPANY INSTITUTE SURVEY ON THE GROWING BURDEN OF FUND PROXY CAMPAIGNS

In March 2026, the Investment Company Institute (“ICI”) published a survey analyzing the escalating costs and challenges of proxy campaigns for U.S. registered investment funds, finding that the U.S. fund proxy system is both inefficient and ineffective. The survey involved 62 investment firms that represented 85% of the U.S.-registered fund assets. The report covered fund proxy campaigns that were conducted between 2020 and 2025. Among other key findings, the survey found that:

• Total campaign costs ranged from $675 million to $1.14 billion, with many of the fund campaigns costing tens of millions of dollars each.
• Special campaigns (362 total) accounted for an estimated $621 million to $1.06 billion, with six campaigns each exceeding $25 million and the most expensive totaling $111 million.
• Contested closed-end fund (“CEF”) campaigns (39 total involving activists) cost between $24 million and $36 million, while uncontested CEF campaigns (698 total) cost between $29 million and $52 million.
• Respondents indicated that CEF proxy campaigns have gotten harder and more expensive since 2020, with almost no respondents reporting that campaigns had become easier or cheaper.

Additionally, the survey found that while shareholders often overwhelmingly support proposals, it can be very difficult to reach a quorum. For example, the survey analyzed a subset of special campaigns seeking to change their Investment Company Act of 1940 sub-classifications from “diversified” to “non-diversified.” Although most of these proposals had average approval rates of 85% of shares present, more than one-third of the proposals could not meet quorum without at least one adjournment, and six of the proposals failed for lack of quorum.

Based on the findings of the survey, the ICI made the following recommendations to the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”):

1. Create a new approval mechanism by coupling a lower quorum requirement (more than 33.33%) with a higher affirmative vote requirement (at least 75%).
2. Adopt alternatives to shareholder approval, such as board approval with advance notice to shareholders, for certain items, including fundamental policy changes.
3. Permit boards to appoint a greater number of new independent directors without shareholder approval.
4. Permit funds to adopt retail voting programs to boost retail investor participation.
5. Allow exchanges to remove the annual meeting requirement for listed CEF and business development companies, returning governance decisions to the states.
6. Revise processing fees and shareholder communication provisions to permit funds to select their own vendors and directly contact shareholders.
7. Reduce proxy statement length by allowing greater use of links and layered formatting to improve shareholder engagement.

SEC PROPOSES AMENDMENTS TO FORM N-PORT REPORTING REQUIREMENTS

On February 18, 2026, the SEC proposed amendments to Form N-PORT reporting requirements for applicable registered investment companies (other than money market funds and small business investment companies) and exchange-traded funds (“ETFs”) organized as unit investment trusts (“UITs”). In light of industry feedback, a challenge in the Fifth Circuit Court of Appeals, and in accordance with the January 2025 Presidential Memorandum entitled “Regulatory Freeze Pending Review”—which directed federal agencies to consider postponing any rules that had not yet taken effect to review questions of fact, law, and policy—the SEC sought to revise (and in some cases reverse) amendments to Form N-PORT that were adopted in 2024 (the “2024 Amendments”). The proposed amendments focus on three areas: filing timeframe, publication frequency, and reporting requirements.

Under the proposal, the deadline for registered funds to file monthly Form N-PORT reports would be extended from 30 to 45 days. According to the Commission, this change is designed to alleviate operational burdens associated with the accelerated timeline of the 2024 Amendments and to reduce the potential for errors and resubmissions.

Additionally, the proposed amendments would restore the quarterly publication schedule that was in place prior to the 2024 Amendments, requiring registered funds to publicly disclose their portfolio holdings every three months, with a 60-day delay following fiscal quarter end, rather than monthly disclosure with a 60-day delay, as adopted in 2024.

Lastly, the proposed amendments would streamline certain N-PORT reporting requirements by:

1. Narrowing the scope of information collected on portfolio-level risk metrics and returns;
2. Eliminating certain information collected regarding payoff profiles of non-derivatives instruments, convertible bonds, and the reasons a single holding has multiple liquidity classifications; and
3. Removing the Names Rule reporting requirements added to Form N-PORT in connection with the 2023 amendments to rule 35d-1 under the Investment Company Act of 1940 (the “1940 Act”).

Additionally, the proposed amendments would require registered funds with ETF share classes to report certain information on net assets and shareholder flows and would require funds to report certain identifying information, including ticker symbols.

In connection with these proposed amendments, the SEC also extended the dates for compliance relating to the Names Rule under the 1940 Act for Form N-PORT reporting funds. Compliance for fund groups with net assets of $10 billion or more as of the end of their most recent fiscal year was extended to November 17, 2027. For fund groups with less than $10 billion in net assets as of the end of their most recent fiscal year, compliance was extended to May 18, 2028.

The deadline for providing comments on the Form N-PORT amendments is April 24, 2026.

