In 2025, hedge fund managers were faced with a new federal administration and new SEC Chair Paul S. Atkins. The effects of those changes in leadership are still being felt and may accelerate in 2026. To that end, the Hedge Fund Law Report spoke with Simpson Thacher partners Adam S. Aderton and Anne C. Choe about the key legal and compliance developments in 2025, what hedge fund managers may expect from the SEC in 2026 and what CCOs should focus on to prepare for the new year. This article presents their thoughts on those topics.

For additional commentary from Aderton, see “SEC Penalizes Fund Administrator for Missing Red Flags” (Jul. 18, 2024); and “Recent SEC ESG Rulemaking, Examination and Enforcement Activity” (Mar. 30, 2023).

2025 in Review

HFLR:  What were the key legal and compliance developments that hedge fund managers faced in 2025?

Choe:  One noteworthy item is that the SEC Division of Examinations released its 2026 exam priorities in November 2025. It was actually a bit surprising that they did not have a separate private fund section, potentially signaling a decreased emphasis on private funds. But, in our experience, examiners routinely look at core topic areas that cover hedge fund managers, such as marketing, valuations, trading and portfolio management. So we think hedge fund managers should continue to remain vigilant on those core issues.

[For more on the 2026 exam priorities, see “Compliance Corner Q1‑2026: Regulatory Filings and Other Considerations Hedge Fund Advisers Should Note in the Coming Quarter” (Dec. 18, 2025).]

We also saw continued growth throughout 2025 of hedge fund strategies being brought to the market in retail wrappers, such as exchange-traded funds, business development companies and other SEC-regulated products. There’s a broader retailization movement that definitely occurred in 2025, and we expect that to further accelerate in 2026.

Aderton:  I’ll layer on one more significant legal or compliance development – the postponement of the compliance deadlines for several significant final rule changes that would have affected hedge fund managers: Form PF amendments, short sale reporting and securities lending. Those deadlines were extended, either following a court action – in the case of short sale reporting and securities lending – or on the Commission’s own volition, as to Form PF. That’s consistent with the SEC’s desire to take a fresh look at a number of rules that were adopted in the prior administration.

HFLR:  What’s likely to happen to those final rules you mentioned?

Aderton:  Taking Form PF as an example, the current majority of the SEC commissioners has historically been somewhat critical of continued expansion of Form PF, and the most recent Form PF amendments that were put on pause would have been a further expansion. We’ve heard Chair Atkins talk about things like the minimum dose of necessary regulation to achieve the Commission’s aims. So if these Form PF amendments ever do take effect, we are likely to see them scaled back to whatever this current iteration of the Commission thinks is actually necessary for it to effectively regulate the market as it sees fit. Thus, one takeaway is that there may be an overall reduction in the number of obligations that are going to come along with, say, Form PF – and the same will be true with short sale reporting and securities lending.

Choe:  Yes, we anticipate potential amendments to Form PF. In fact, in an open meeting on the postponement of the compliance date, Atkins specifically noted that he has directed the staff to further evaluate any appropriate action and the Division of Investment Management to consider whether those changes are achieving the goals the form was originally intended to address.

[See “Third Round of Form PF Amendments Focuses on Granular Hedge Fund Data (Part One of Two)” (Jun. 6, 2024).]

HFLR:  What about the pending rule proposals that were released under former SEC Chairman Gary S. Gensler that have also been paused under Atkins, such as the cybersecurity rules for investment advisers; the environmental, social and governance (ESG) disclosures; and the revised Custody Rule, which the SEC renamed the Safeguarding Rule. Will those ever see the light of day in some form or are they dead at this point?

Choe:  We aren’t anticipating that the ESG rules will go forward, so that’s likely dead. But we are expecting potential amendments to the Custody Rule, which was included on the latest Reg Flex agenda as a regulation that could potentially be amended or modernized to address, for example, crypto assets.

[See “The SEC’s Proposed Safeguarding Rule: Significant Implications for Private Fund Managers” (Apr. 27, 2023).]

Aderton:  I don’t think we’ll see the cybersecurity rules and the other proposals again. If you read the statements of the SEC commissioners who are currently in the majority, but were in the minority at the time of the proposals, it’s clear that, in many cases, they did not think the rule proposals were necessary or were solving a problem in the market that existing rules couldn’t reach. So anytime you see a historical statement like that about a proposal, it’s unlikely to be reproposed.

[See “SEC Proposes Cyber Risk Management Rules for Advisers” (Mar. 24, 2022).]

HFLR:  Talking about the SEC in general, how would you describe the overall changes at the SEC in terms of its operations and priorities?

Aderton:  To me, the biggest change is related to the agency’s personnel. They’ve publicly disclosed that the agency has gone from somewhere north of 5,000 staffers to something closer to 4,000 – and there may be additional reductions in the future. Those cuts necessarily make it a little bit more challenging for them to do as many things. So although the SEC has always been resource constrained, that is more acutely felt now, such that it’s going to have to think carefully about what aspects of its operations to prioritize. Due to that, one big thing that will come out of 2025 is that the SEC’s ability to be in as many places at the same time will be somewhat limited.

Another thing is a complete reversal of the SEC’s position on cryptocurrency. A lot of its prioritization is probably going to go toward the ability to bring crypto into the overall regulatory environment.

Operationally, the SEC is really focused on facilitating innovation and thinking creatively about ways to promote it. That’s something that could be beneficial to hedge fund managers that think innovatively about ways to expand and enhance their businesses. This is an SEC that has been very clear that it wants to hear ideas about how the regulatory environment could be shaped to facilitate that innovation and capital formation.

Choe:  The only thing I would add to the innovation point is the growth of more private equity (PE) and hedge fund managers exploring retailization, as well as additional investment strategies they may not have pursued historically, including more private credit and direct lending. And as part of innovation by the SEC, there may be more targeted rulemaking in that area. But the SEC is also open to hearing ideas around additional staff guidance, FAQs and no-action relief, which may promote innovation.

HFLR:  There has been criticism, including by some of the current commissioners, of the perceived practice of “regulation through enforcement” under Gensler. Do you think we’ve seen the end of that approach under Atkins?

Aderton:  The short answer is yes. I expect that they will bring cases when, in their view, the lines are clear in terms of what is permissible and what is violative conduct. When the lines aren’t clear, we’re likely to see things like staff guidance or similar statements coming out of the Commission, rather than the pursuit of enforcement actions as the mechanism to advance new or broadening interpretations of existing regulations.

Choe:  That recently occurred when, on December 16, 2025, the Division of Examinations released a new risk alert on deficiencies examiners found in connection with the Marketing Rule. So that’s an example of when they decided to issue a risk alert around those findings in lieu of pursuing enforcement actions.

HFLR:  Under Gensler, the SEC issued very little guidance, and, frankly, the guidance that did come out wasn’t particularly helpful. Do you see the new SEC being more open to releasing that sort of guidance, which CCOs and the like really appreciate?

Choe:  That’s a great observation. We do anticipate additional guidance and FAQs. We know the staff is reaching out to the industry and having meetings to talk about additional FAQs as to the Marketing Rule, as well as potential rulemaking in advance of actual putting pen to paper on proposed rules. So there has definitely been a push for more engagement between the SEC staff and the industry.

[See “What Hedge Fund Managers May Expect From the SEC in 2025” (Jan. 16, 2025).]

Cryptocurrency and Tokenization

HFLR:  You’ve both mentioned cryptocurrency. This SEC has done a complete 180 from the prior leadership on digital assets. What are the implications for hedge fund managers specifically, and the private fund space in general, of the SEC’s embrace of cryptocurrency under Atkins?

Aderton:  I was at the SEC through part of Gensler’s term and through the prior approach to crypto. The takeaway is that this Commission is very committed to establishing a system of regulation that incorporates crypto into the existing financial regulatory system. Part of that is going to have to be done by Congress, but the part that the SEC can do, it seems committed to doing.

So for hedge fund managers that were concerned about the uncertainty of the regulatory approach to crypto in the last administration, that concern and the likelihood of enforcement is much diminished. In instances in which cryptocurrency intersects with some type of fraud, the Commission has said that it’s going to bring those cases. But I don’t think that was the concern for a lot of managers under the prior administration. They were more worried about registration and reputational concerns then, and those concerns are on the shelf through the end of this Commission.

Choe:  I would just add that the Simpson Thacher team obtained a no‑action letter right before the government shutdown that actually helped pave the way for managers, including hedge fund managers, to be more comfortable investing directly in spot crypto. And we are already seeing some managers pursue this strategy when, historically, they have not because of Custody Rule concerns.

[See “NSCP to SEC’s Crypto Task Force: Focus on Clarity, Custody and Coordination” (Nov. 20, 2025); as well as our two-part series on an SEC Crypto Roundtable on custody of digital assets: “Custody Challenges” (Jun. 5, 2025); and “Custody Models” (Jun. 19, 2025).]

HFLR:  The SEC may have embraced cryptocurrency, but it’s not the only regulator with a stake in that world. The CFTC also has some claims on regulating cryptocurrency. Do you think the two agencies will be able to work together to figure out how best to put crypto regulations in place?