SEC PROPOSES EXPANDED “SMALL ENTITY” DEFINITIONS FOR PURPOSES OF THE REGULATORY FLEXIBILITY ACT

On January 7, 2026, the SEC proposed amendments to modernize the definitions of “small entity” applicable to investment companies and investment advisers under the Regulatory Flexibility Act (the “RFA”). If adopted, the proposal would substantially increase the asset-based thresholds used to determine small entity status and would introduce a mechanism for periodic inflation adjustments to reduce the likelihood that the thresholds become outdated over time.

The SEC adopted its current definitions of “small business” and “small organization” for investment advisers under Rule 0-7 of the Advisers Act and for investment companies under Rule 0-10 of the 1940 Act in 1982, with the most recent amendments made in 1998. The RFA requires the SEC to conduct an initial regulatory flexibility analysis and a final regulatory flexibility analysis in connection with proposed and final rulemakings, respectively.

Under existing Rule 0-10 of the 1940 Act, an investment company is deemed a “small entity” if it, together with other investment companies in the same “group of related investment companies,” has net assets of $50 million or less as of the end of its most recent fiscal year (the “Net Asset Threshold”).

Under existing Rule 0-7 of the Advisers Act, an investment adviser is deemed a “small entity” if it satisfies each of the following conditions: (i) it has regulatory assets under management (“RAUM”) of less than $25 million (the “RAUM Threshold”); (ii) it did not have total assets of $5 million or more on the last day of its most recent fiscal year (the “Total Assets Threshold”); and (iii) it does not control, is not controlled by, and is not under common control with (a “control relationship”) another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year (the “Control Relationship Threshold”). By way of brief background, the RAUM Threshold and Total Assets Threshold measure different concepts. As reported on Form ADV, RAUM reflects the value of client assets for which an adviser provides continuous and regular supervisory or management services. By contrast, the Total Assets Threshold refers to assets held on the adviser’s own balance sheet, such as cash, receivables, or ownership interests in affiliated entities.

For investment advisers, the proposal would increase the RAUM Threshold from $25 million to $1 billion. The assets under management component of the Control Relationship Threshold would increase correspondingly from $25 million to $1 billion to conform with the revised RAUM Threshold; however, the total assets component of the Control Relationship Threshold ($5 million) would remain unchanged pending receipt of public comment. The current $5 million Total Assets Threshold would remain unchanged, although the Commission is requesting comment on whether and how it should be revised.

For registered investment companies, the proposal would increase the Net Asset Threshold from $50 million to $10 billion and update the methodology by which the assets of related investment companies are aggregated when determining the small entity status of a registered fund complex. The proposal would also replace the concept of “group of related investment companies” with “family of investment companies,” as defined in Form N-CEN Item B.5, thereby leveraging existing reporting data.

The proposal also provides for inflation adjustments to the applicable asset thresholds every 10 years, which could be effectuated by order of the Commission rather than through formal notice-and-comment rulemaking. Such adjustments would be calculated using the Personal Consumption Expenditures Chain-Type Price Index.

The proposal also provides for Form ADV Amendments. Item 12 of Part 1A of Form ADV would be revised so that investment advisers with RAUM of less than $1 billion (rather than $25 million) would be required to complete the small entity determination questions. Instruction 17 of Form ADV, which provides for a continuing hardship exemption from electronic filing, would be similarly updated to reflect the new $1 billion threshold.

Under the proposed $1 billion RAUM Threshold, the SEC estimates that approximately 15,850 of 21,650 total investment advisers (roughly 75%) would report RAUM below the threshold. After application of the revised Control Relationship Threshold, however, approximately 1,225 advisers (5.7%) would be excluded, resulting in an estimated 14,620 advisers (approximately 70%) satisfying the revised RAUM and Control Relationship Thresholds. This represents a substantial increase from the approximately 3% of SEC-registered advisers that currently qualify as small entities under the existing definitions.

Advisers with RAUM between $25 million and $1 billion that do not have a control relationship with a larger affiliate would be newly classified as small entities, with the result that future RFA analyses would be required to assess the regulatory burden of proposed and final rules on these firms. The direct compliance impact of the proposed amendments is modest: approximately 10,051 additional SEC-registered investment advisers would be required to complete Item 12 of Form ADV, at an estimated cost of approximately $95 per adviser per year. The continuing hardship exemption from electronic filing would also become available to a broader set of advisers, although the SEC expects that few, if any, would qualify for the exemption given the current ubiquity of electronic filing capabilities.

The SEC accepted public comments on the proposal through March 13, 2026.

FEDERAL COURT DISMISSES SHAREHOLDER SUIT AGAINST MUTUAL FUND DIRECTORS FOR FAILURE TO AUTO-CONVERT MONEY FUND SHARE CLASSES

On March 26, 2026, the U.S. District Court for the Southern District of New York dismissed a shareholder lawsuit against a money market fund (the “Fund”), its board of directors, and certain officers, alleging breaches of fiduciary duty and related claims arising from the failure to automatically convert shareholders’ Fund holdings into lower-cost share classes.