Choe:  The head of the CFTC is Michael Selig, who was previously on the SEC’s Crypto Task Force. So I think there will be close collaboration and cooperation between the SEC and CFTC in this area.

HFLR:  You mentioned innovation, which brought to mind the idea of tokenizing interests in hedge funds. The SEC seems to be open to the idea of tokenization. If so, will more hedge fund managers embrace that approach?

Choe:  I think the SEC is open to exploring innovation, including tokenized products. We are already seeing tokenized fund shares being developed and evolving significantly even just in the past year or two. And we are continuing to have discussions with clients around tokenized fund shares. So this is going to be a really exciting and developing area.

Aderton:  I completely agree and see tokenization as one area that, across the investment adviser broker-dealer ecosystem, firms believe there are real opportunities for efficiencies. So I think this is going to be vigorously pursued over the next couple of years.

[See “Project Guardian Report Addresses Tokenization in Asset Management” (Dec. 5, 2024); “Benefits and Challenges Associated With Tokenization of Assets” (Apr. 25, 2024); as well as our two part-series on tokenization on the blockchain: “Unique Challenges and Benefits and Its Use by Hedge Funds” (May 27, 2021); and “Applicability to Private Debt and the Technology’s Future Outlook” (Sep. 30, 2021).]

Retailization

HFLR:  What other aspects of innovation should we discuss?

Aderton:  To me, the other really big one is around retailization, which Anne already touched on a little bit. I see fund managers looking for ways to facilitate the dissemination of private fund strategies, including hedge fund strategies, through retail-type products.

HFLR:  Is the SEC’s interest in retailization – and generally making private markets more available to retail investment – geared more toward PE funds and less toward hedge funds?

Choe:  That’s a fair characterization, but we are seeing a convergence in the strategies that more traditional hedge fund managers pursue. For example, they are pursuing less liquid strategies like private credit and direct lending, and those types of strategies will likely be involved in retailization conversations.

Another development in this area is President Trump’s executive order directing regulators to examine how alternative assets can be incorporated into 401(k) plans. We anticipate that both PE and hedge fund managers will be part of that broader conversation. For example, an interval fund could be included as an investment option for a target date fund for which a hedge fund or private credit manager could manage either the liquid or less liquid credit strategies.

HFLR:  Is there a lot of interest in retailization in the hedge fund space? Are managers willing to tackle the associated challenges in exchange for having access to a new pool of capital?

Choe:  It’s a mixed bag. There are certainly managers that have expressed interest in retail and others that have not. We are seeing both.

HFLR:  Are managers hesitating in the hope that some of those barriers or challenges will be minimized or alleviated by the SEC to promote retailization?

Choe:  That’s right. Although with the growth of new strategies, new products and retailization, we are still expecting the SEC to pay attention and conduct examinations in these areas – particularly if there are allegations of misconduct. We’ve already seen an increase in examinations of interval funds and their sponsors, including alternative asset managers.

[See our two-part series on the retailization of private funds: “Incremental Changes Signal SEC Support” (Aug. 14, 2025); and “Practical Consequences” (Aug. 28, 2025); as well as “Advances and Challenges in ‘Retailization’ of Alternative Investment Products” (Jun. 19, 2025).]

Artificial Intelligence

HFLR:  It feels like, in the last year, the use of artificial intelligence (AI) by basically every industry has skyrocketed. Have you seen hedge fund managers jumping on that bandwagon by using AI, and, if so, in what ways are they using this technology?

Aderton:  Yes. We’ve seen increased implementation and use of AI across hedge fund managers’ businesses. Some of it is the way that many other businesses are using AI – i.e., to facilitate meetings, write first drafts, etc. But hedge fund managers are some of the most sophisticated users of technology in the financial markets. In my experience, a lot of them have been using machine learning and other forms of AI for a considerable period of time now. The most recent AI boom is enhancing and accelerating those efforts that were already ongoing.

Most managers are thinking about all the areas across their firms that they can safely and compliantly deploy AI to improve their performance and make their business more efficient. So we saw an uptick in 2025, and I think we will continue to see significant additional deployment in 2026.

HFLR:  I get the sense you think the hedge fund space may have been a little bit ahead of the curve compared to other industries in terms of adopting AI.

Aderton:  That’s my perception. A lot of hedge funds have quantitative strategies, or, even to the extent they have fundamental strategies, they are running complex modeling for which AI can be beneficial. So, compared to many industries, hedge fund managers were probably further down the path than some others.

HFLR:  What about the use of AI by the SEC itself? Is the SEC using AI internally? If so, in what ways? And do you expect that to continue?

Aderton:  I know that the SEC publicly disclosed that it has an AI Task Force, which is intended to look at the ways the SEC can use AI for its own operations. Given that announcement, I expect that the SEC is deploying AI in some ways internally and will be looking for opportunities to continue to expand that deployment. It also dovetails nicely with the fact that it has experienced staff reductions, so I’m sure it’s looking for efficiencies and work that AI can do that may have been done by staffers historically.

Choe:  The other point I would make is that the SEC is a disclosure-based regulator. It’s a very data-rich environment – the exact type of environment that could potentially benefit a lot from more widespread deployment of AI.

[See “Benchmarking AI Uptake by Compliance Functions” (Dec. 4, 2025); and “Benchmarking Fund Managers’ Adoption and Governance of Generative AI” (Nov. 6, 2025).]

ESG

HFLR:  The Trump administration has seemed very hostile to ESG, as are certain states such as Texas. We’ve already seen some pullback from ESG in the private funds space. What is the future of ESG as a concept or strategy in the private funds space in the U.S., given this current hostility?

Choe:  There will continue to be certain pockets of interest in ESG or sustainability strategies, particularly among institutional investors. That’s going to be even more pronounced in the European market. We are seeing – and, going forward, there may be more – rebranding of the ESG strategy.

HFLR:  ESG feels like one area where there’s a big divergence between European and U.S. regulations. Europe has really committed to ESG funds, whereas the U.S. is pulling back in some ways. Where does that leave fund managers that want to have both U.S. and foreign investors in their funds?

Aderton:  That’s a very challenging situation because the regulations and investor expectations may differ so much across jurisdictions. We had a little bit of that in the U.S. in the last administration where we did see state-by-state differences. For some managers, if the strategy really is a sustainability strategy, they may feel like they need to pick a lane. For other managers, I’m hopeful that a market develops in which you can pursue strategies that meet investor demand, depending on what that demand is, such that you could potentially run a sustainability strategy for investors that are interested in that strategy and other strategies for investors who are not interested in sustainability. I recognize that the current administration’s posture toward ESG may make that a little bit more challenging, but, as a long-term solution, that really does facilitate the idea of investors’ being able to choose the strategies that best meet their investing goals.

[See “FTC and DOJ Support State Antitrust Suit Aimed at Asset Managers’ Coal Industry ESG Initiatives” (Jul. 31, 2025); “SIFMA Secures Injunction Against Missouri’s ESG Disclosure Rules” (Mar. 27, 2025); and “Tennessee Sues BlackRock Over Allegedly ‘False and Deceptive’ ESG Claims” (Feb. 1, 2024).]

CCO Priorities for 2026

HFLR:  What should hedge fund manager CCOs focus on in 2026? What are some of the biggest challenges they’re going to face this year?

Choe:  I started off the conversation by talking about the SEC’s exam priorities, and I think that’s always a good place to start for a CCO planning the upcoming year. We have been counseling our clients to focus on continued Marketing Rule compliance. If they are launching new products or strategies, they should focus on core areas, such as valuation, investment allocation and expense allocation.

Finally, I want to highlight compliance with Regulation S‑P (Reg S‑P). That’s one of the rules that did get implemented. The SEC has communicated that it will focus on compliance with Reg S‑P during its examinations, so CCOs should not only have adopted their policies and procedures but also be implementing a testing program to ensure they can comply with the requirements. Some of the more challenging aspects are the 30‑day breach notification requirement and the obligation to oversee service providers.

[See “SEC Staff Discuss Regulation S‑P Amendments and Related Examination Processes” (Oct. 23, 2025).]

Aderton:  Analysis of [material nonpublic information (MNPI)] policies and procedures is another perennial topic that may become more significant as hedge fund managers diversify their strategies and there’s more convergence between traditional PE or private credit strategies and hedge fund strategies. As managers receive more private information – whether through a PE or private credit line of business – they need to think about how that might affect their existing MNPI policies and procedures, and how those might be enhanced to address any new business lines.

[See “SEC Charges Hedge Fund Manager With MNPI Failures Related to Consultant” (Jan. 30, 2025); and “Inadequate MNPI Policies Cost CLO and Hedge Fund Adviser $1.8 Million” (Nov. 21, 2024).]

On October 7, 2025, SEC Chair Paul S. Atkins gave a keynote address (Address) at the 25^th Annual A.A. Sommer, Jr. Lecture on Corporate, Securities and Financial Law, in which he stressed the importance of the Wells process, whereby the SEC shows potential targets of enforcement cases what it believes to be evidence of violations and allows those parties to make a case against enforcement action. In Atkins’ view, the Wells process offers a crucial guarantee of due process and a bulwark against regulation by enforcement, yet it is underutilized. In keeping with the broad laissez-faire and pro-innovation philosophy that has marked his tenure as SEC chair so far, he called for wider use of the Wells process and for extending the window of time in which the defense can present evidence.

On one level, Atkins provided a welcome affirmation of the need to allow registered entities to tell their side of the story and present evidence in the hope of curbing or eliminating liability. However, it remains to be seen how faithfully SEC leadership will act on the precepts set forth in the Address, in the view of legal experts interviewed by the Hedge Fund Law Report. This article summarizes the Address, the limits on use of the Wells process that Atkins aims to rectify and key takeaways for private fund managers, with expert commentary from former SEC attorneys.

See our three-part series on the Wells process: “Origin and Key Elements” (Jun. 13, 2019); “SEC Enforcement Staff Views of the Process” (Jun. 20, 2019); and “The Pre-Wells Process Versus the Post-Wells Process” (Jun. 27, 2019).

Role of the Process

Protecting Respondents’ Due Process Rights

In his Address, Atkins gave a brief overview of what the Wells process is and what he views as its centrality to due process and responsible securities law enforcement, before setting forth specific changes to official protocols in enforcement matters. Formally adopted in 1979, the Wells process is the mechanism through which the SEC’s Division of Enforcement (Enforcement) staff informs potential respondents or defendants of charges the staff plans to recommend that the Commission pursue against them, as well as the evidentiary and factual basis for those charges. With that information in hand, the potential respondents or defendants can seek to change the mindset of Enforcement staff about whether the perceived rationale for bringing charges is sound. They can make written and/or video presentations that set forth their side of the story, explained Atkins, making a case for the legality and legitimacy of the actions that came under investigation and any finer points of law Enforcement staff may have overlooked, misunderstood or misapplied.

In many cases, Atkins stressed, submissions made as part of the Wells process are a last line of defense for the potential respondents or defendants. They can also educate Enforcement staff by presenting “a different, and potentially convincing,” perspective on the relevant facts and law, he emphasized.

“Potential respondents and defendants share a similar interest in accuracy, but, absent a Wells process, they are disadvantaged by a lack of access to the investigative record and the specific concerns of the Enforcement staff,” Atkins stated. “Providing the potential respondent or defendant with information about potential charges and the key evidence that forms the basis of those potential charges is critical to due process.”

Hence, in Atkins’ view, the Wells process is an integral part of upholding the rights of entities in the market. Without it, the already powerful SEC could easily turn into “policeman, prosecutor, judge, jury and executioner all in one,” he warned. The virtues of the Wells process are not merely hypothetical. Over the course of his 35 years at the SEC, or in roles that involved close contact with the agency, the process has altered the course of enforcement actions and provided a bulwark against “plain mistakes, extreme legal theories, misinformation, biases and conflicts of interest,” he argued.

See “How Managers Can Navigate the Thin Line Between SEC Examinations and Enforcement” (Nov. 14, 2019).

Balancing Priorities

In stressing the urgency of keeping within legal bounds and respecting the rights of market entities, Atkins did not downplay the importance of the SEC’s role or the need for robust enforcement actions to counter and eradicate fraud and malfeasance. Without a capable and vigilant SEC, he acknowledged, it would be much harder to ensure that the private funds market operates transparently and that market forces – rather than greed and dishonesty – determine the prices of securities.

But with that enforcement power comes a responsibility to operate fairly and in keeping with rectitude and good judgment, Atkins stressed. Fulfilling the SEC’s mission depends on investors and market players having respect for the agency and confidence that it performs that mission with fairness and transparency.

Another consideration is that, given the limited resources at the SEC’s disposal, it is all the more crucial for Enforcement to choose its battles well – i.e., to use judgment and discernment about which matters warrant bringing an enforcement action, added Atkins. Although he did not mention it specifically in the Address, the SEC’s resources have, indeed, declined sharply, with 1,000 out of a total staff of 5,000 having departed voluntarily or been laid off.

Changes to the Process

In his Address, Atkins outlined a number of changes he expects SEC staff to adopt in dealings with potential respondents and defendants, prior to escalating a case to the Commission. The Wells process is still fundamentally the same, but, in his vision, its application will be fairer, more patient and more judicious.

Both sides must engage in the process in good faith, urged Atkins. In serving a Wells notice, the onus will be on Enforcement staff to provide enough information for the opposing parties to understand the charges and to explain the evidence they are based on, such as by providing transcripts of key testimony and other relevant documents. However, the staff will have discretion to keep certain sensitive information, such as whistleblower identities and roles, confidential.

Crucially, the staff will need to provide potential respondents and defendants with at least four weeks, not two weeks, to make their Wells submissions. As potential defendants and respondents reap the benefits of that extended time frame, they should be reasonable and keep in mind the staff’s duty to meet deadlines and arrive at conclusions “within reasonable time periods,” Atkins clarified.

See “SEC Enforcement Action Takes Aim at Adviser’s Wells Submission” (Dec. 19, 2019).

Chronic Frustrations

Inconsistency of Defense Rights

The Address was, in part, an acknowledgment of deep frustrations with the state of due process in enforcement matters under the new SEC leadership. None of the benefits of the Wells process are to be taken for granted, and its benefits have been all too limited in recent years, argued R. Daniel O’Connor, co-head of the securities and futures enforcement practice at Ropes & Gray and a former SEC trial attorney.

During the tenure of Atkins’s predecessor, Chair Gary Gensler and his director of Enforcement, Gurbir S. Grewal, sharing evidence with parties under investigation for purposes of facilitating a dialogue “was honored more in the breach than the norm,” O’Connor said. Gensler’s stance marked a significant break from what had been longstanding practice and significantly complicated the work of white-collar defense counsel, he noted. “Prior to Gensler, the standard was that you almost always got to go in and review all the testimony, transcripts and exhibits, so you could prepare a more adequate and fully functional response,” he observed.

“Then under the Gensler administration, the staff used the discretion that’s built into the Wells process and decided, in most instances, that they wouldn’t give you access to the underlying material. That made things difficult, especially if you represented an individual and couldn’t get that overarching picture,” O’Connor reflected.

The Gensler regime was hostile to defendants’ rights in ways that were felt through a broad swath of the industry, concurred Neil T. Smith, co-head of the white-collar defense practice at K&L Gates and former SEC senior counsel. “Under the last SEC administration, there was a sense that, fairly or unfairly, counsel for individuals or entities would not necessarily get an open door to speak to the SEC about the case before charging decisions were made,” he told the Hedge Fund Law Report. “The Wells process was always in place, but, in many cases, it didn’t get used as intended.”

Pending charges would stay on the books at least until the Commission voted on them, but, for defense counsel, an element of arbitrariness sometimes came into play with regard to opportunities to present important evidence, Smith shared. Enforcement might signal its openness to receiving a written submission from the defense counsel, but the window of time for making the submission varied without rhyme or reason. In some cases, it was two weeks; in others, it was longer. The right to meet with Enforcement staff, whether about the charges themselves or the envisioned penalty, was also subject to capriciousness, he added.

Adding further frustrations for defense counsel and their clients, continued O’Connor, was the unwillingness of Grewal, director of Enforcement from July 2021 to October 2024, and certain staff to meet with potential respondents and defendants in a manner that had been customary in the past. Hence, the defense side might submit materials through the Wells process and still end up dealing with the same SEC staff they had been dealing with all along – often, the same Enforcement attorneys who had already committed to a certain view of a matter and were not receptive to any counterarguments or new evidence.

“Getting through the Wells process has always been a challenge,” O’Connor said. “And it’s challenging when you can’t actually sit across the table from someone senior and explain to that person why the generally well-meaning SEC staff who have devoted the last two to four years to the case are wrong in their outlook.” He added that “no one likes to go above someone’s head. But you rely on the possibility that, if it’s really needed, you can get someone who has just a bit more objectivity than the staff you’ve been dealing with.”

See “SEC Enforcement Director Grewal Emphasizes Benefits of Cooperation” (Sep. 12, 2024); and “Speeches Outline the Ethos, Direction and Priorities of the SEC’s Division of Enforcement Under Gurbir Grewal” (Jan. 13, 2022).

Pedal to the Metal

In many cases, the stated rationale for denying potential respondents and defendants greater opportunities to build and present their case was the need to move ahead with enforcement cases expeditiously, O’Connor noted. But, in reality, that rationale often just provided a pretext for the SEC to move swiftly with the interpretation of the facts that it had settled upon, he said.

“I have always thought that approach was shortsighted, because, at the very least, the Wells process allows the staff to understand where there might be weaknesses [in the case] they can ameliorate through additional investigation or decide they don’t need to include [those charges] at all,” O’Connor opined. “It’s frustrating when the staff say the Wells response must be submitted in two weeks, and then they go away for three or four months before you hear back,” he continued. “If you’re going to take that much time, then give us the time to have a reasonable conversation, which is one of many reasons Chair Atkins’ change is welcome.”