In their complaint, two shareholders claimed that the Fund’s board of directors allowed clients to continue paying higher fees despite being able to convert their holdings into a more cost-efficient share class. Through the board’s inaction, the plaintiffs alleged that the directors breached their fiduciary duty and implied covenant of good faith and fair dealing, demonstrating willful negligence.

Members of the Fund’s board along with Fund officers and executives were named in the lawsuit. Notably, the asset manager oversees other financial products that offer a multi-class structure with automatic conversion to lower expense classes; however, no such mechanism was created for the Fund. In response to the claim, the Fund asserted that a mutual fund’s officers and directors do not have a fiduciary duty or legal obligation to ensure shareholders are automatically converted to lower-expense share classes once they are eligible.

In dismissing the case, the court rejected the plaintiff’s assertions, stating that their claim was a “far cry” from the standard that courts have applied to breaches of the duty of care under Delaware law. As such, the court held that the Fund, its officers, and its board did not (i) breach their fiduciary duty by failing to automatically convert the holdings of two shareholders in the Fund despite allegedly being eligible for a lower-cost premium share class, (ii) aid and abet the alleged breach of fiduciary duty, or (iii) unjustly enrich themselves through the additional expenses the shareholders paid by remaining in the higher-cost share class.  The court also ruled that there was no breach of an implied covenant of good faith or fair dealing.

SEC ORDERS ADVISER TO PAY $900,000 FOR PRINCIPAL TRADE PRICING FAILURES DURING MARKET DISRUPTION

On February 25, 2026, the SEC announced that an investment adviser (the “Adviser”) consented to the entry of a cease-and-desist order, censure, and $900,000 civil money penalty in connection with the Adviser’s fair market value determinations when conducting principal trades with pooled investment vehicles it advised (the “Order”).

According to the Order, from March 2020 to May 2020 (the “Relevant Period”), the Adviser offered lending services to companies that were acquired by private equity firms to help them purchase middle-market companies through leveraged buyouts. The Adviser would then originate senior loans, which it would subsequently sell portions of such loans to private funds (the “Private Funds”) that it advised.

In connection with these transactions, the loans that the Adviser made and subsequently sold to the Private Funds were to be sold at par value less the unamortized loan fee to create a “fair market value,” as required by the Private Funds’ advisory agreements and disclosures the Adviser made to investors. This practice was based on the Adviser’s belief that the closing price of recently originated loans generally represented fair market value.

However, during the Relevant Period and at the outset of the COVID-19 pandemic, the Adviser continued to sell performing loans it originated prior to the market disruption at par value minus the unamortized loan fee without determining whether the fair market value of those loans had declined as a result of deteriorating market conditions.

During this same period, the SEC noted in its Order that credit spreads experienced significant dislocation across the fixed income space, which resulted in widespread price declines for many existing fixed income investments. Despite that, the Adviser made 143 sales to the Private Funds during the three-month period, utilizing the original fair market value methodology while also affirmatively stating to the Private Funds’ independent review agent that each sale was at fair market value based on current market conditions.

Based on these findings, the SEC determined that the Adviser willfully violated Section 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”), which prohibits fraudulent or deceptive conduct, Section 206(4) of the Advisers Act—and Rule 206(4)-8 thereunder—which prohibit material misstatements and fraudulent conduct with respect to investors in pooled investment vehicles. In accepting the Adviser’s settlement offer, the Commission considered remedial acts undertaken by the Adviser, including voluntary reimbursement of slightly over $5 million, plus over $200,000 in interest, to the Funds in May 2021, as well as enhancements to disclosures and policies regarding loan transfer practices.

SEC DIVISION OF ENFORCEMENT ANNOUNCES UPDATES TO ENFORCEMENT MANUAL

On February 24, 2026, the SEC’s Division of Enforcement (the “Division”) announced updates to its enforcement manual (the “Manual”). The Manual is used by the Division’s staff in connection with investigations into potential federal securities law violations. It contains general policies and procedures but is not binding on the Commission.

According to the press release announcing the updates, the updated Manual “emphasizes the importance of open, informed, and thoughtful dialogue between SEC staff and potential respondents and defendants, with the goal of producing better outcomes and ensuring the fair and timely resolution of investigations and recommendations of possible enforcement actions.” With the aim of encouraging dialogue and facilitating consistency in the Wells process, the Manual updates include that Wells notice recipients will ordinarily receive four weeks to make Wells submissions. Wells meetings will include a member of the senior leadership of the Division and will be scheduled within four weeks of receipt of the Wells notice.

The updated Manual also reflects that the Commission restored its practice of permitting a settling party to request that the Commission simultaneously consider a settlement offer and any related waiver requests. The updated Manual also includes (i) changes intended to encourage more consistent internal collaboration, (ii) updates regarding the formal order process, (iii) an updated framework for referrals to criminal authorities, and (iv) other changes intended to conform the Manual to current Division practices.

UPCOMING CONFERENCES

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

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

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