Moreover, it is far from clear that skipping the Wells process makes for greater efficiency in the pursuit of enforcement actions. In some cases, the reality may be closer to the opposite, in the view of John P. Nowak, partner at McDermott Will & Schulte and former federal prosecutor and SEC enforcement attorney. If potential respondents and defendants are able to engage in dialogue with SEC staff on an ongoing basis, Enforcement staff often will have the opportunity to correct mistakes and clarify issues in a manner conducive to the swifter resolution of a case, he reasoned.

“So, instead of a two-year investigation, you will have maybe a six-month investigation, because you know what the SEC is looking at and you’re able to engage in a dialogue with them,” Nowak posited. “I understand that some people at the SEC might not think that’s a fruitful way of conducting an investigation. But, in those situations, you’ll be able to communicate more effectively and expedite the ultimate resolution.”

See “SEC, CFTC and FINRA Heads Discuss Enforcement Outlook” (Apr. 24, 2025).

A Two-Way Street

Although the importance of due process is not in dispute, some might ask whether providing information to potential respondents in enforcement cases could, in some cases, tip the balance too far in their favor – alerting them to what the SEC has on them and the nature of the government’s case and giving them time to destroy or alter evidence before matters go to trial and the evidence can be used against them. But, in a majority of matters that come under investigation for possible securities law breaches, such concerns are misplaced, in O’Connor’s view.

In general, the SEC has limited opposing parties’ access to information when the evidence in question touched on something extremely serious, i.e., a Ponzi scheme or another circumstance in which the respondent did not have its fiduciary duty to clients at heart and was a bad actor that had engaged in malfeasance of such magnitude that giving it any access to the government’s evidence could undermine the case. Those types of matters are relatively rare, however, and are not a useful standard for prescribing how the Wells process can and should work.

“In the private funds space, enforcement cases often turn on interpretations of limited partnership (LP) agreements or of what is really in the clients’ best interest,” pointed out O’Connor. “You’re dealing with a common set of facts, which is presented in people’s testimony. And, if you can’t get access to that testimony and refute the interpretations, it makes for a very challenging Wells process.”

For white-collar defense lawyers, the practical benefits of understanding the SEC staff’s interpretation at issue – not some speculative version of it that may or may not correspond to the regulator’s position – are self-evident, continued O’Connor. “When we talk to clients, we’re at interpretation 3.0. We’re not at 2.0 anymore. Often, the case turns on the question: Is the SEC’s interpretation of the LP agreement correct, or is the one that we’ve generally been sharing with our clients correct?” he queried.

Moreover, in many matters for which Enforcement staff may be seeking authority to file from the Commission, the potential respondents or defendants did not produce the data on which the SEC is relying, O’Connor noted. That information came from limited partners and other third parties, and is securely stored in the SEC’s records and archives – not vulnerable to tampering or erasure by someone trying to cover his or her tracks, he explained.

The potential use of the Wells process to suppress or destroy evidence in a potential enforcement proceeding should not be a deterrent to its use, concurred Smith. In some cases, evidence is inherently vulnerable to fading memories and the passage of time. But the kinds of evidence presented and discussed in a Wells process are not typically susceptible to alteration by parties acting in bad faith, he agreed.

“Unless you’re dealing with an active insider trading ring, the conduct has already happened and you’re trying to investigate whether it broke the law or not,” Smith affirmed. “If you’re going through the Wells process, it’s almost by definition historic conduct, so that you don’t have that need to get immediate relief. And, of course, the SEC does have mechanisms to do that” when warranted, he added. Also, in particularly serious criminal matters in which the DOJ is taking actions parallel with those of the SEC, the former may make use of wire taps, informants and other tactics that further counter the hiding or erasure of evidence, he noted.

See “Parallel Actions Against Securities Analyst Show SEC and DOJ Focus on Front‑Running” (Oct. 21, 2021); and “Disclosure of Exculpatory Evidence in ‘Parallel’ Civil and Criminal Investigations” (May 13, 2021).

Wider Adoption of a Popular Measure

Uniting Local and Federal Regulators

In endorsing the Wells process, Atkins has not merely made a concession to players in the market but has recognized the best interests of securities regulators of all profiles, affirmed O’Connor. Atkins’ sense of how the Wells process should, ideally, function at the federal level is in line with current practices at the state level. Among regulators at the state level, its use is hardly controversial at all – in fact, it is considered indispensable to an impartial judicial process.

“A lot of state securities regulators whom I deal with use the Wells process,” O’Connor told the Hedge Fund Law Report. “It’s a common mechanism in which the basic idea is that the government gives you its evidence, tells you at a high level what’s going on and gives you a chance to respond.”

Although use of the Wells process is the optimal approach from the potential respondents’ and defendants’ point of view – and is an area in which the market has been hungry for change for many years – it is in the interest of both local and federal securities regulators to undertake the process, O’Connor argued. “There are very good reasons for the government to follow that protocol. At the very least, the federal regulators get an opportunity to refine their case and avoid subsequent mistakes.”

Continuing Uncertainty

Although Atkins’ remarks may be welcome to many in the industry, Smith noted that they have nevertheless come at a slightly unusual juncture – after significant attrition of SEC staff, at the tail end of the longest shutdown in U.S. government history and only a few months after the SEC’s August 21, 2025, announcement of the appointment of Judge Margaret Ryan as the agency’s new director of Enforcement. In contrast to many people who have held that position, Ryan is not a former prosecutor, and it remains to be seen what kind of regulatory approach she will pursue, he said.

“These are generally welcome changes, but we’ll see how things go,” Smith said. “It’s hard to speed up an investigation when your headcount is down significantly, you have less resources, you have been out of work for months and you’re trying to catch up on everything.” But, as things settle down and the government gets back to work with funding restored, he acknowledged that long-term benefits of a broader use of the Wells process are more than possible to envision.

“I do think that this process will give both sides a good chance to make their arguments and lay out their positions,” Smith affirmed. “And then, ultimately, the Commission will have all the information it needs and be able to make a decision.”

Maintaining a Careful Approach

It would be a mistake for potential respondents to assume that, because the SEC is more open to the use of the Wells process as it can and should work, they can forego the care and protocols that they have brought to bear in the past, Nowak cautioned. In meeting with Enforcement staff to present evidence and discuss a case, potential respondents should always make use of outside counsel rather than relying on their own legal resources, he said. “Obviously, the outside attorney is in direct contact and coordination with the client to ensure the accuracy of the information presented and ensure the client understands the risks associated with certain positions taken – not to mention, the likelihood of success of those positions,” he commented.

Anticipating Potential Outcomes

Nor should fund managers view the Wells process as a “get-out-of-jail-free” card, continued Nowak. They need to anticipate the possibility that, after having engaged in a robust dialogue and taking the alleged violators’ evidence and viewpoint into consideration, the SEC may still move ahead with an enforcement action – including potentially severe penalties – or even recommend a matter to the DOJ for prosecution at some point during the investigation.

Additionally, in certain cases, the settlement process may break down, and firms may simply decide that they stand a better chance at obtaining a more favorable outcome through litigation, added Nowak. In recent Southern District of New York cases involving allegations that relate to potential insider trading, respondents have come to that conclusion, he noted.

On September 30, 2025, the Office of the Chief Counsel of the SEC’s Division of Investment Management (Division) released a no-action letter (Letter) stating that – subject to strict conditions – it will not recommend enforcement actions against registered investment advisers (RIAs) and regulated funds that treat a state trust company as a bank for purposes of holding and maintaining crypto assets and related cash and cash equivalents. The Division issued the Letter in response to a request for no-action relief (Request) from lawyers at Simpson Thacher & Bartlett LLP, who argued that state trust companies are sufficiently well-regulated and operationally analogous to banks to be treated similarly for the purpose of holding crypto assets and that uncertainty about the legality of placing such assets with them needs to be dispelled.

On one level, the Letter stands as a victory for private funds seeking greater latitude with respect to crypto, and, for crypto traders and investors, it may broaden the appeal of private funds as vehicles in which they can invest those assets. But the Letter has brought to the fore sharp disagreements among SEC leaders about the wisdom of permitting the holding of such assets with entities that are not subject to the same regulatory standards as banks; perceived favoritism shown to state trust companies; and the legality of opening the door to such domiciling without rulemaking. This article summarizes the Letter and the principal arguments for and against it, with commentary from legal experts.

See our two-part coverage of an SEC Crypto Roundtable: “Digital Asset Custody Challenges” (Jun. 5, 2025); and “Potential Digital Asset Custody Models” (Jun. 19, 2025).

The Letter

Definition of Qualified Custodian

The Letter does not substantially push back against the lawyers’ request for relief in the form of no action against RIAs and regulated funds that domicile crypto assets with state trust companies, which it defines as legal entities:

• organized under state law;
• supervised by state authorities that also oversee banks; and
• vested with fiduciary powers under state law.

Indeed, the Letter concedes the validity of many of the arguments with regard to what type of institution may be considered a bank for legal and regulatory purposes. For example, the Letter approvingly quotes several of the key arguments regarding the legality and appropriateness of treating state trust companies as functionally interchangeable with banks in terms of domiciling crypto assets.

The Request asks that the Division not recommend that the SEC pursue enforcement actions under Section 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and related Rule 206(4)‑2 (Custody Rule), or under Sections 17(f) and 26(a) of the Investment Company Act of 1940 (Investment Company Act), respectively, against RIAs and investment companies or business development companies (collectively, regulated funds) for treating a state trust company as a bank under the definition set forth in the Advisers Act.

The Letter acknowledges that, traditionally, the requirement has been that regulated funds will place and maintain securities and similar investments with specified custodians in keeping with Sections 17(f) and 26(a) of the Investment Company Act and that, under Section 2(a)(5) of the same law, most banks are included in the definition of such custodians. Moreover, Rule 206(4)‑2 has mandated that RIAs must maintain client funds and securities with a qualified custodian, traditionally understood as a bank in accordance with Section 202(a)(2) of the Advisers Act.

Under both the Investment Company Act and the Advisers Act, there is ambiguity as to what sort of entity can be considered a bank for purposes of meeting those custodial requirements, the Letter observes. They both treat a “bank” as a “banking institution” or “trust company” and affirm that such a classification applies “whether incorporated or not,” as long as the institution is “doing business under the laws of any State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency.” A further requirement is that the institution must be “supervised and examined by State or Federal authority” and “not operated for the purposes of evading the provisions” of either the Advisers Act or the Investment Company Act.

See “Custody Rule Dilemmas in DeFi Investing” (Sep. 29, 2022).

Need for Clarity

However, as straightforward as the above definitions might seem, the practical reality is that a bit of uncertainty has swirled around the legal threshold enshrined in the phrase “a substantial portion,” at least from the point of view of state trust companies and those seeking to do business with them. The Letter approvingly cites the petitioners’ observation that the definition of “bank” set forth here leaves the door open to interpretation as to whether a “substantial portion” of a non-depository state trust company’s business can be said to consist of exercising the same fiduciary powers the Office of the Comptroller of the Currency (OCC) grants to national banks.

Indeed, according to the Request, a facts-and-circumstances analysis has come into play because of the ambiguity here. In the absence of regulatory clarity, it has been hard for a given organization to know whether it could operate as a bank, and things have been decided on an ad-hoc basis.

“The definition of a ‘bank’ is challenging to work with, as applied to anything other than a national bank,” said Justin L. Browder, partner at Simpson Thacher and author of the Request. “National banks are automatically banks and can therefore serve as qualified custodians. When it comes to state-chartered banks, it becomes more challenging, particularly in the case of state trust companies.”

State trust companies, Browder explained, have often proceeded with the understanding that they could serve as qualified custodians if they either:

• held deposits; or
• derived a “substantial portion” of their business from the kinds of fiduciary activities the OCC has allowed national banks to pursue.

“So it’s a circular definition. It sends you from the SEC’s statutes to the OCC to figure out what the federal banking regulators think about fiduciary activities,” continued Browder. “Then you have to look at the state banking law and the charter under which the relevant state banking institution operates to figure out if it actually engages in the type of fiduciary activities the OCC permits national banks to perform.”

Therefore, when it comes to working with state trust companies, the problem has not been the absence of the concept of a qualified custodian – that has, in fact, been around for about 25 years – but, as the Division rightfully admitted in its Letter, the facts-and-circumstances definition, Browder affirmed.

Indeed, the Request and the Letter have provided some clarity on an issue over which certain state regulators have been at odds with the SEC for years, in the view of Scott H. Moss, partner at Lowenstein Sandler LLP. Moss alluded to the dispute that arose in 2020 when the Wyoming Division of Banking issued guidance stating its position that state-chartered trust companies could be considered custodians of digital assets. The SEC expressed doubt as to the merits of the Wyoming regulators’ view and sought public comments.

“For the past several years, it has been debated whether and when a state-chartered trust company can constitute a qualified custodian under the Custody Rule,” Moss recalled. “But the SEC didn’t say anything definitive in response to the public comments it received, so it was just kind of an ‘out-there’ issue. Now, it’s good to have the regulator actually opine on it” via the Letter.

Bespoke Solutions

Further inconsistency has come into play as a result of federal banking regulators’ wavering, over the last decade, about whether nationally chartered banks are permitted to engage in crypto activities in the first place, Browder added. “Over the last five to six years, they have been mostly skeptical and have basically said that national banks cannot do so,” he posited. “So there has been a lot of demand to use qualified custodians from RIAs that are managing private funds and other types of client money. But there were no traditional custodians available until the state trust companies – many affiliated with crypto platforms – popped up to meet that demand.”

Indeed, the Letter directly acknowledges that basis for the petitioners’ seeking no-action against advisers and funds that domicile crypto assets with state trust companies. “You further represent that State Trust Companies are critical providers of custody services for Crypto Assets and Related Cash and/or Cash Equivalents and that demand for Crypto Asset investment strategies has grown considerably over the last decade,” it states.

Strong Compliance

Not only does the logic of the market support RIAs’ and funds’ use of state trust companies, the Letter acknowledges, but the latter have internal policies and procedures in place that make them well-suited to provide such services without compromising security or falling afoul of high regulatory and custodial standards.

“In support of your contention, you state that State Trust Companies that provide Crypto Asset custody services have implemented sophisticated controls to ensure safekeeping of crypto assets,” the Letter states. It lists six categories of “sophisticated controls” that the petitioners believe are widely in place at state trust companies with which RIAs and funds seek to do business. In the petitioners’ view, those internal controls help validate giving state trust companies a functionally identical legal status to that of banks. They consist of:

1. use of “deep” cold storage of crypto assets;
2. annual audits of the custodians’ financial statements by third parties;
3. third-party reports on the custodians’ financial, governance and IT controls and processes, such as system and organization controls reports;
4. policies and procedures designed to ensure cybersecurity, physical security and business continuity;
5. encryption protocols and movement verification controls for crypto assets; and
6. policies and procedures with respect to private key generation and storage.

See “Adviser Penalized for Losing Access to Digital Asset Wallet and Not Producing Records for Exam Staff” (Dec. 5, 2024).

Besides having such an array of robust internal policies and procedures to safeguard crypto assets and the operational safety and integrity of state trust companies that act as custodians for them, the Letter notes, the petitioners have described state regulatory frameworks that help ensure the safe and transparent domiciling of crypto assets with such custodians. Those frameworks broadly include:

• eligibility requirements for licensing, along with thorough reviews of licensing applications;
• supervision and examination, on an ongoing basis, of the domicile by an official state banking authority;
• minimum capital requirements;
• strict limits on activities and balance sheet investments;
• regular, legally mandated reporting on the custodian’s financial condition and/or operations;
• comprehensive recordkeeping requirements; and
• ability of state banking authorities with oversight of the custodian to bring enforcement actions in the case of failure to meet minimum financial conditions and other regulatory requirements.

According to the Letter, the Request has done an admirable job of setting forth a legal, operational and regulatory foundation for treating state trust companies as functionally similar to banks in the most material and relevant ways. Hence, the Letter confirms that, based on the facts and representations stated in the Request, the Division will not recommend bringing enforcement actions under the custody provisions of either the Advisers Act or the Investment Company Act against an RIA or regulated fund that treats a state trust company as a bank when it comes to crypto asset (and related cash and cash equivalent) domiciling and custody.

Strict Conditions

Although the Letter makes what might sound like significant concessions, reliance on it is subject to a number of conditions, some of which require extensive due diligence prior to having any business relationship with the prospective custodian. The Letter sets forth the conditions in detail:

• Before engaging a state trust company, and on a yearly basis, the RIA or regulated fund must have a reasonable basis to believe that the state trust company:
  • has authorization from the relevant state banking authority to provide custody services for crypto assets and related cash or cash equivalents; and
  • maintains and implements written policies and procedures reasonably designed for the safeguarding of crypto assets and related cash or cash equivalents from the dangers of theft, misappropriation or other loss, including having robust cybersecurity defenses and protocols in place – a requirement subject to receipt and review of the state trust company’s most recent:
    • annual financial statements and confirmation that the statements have undergone audit by an independent public accountant are prepared in accordance with generally accepted accounting principles; and
    • written internal control report, which an independent public accountant must have put together during the current or previous calendar year, and which must contain the latter’s opinion that the controls have been implemented as of a specific calendar date and are suitably designed and operating effectively.
• The RIA or regulated fund must enter into a written custodial services agreement with the state trust company stipulating that:
  • the state trust company will not lend, pledge or rehypothecate any crypto assets, or related cash or cash equivalents, without the client’s written consent and then only for the client’s account; and
  • all crypto assets and related cash or cash equivalents held in custody will be segregated from the state trust company’s assets.
• The RIA must disclose to its clients, or the regulated fund must disclose to its board of directors or trustees, any material risks associated with using state trust companies as custodians.
• The RIA or the regulated fund must reasonably determine that the use of the state trust company’s custody services is in the best interest of its own client and the client’s shareholders.

A Split Between Commissioners

Commissioner Hester M. Peirce

In a September 30, 2025, statement, SEC Commissioner Hester M. Peirce emphatically endorsed the Letter, arguing that it provides much-needed regulatory clarity on an issue with which RIAs and funds have struggled. For far too long, Peirce argued, RIAs and funds have found themselves engaged in a “guessing game” as to whether the entity they seek to use as a custodian for crypto assets – in some cases, not having any other choice – is a legally acceptable custodian under the Advisers Act and the Investment Company Act. She identified the “specific lingering question” as whether a state trust company meets those acts’ definition of a bank. The Letter is an “encouraging development” for RIAs and funds that invest, or may be thinking of investing, in crypto assets, she asserted.

In Peirce’s view, the shift the Letter represents is essentially interpretive in nature and does not really require rulemaking. Rather than expanding the definition of a permissible custodian under the Advisers Act and the Investment Company Act, it simply affirms that the SEC recognizes that the use of state trust companies as custodians was already permissible under any correct reading of the acts. The regulatory framework in which such companies operate, Peirce contended, is “similar in material respects” to those under which other varieties of permissible custodians already function.

Part of the Letter’s utility, continued Peirce, lies in its broad applicability – covering not only “the crypto assets that are native to crypto networks and applications and may be subject to the custody provisions” but also “equity or debt securities that have been formatted as crypto assets on a crypto network (commonly known as ‘tokenized’ securities).”

See “Benefits and Challenges Associated With Tokenization of Assets” (Apr. 25, 2024).

In Peirce’s view, the Letter is a welcome countermeasure against the kind of regulatory “gray zone” that causes confusion and uncertainly for investors and needlessly complicates their operations and compliance efforts. Besides its intrinsic merit, she concluded, the Letter serves as a reminder that the time is ripe for a revisiting of custody requirements that pertain to RIAs and funds and consideration of how to modernize them through various measures, including principles-based rules.

Commissioner Caroline A. Crenshaw

A notable dissent from the Division’s stance and counterpoint to Peirce’s arguments, revealing deep rifts in the regulatory philosophies of the SEC’s leadership, came in the form of then-Commissioner Caroline A. Crenshaw’s September 30, 2025, statement about the Letter. (Crenshaw left the SEC on January 2, 2026.) She pointedly questioned the wisdom of allowing state entities that are not federally chartered banks; are subject to inconsistent and sometimes shoddy regulation; and are generally not allowed to accept deposits to take on responsibility for the safeguarding of crypto assets from far-flung investors of many different sizes and profiles. “Degrading our custody framework is a serious matter,” she stated. “I am struck that we are eroding our rules to pave the way for a new class of custodians who seem ready to admit they do not meet the current standards of our custody regime.”

See “Navigating Custody and Other Regulatory Issues Associated With Digital Assets” (Aug. 4, 2022).

Premature Preemptive Action

Not only does the no-action stance lack a basis in fact, Crenshaw maintained, but it attempts to draw support from a “false narrative” holding that no entities other than state trust companies are available to provide custody of crypto assets in keeping with SEC rules. In Crenshaw’s view, the relief attempts to preempt efforts underway in three different areas that should rightfully be given precedence:

1. SEC rulemaking;
2. applications for federal charters from the OCC; and
3. interest on the part of dependable custodians that do operate in the appropriate regulatory framework.

Banks vs. Traditional Custodians

According to Crenshaw, the Advisers Act and the Investment Company Act do not broadly authorize many different types of institutions to have custody of assets. Rather, that safeguarding is rightly the prerogative of a small number of entities – namely banks, registered broker-dealers and registered futures commission merchants – that are suited to the role thanks to an extremely high degree of regulatory oversight. To illustrate her point, she listed four specific characteristics of banks that help alleviate the danger of mismanagement of assets:

1. requirements for banks to maintain internal controls ensuring the segregation of assets of each custody account from the custodian’s assets;
2. a comprehensive OCC application process banks must go through before they assume custody of customers’ assets;
3. an OCC-directed receivership process activated in the event of a bank’s failure but which may not come into play for state trust companies; and
4. the OCC’s “well-resourced” examination program, in contrast to those of states which may be subject to the varying availability of resources.

Expanding on the fourth point, Crenshaw described regulations applicable to state trust companies at the state level as “an inconsistent hodgepodge” of weak rules and shoddy oversight. Although she acknowledged that Wyoming and New York have gone to the trouble of developing sophisticated crypto regulatory regimes, the general view that comes across in her dissent is that nowhere does state-level regulation rise to the exacting standards to which traditional custodians must adhere.

Favoritism

Crenshaw further argued that the relief is also flawed because it inexplicably singles out state trust companies when other kinds of entities have submitted themselves to the OCC application process in the hope of obtaining national charters for crypto custody services. In essence, the relief enables one class of would-be custodians to jump the line, as it were, and subjects investors to what she describes as an unnecessary gamble with no other purpose than to appease the crypto sector.

Building on that point, Crenshaw noted that the Letter does not envision allowing state trust companies to have custody over any assets besides crypto. Here, in her view, is a blunt admission that the companies in question are not cut out to meet the stringent requirements for custodians – if they were, then surely there would be a push to have them hold other asset classes, she reasoned. That struck Crenshaw as all the more curious given that crypto’s risk of severe loss is known to be significantly higher than that of other types of assets.

Lack of Rulemaking

Directly contradicting Peirce’s stance on whether rulemaking is needed, Crenshaw argued that undertaking such a dramatic policy shift without any economic analysis or public comment period is not only ill-advised on its face but also probably violates the Administrative Procedure Act, which Crenshaw viewed as an all-too-common occurrence under Chair Paul S. Atkins’ SEC. Moreover, the timing of the relief, coming just after the release of the Commission’s Spring 2025 Regulatory Flex Agenda – which promised rulemaking on the very topic of crypto asset custody – struck her as especially problematic.

The current SEC wants to have it both ways, Crenshaw concluded. It acknowledges the need for rulemaking on a question of such monumental import yet chooses to “take the easy way out with slapdash no-action relief pushed out the door just under the wire of a potential government shutdown.”

See “SEC Regulatory and Examination Priorities in 2025” (Aug. 14, 2025).

Next Steps for Fund Managers

Diligence on Counterparties

Although aspects of the relief are in dispute, the way forward is clear from a compliance perspective, legal experts told the Hedge Fund Law Report. Despite the sharp disagreement at the SEC, there are steps that RIAs and funds can take right away, affirmed Michael S. Didiuk, partner at Katten Muchin Rosenman LLP. The diligence that must be performed before entering into a relationship with a state trust company is clear. “Although some fund managers already have in place the diligence steps set out by the conditions in the Letter, the Letter helps managers formalize their process. In other cases, based on the Letter, fund managers will have to implement new diligence frameworks or update existing ones,” he reasoned.

Points raised in the dissent about the variation among state-level regulations are indeed valid, and although they do not signal an insurmountable barrier from a compliance standpoint, they do very much need to be addressed. “Fund managers will need to evaluate whether any state trust companies currently being used operate under a state regulatory regime that satisfies the Letter’s conditions,” continued Didiuk. “If any differences are identified, the fund manager should evaluate whether they are material and what steps need to be taken.”

“Fund managers should be mindful of the technological and operational capabilities of state trust companies as they consider continuing their engagement or starting new ones,” Didiuk added. “By requiring a written custody agreement and risk disclosure updates, fund managers may need to amend existing agreements and supplement offering materials.”

Regardless of the existence or maturity of any state trust company relationships managers have in place – whether they are considering forming relationships or reassessing existing ones – the Letter sets forth all the points managers and funds must verify to avoid potential SEC action, Didiuk stressed.

“The Letter doesn’t absolve advisers from following their standard vendor diligence procedures, but it does present minimum standards when it comes to engaging a state-chartered trust company,” Browder concurred.

See “Operational Due Diligence on Managers That Hold Digital Assets” (Feb. 3, 2022).

The Letter’s Limitations

It is crucial for RIAs and funds to remember the limitations of the Letter, Didiuk cautioned. “Having worked on no-action letters while at the SEC and having obtained a no-action letter on behalf of a client, it’s important to highlight” a few key points, he said. “Many people forget that no-action letters are issued by SEC staff and are not binding on the Commission,” he noted. “But although this Letter is not a rule, regulation or statement of the Commission and could be subject to change, it does represent a significant effort to support innovation while taking into account investor protection.”

Fortunately, from regulated entities’ perspective, the Division generally allows third parties to rely on no-action letters to the degree that the third party’s facts and circumstances are substantially similar to those stated in the underlying request for a letter, Didiuk explained. Again, that reality underscores the importance of complying with all the conditions set forth above in the Letter.

Highly Specific Role of State Trust Companies

“You have to remember that state trust companies are not unregulated,” Browder noted. “They all have their own internal compliance requirements under state law. The Letter doesn’t act in place of those requirements but indirectly standardizes the controls those companies will have to implement if they want to partner with SEC-regulated entities to provide custodial services.”

Indeed, the Letter should by no means be construed as blurring the operational lines between state trust companies and banks, concurred Didiuk. Nowhere does the Letter take the position that a state trust company is a bank or that it can act as a qualified custodian for other kinds of client assets, he noted. Given the variety of assets at play, the Letter may encourage diversified relationships, which would have compliance consequences.

“Although the relief expands the pool of qualified custodians, it is limited to crypto assets and related cash equivalents,” Didiuk emphasized. “That limit could create the need for different custody arrangements when funds hold non-crypto assets, which would insert added compliance and operational considerations and challenges.”

Hedge Fund Managers and Crypto

Legal experts are generally in agreement that the SEC administration of Chair Atkins is far more receptive to crypto than that of his predecessor, Gary S. Gensler and that the Letter is part of the more pro-innovation trend now prevailing at the agency. But whether fund managers will now be more inclined to accept investments of crypto from customers is a slightly different issue.

In the end, the decisive factor may not be fund managers’ willingness to accept crypto assets from customers but their ability to find an appropriate custodian once they have done so, in the view of Anthony Tu‑Sekine, head of the digital assets practice at Seward & Kissel LLP. So, the Letter may end up having indirect consequences for the first issue as a result of having addressed the second. “It’s easier now for somebody in the compliance department of an RIA to get comfortable that a state trust company is a qualified custodian,” he commented. “So, yes, that may mean that when some clients ask to invest crypto, it will be easier for RIAS to make a decision as to whether to accommodate those investors.”

Indeed, some hedge fund managers might well become more receptive to accepting crypto from investors, affirmed Moss. “It is possible that they could start to accept ‘in-kind’ contributions of crypto, because they now have a method of knowing how to custody it and be compliant with regulations,” he acknowledged. “It is also possible that they will increase their trading in digital assets.”

See “Study Finds Increasing Hedge Fund Interest in Digital Assets” (Mar. 13, 2025).

Crypto, artificial intelligence (AI) and other technologies are attracting considerable public interest and taking priority positions on legislators’ and regulators’ agendas. Although emerging technologies present opportunities for private funds, it can be difficult to navigate the risks while the regulatory environment is still evolving.

To discuss some of the pertinent issues that private funds face, the Practising Law Institute (PLI) brought together a panel, entitled “Emerging Technology Risks for Private Funds.” The program was moderated by Davis Polk partner Robert Cohen, and featured White & Case partner Ladan Steward, Skadden partner Daniel Michael and Debevoise & Plimpton partner Charu Chandrasekhar.

For coverage of another PLI program, see “To Work Effectively, CCOs Need Authority, Autonomy and Information” (May 22, 2025).

Introduction

Unlike past governments, the second Trump administration has a very positive approach to crypto and is working to facilitate economic activity in that area, Cohen observed. However, the change in approach has mostly taken the form of guidance or been reflected in the exercise of enforcement discretion, as opposed to new rules or legislation. It is therefore an interesting time for private funds that wish to engage more vigorously in crypto and other emerging technologies because there are less restrictions, but that is largely a matter of government discretion, he explained.

SEC Cyber and Emerging Technologies Unit

In early 2025, the SEC announced the creation of the Cyber and Emerging Technologies Unit (CETU) to replace the Crypto Assets and Cyber Unit, Chandrasekhar noted. CETU is within the Division of Enforcement (Enforcement) and is the latest iteration of the Cyber Unit – launched in 2017 – which initially focused on hacking material nonpublic information (MNPI), dark web activity, social media market manipulation, retail account takeovers, initial coin offerings, distributed ledger technology and market infrastructure threats. Under Chair Gary Gensler, the Cyber Unit became the Cyber and Crypto Unit with a clear mandate to investigate and charge crypto-related fraud, she added.

Emerging technologies have now been added as a focus for CETU, continued Chandrasekhar. It seems likely that the unit will continue to focus on most of the areas it has pursued since 2017, with an additional focus on fraud involving AI and machine learning. There have already been enforcement actions for AI washing, and there are likely to be more such cases, she commented.

CETU will continue to focus on crypto asset cases when the conduct amounts to fraud (not pure registration violations), as well as compliance with Regulation S‑P and Regulation S‑ID, and fraud involving material misstatements and omissions by public companies in their cyber disclosures, Chandrasekhar said. The unit has already started bringing cases, including crypto Ponzi cases, a market manipulation case, online retail fraud matters and account takeovers, she added.

See “Six Steps to Address the SEC’s Trump Era Cyber Enforcement Priorities” (Oct. 9, 2025).

Crypto Cases Going Forward

Crypto cases under the second Trump administration will probably be fraud cases with an impact on investors, especially retail investors, Stewart opined. Registration-only breaches are unlikely to be the subject of enforcement action now. Similarly, we are unlikely to see cases in which the conduct indicates a systemic issue, but there is no quantifiable harm to investors, she noted.

Enforcement actions in the crypto area will probably involve fraud and may only be brought when there is an opportunity to recover assets through disgorgement or otherwise, Michael added. There are unlikely to be cases against intermediaries, unless there are extraordinary circumstances, he commented.

A major market event can affect the SEC’s priorities and degree of oversight, especially when the event occurs in an area of regulatory uncertainty, Cohen noted. It will be interesting to see whether the SEC changes its views on crypto, and the extent to which crypto assets are considered securities, if there is a relevant market event, he added.

Transition From Gensler Administration

Throughout Gensler’s tenure, cases were brought against intermediaries that were connecting investors with each other, Stewart noted. For example, in 2023, enforcement actions were brought against Coinbase Inc. and Coinbase Global Inc. (Coinbase); Binance Holdings Limited (Binance); and Kraken, in which the SEC alleged that crypto trading platforms were acting as unregistered exchanges, unregistered broker-dealers and unregistered clearing agents. The defendants vigorously defended their positions, and the litigations were not resolved before the change in administration, she explained.

There has been a dramatic and unprecedented turnaround under the new administration, with pending litigation against intermediaries – including Coinbase, Binance and Kraken - being voluntarily dismissed by the SEC, Stewart said. Generally, the SEC has moved to dismiss cases with registration-only violations, not fraud cases, which is aligned with its shift in priorities. A notable exception is the Binance case, which had a fraud component, she noted.

The SEC also brought a case against a liquidity provider in the crypto space, Cumberland DRW LLC, which was part of a line of unregistered dealer cases that the SEC brought throughout the Gensler administration and was not limited to the crypto context, Stewart added. Unregistered dealer cases were very controversial, and there seemed to be an ongoing effort to expand the definition of “dealer” during Gensler’s tenure. However, the SEC has indicated that the dealer definition will not be expanded and moved to dismiss pending litigation in the area, including the Cumberland case, she commented.

The SEC has also dismissed the case against Consensys Software Inc. in relation to its self-custodial wallet, continued Stewart. In that case, the SEC had taken the position that liquid staking amounted to securities transactions, she elaborated.

In addition, the case against Ripple Labs Inc. (Ripple) has finally been brought to an end, Stewart noted. On summary judgment, the court ruled in favor of the SEC with respect to certain issues and for Ripple on other issues. The summary judgment order against Ripple included a penalty of $125 million and an injunction. In 2024, the parties filed cross-appeals to the Second Circuit. Early in the second Trump administration, the parties advised the district court that they were each willing to drop the cross-appeal, but they wanted the penalty reduced to $75 million and the injunction lifted. The district court did not grant the parties’ request, however, she said.

Numerous investigations were closed early in the new administration, many of which are not public, Stewart noted. The public investigations that have been discontinued are those against Uniswap Labs (which would have been the first decentralized finance (DeFi) case brought by the SEC), a non-fungible token (NFT) case against OpenSea and an investigation into Crypto.com that involved platform issues similar to those that had been brought against Coinbase and Kraken. Interestingly, Wells notices had already been issued in all three of the investigations, she observed.

Some recent presidential pardons impact prior SEC enforcement cases. For example, President Trump has pardoned Binance founder Changpeng Zhao and several founders of the BitMEX global cryptocurrency exchange, Cohen added.

Current State of Crypto Law

Although the second Trump administration’s approach to crypto may give the industry more confidence to engage in that space, case law established during Gensler’s tenure is still relevant, Cohen commented.

Questions around the Howey test and whether an entity is a broker-dealer or exchange were actively litigated under the previous administration, Michael noted. Overall, the SEC was quite successful and was able to advance its mandate through the courts in several ways.

The Howey test is an important topic because it determines whether something is an investment contract and, in turn, a security that falls within the SEC’s regime, Michael explained. In the Coinbase case, the SEC advanced the so-called “ecosystem theory.” The SEC’s view, which the court found persuasive, was that even general efforts have a positive benefit or impact on the price. Denying Coinbase’s motion to dismiss the SEC’s case, Judge Failla of the Southern District of New York (SDNY) stated, “If the development of the token’s ecosystem were to stagnate, all purchasers of the token would be equally affected and lose their opportunity to profit.”

Another important decision is SEC v. Barry, which was briefed during the Gensler administration but decided in the Ninth Circuit after the change in administration, Michael said. The case involved fractionalized life insurance settlements. Using the Howey test, the court found the fractional interests were investment contracts because investors did not control the policies and were entirely dependent on the defendant. Notably, the defendants handled payments (premium payments and payments to investors), picked the policies and engaged in certain activities, which was sufficient in the court's view, he noted.

Although it is not an SEC case, the court in the class action against Yuga Labs Inc. found that the relevant NFTs were not securities, Michael highlighted. That is a significant win and an important reaffirmation of the idea that an asset with a consumptive benefit or utility is not a security, even if there is also a profit element (e.g., collectibles), he elaborated.

Secondary trading and the Howey test have also been considered by the courts, with mixed outcomes, Michael said. In SEC v. Ripple, Judge Torres in the U.S. District Court for the SDNY found that primary transactions satisfy the Howey test and can be investment contracts, but, in secondary transactions, it depends on the circumstances. For example, when the purchaser buys on an exchange, the court did not deem that sale to be pursuant to an investment contract because the seller’s identity was unknown and it was not reasonable for the buyer to believe its funds were pooled in pursuit of furthering the enterprise. Similar logic was applied by Judge Jackson in the Binance case, he added.

On the other hand, in SEC v. Terraform Labs, Judge Rakoff found the manner of sale did not impact whether a reasonable investor would objectively view the defendant's actions as evincing a promise of profits, continued Michael. Judge Failla agreed with that position in the case against Coinbase. As a result, there are differing decisions and some lingering uncertainty, he said.

Traditionally, a security has been found when money is given to someone running a business with a view to that money being used to drive profits, which will then be shared, Cohen summarized. The last administration sought to expand that approach to encompass situations in which there is any economic activity and a desire to make a profit, even without clear reliance on the manager of a business. Under the new administration, there has been some guidance and speeches by Chair Paul Atkins and Commissioners Hester M. Peirce and Mark T. Uyeda indicating a return to the traditional view, he noted.

Defense teams have argued that an asset cannot be a security if it does not represent economic rights or an interest in a business entity, Stewart added. The SEC took the opposite stance but now seems to be adopting the defendants’ position, with Commissioner Peirce explicitly supporting that view. The SEC is still using the Howey test but interpreting it more narrowly, she concluded.

GENIUS Act

In July 2025, Congress passed the Guiding and Establishing National Innovation for U.S. Stable Coins (GENIUS) Act, which is the first significant step to regulate payment stable coins at the federal level, Stewart said. Payment stable coins are digital assets that are pegged to a fixed monetary value. The GENIUS Act imposes federal licensing and regulatory requirements on stable coin issuers, which apply to domestic and foreign issuers. The Office of the Comptroller of the Currency is largely responsible for regulating stable coin issuers, although other prudential regulators may have jurisdiction, and smaller issuers can choose to be regulated at the state level, she noted.

Stewart explained that the GENIUS Act requires stable coin issuers to:

• hold one-to-one reserves in low-risk assets (e.g., U.S. Treasury bills);
• provide regular reports on the composition of reserves; and
• comply with Bank Secrecy Act requirements, as well as quite strict disclosure and marketing rules.

In addition, issuers are prohibited from paying interest or yield to users. As a result, the GENIUS Act does not cover yield-bearing stable coins, Stewart added.

It is made clear in the GENIUS Act that payment stable coins are not securities or commodities, so the SEC and CFTC do not have jurisdiction over them, Stewart emphasized. The regulatory framework provided under the act is a useful way to expand the reach of stable coins because traditional financial institutions are now more likely to use and incorporate them into their businesses, she explained.

The SEC is also considering issuing additional guidance or rulemaking for its registrants that want to use stable coins, such as for settlement and margining, Steward noted. Although the SEC has no jurisdiction over stable coin issuers, it is looking to make it easier for their registrants that want to use the assets, she said.

Pending Regulatory Efforts

Congress has been working on solutions to some of the major problems addressed in the case law, Michael commented. There are two main issues being addressed in the regulatory efforts, he noted. First is decentralization, because legal accountability is difficult without a centralized actor, especially with respect to anti-money laundering (AML). The second issue is coordinated functions, in which a single protocol may offer lending, trading and asset management, and possibly enable trading alongside securities, commodities and other issues. That is currently very difficult because there are not enough road rules, and many different regulatory regimes may apply, he added.

Clarity Act

The Digital Asset Market Clarity Act (Clarity Act) gives the CFTC jurisdiction over “digital commodities,” which have three main features, Michael explained. A digital commodity is linked to a mature blockchain, is decentralized and does not confer ownership rights. An asset that comes within the definition of a digital commodity – or is intended to qualify within four years – is exempt from the Securities Act of 1933. The Clarity Act imposes disclosure-lite obligations that are tailored to digital assets, as opposed to traditional equities, and also helps with the challenges of getting a system started without centralization by providing a four-year run-up for an asset to qualify, he commented. The Clarity Act passed the House but appears to have stalled in the Senate, he added.

See “Landscape of OnChain Asset Tokenization & Blockchain Technology’s Path Toward Maturity” (Apr. 13, 2023).

RFIA

The Senate has produced a discussion draft of the Responsible Financial Innovation Act (RFIA), which is intended to build on the Clarity Act, Michael said. Both the Clarity Act and RFIA aim to resolve uncertainties around whether an asset is an investment contract, but there will always be gray areas. The Clarity Act approached the issue from a decentralization angle. In the RFIA, the Senate used the term “ancillary assets” to cover assets that are distributed with investment contracts. This approach acknowledges the potential for an asset to be an investment contract but allows it to be deemed not a security with certain disclosure and certification requirements, he explained.

The process would start with self-certification that the assets are ancillary assets and certain disclosure obligations will be met, continued Michael. The SEC would then have 60 days to dispute that position and make a claim for jurisdiction. Notably, the RFIA requires the SEC to provide more detailed rules defining an investment contract to help clarify the issue, he added.

Democratic Proposal on DeFi

The Democrats have also submitted a proposal in outline form that seeks to confer significant authority to the Treasury Department, CFTC and SEC, Michael said. The proposal focuses on DeFi and secondary trading. It suggests a broad definition of a “digital asset intermediary,” which would essentially capture anything with a DeFi front-end application and require registration with the SEC (as a broker) or the CFTC (as a futures commission merchant or digital commodity broker). A CFTC registrant would be subject to the current rules relating to AML and the Bank Secrecy Act, he noted.

The proposal appears to apply the existing system to DeFi, which has advantages but is challenging given the fundamental structure of DeFi, Michael observed.

SEC Activity

The day after Trump’s 2026 inauguration, the SEC formed the Crypto Task Force, which has been actively engaging with the industry through public roundtables, private meetings and other meetings on the road, Stewart noted. SEC staff, especially from the Division of Corporate Finance, have issued guidance on numerous types of assets (e.g., meme coins, stable coins and staking products) using the Howey test analysis to conclude that those assets are not investment contracts and thus not securities, she commented.

After the President’s Working Group on Digital Assets was released, Atkins announced “Project Crypto” and directed SEC staff to find ways to bring U.S. financial markets on-chain, Stewart said. Certain issues have been prioritized as part of Project Crypto, such as whether an asset is a security, as well as custody issues, which are key to making digital assets usable, especially by traditional financial institutions. Atkins has been advocating for super apps in finance, and there are efforts to bring DeFi into the system, she added.

There have also been suggestions for innovation exemptions that would allow crypto projects to quickly go to market provided they meet certain conditions, continued Stewart. Early in the new administration, the SEC repealed the unpopular Staff Accounting Bulletin No. 121 guidance, which was issued during Gensler’s tenure and made crypto custody more difficult for financial institutions. Finally, the SEC and CFTC held a joint public roundtable, which indicates there may be more regulatory harmonization going forward, she noted.

See “NSCP to SEC’s Crypto Task Force: Focus on Clarity, Custody and Coordination” (Nov. 20, 2025); as well as our two-part series on an SEC Crypto Roundtable: “Digital Asset Custody Challenges” (Jun. 5, 2025); and “Potential Digital Asset Custody Models” (Jun. 19, 2025).

Cybersecurity

Abandoned Rule Proposals

Significant cybersecurity rule proposals were pending when the new administration commenced, including separate sets of sweeping rules on cybersecurity for investment advisors and broker‑dealers, Chandrasekhar noted. All those rule proposals have been dropped under Atkins’ administration, she said.

See “SEC Proposes Cyber Risk Management Rules for Advisers” (Mar. 24, 2022).

Regulation S‑P

After being originally promulgated under the Gramm-Leach-Bliley Act as a lean rule addressing cybersecurity policies and procedures, significant amendments were made to Regulation S‑P that took effect in early December 2025, Chandrasekhar commented. Although Regulation S‑P does not apply to private funds, the SEC has made it clear that registered investment advisers (RIAs) are covered entities under Regulation S‑P and must protect any customer information in their possession, either of their own natural person investors or customers of other financial institutions, she explained.

Regulation S‑P requirements include a new mandatory incident response program, so RIAs should have such a written program that is designed to detect, respond to and recover from unauthorized access or use of customer information, Chandrasekhar explained. Second, and most significantly, individual customer notification is required. As a result, RIAs and other covered entities must notify each affected individual whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization within 30 days. There is a presumption of notification, so a firm can only forgo giving notice if, after a reasonable investigation, it determines the data is not likely to have been used in a way that causes substantial harm or inconvenience. There is also a law enforcement delay that can be granted in limited circumstances, she added.

Service provider oversight is also required, continued Chandrasekhar. When there is a breach at a service provider that houses customer information, the service provider has 72 hours to notify the RIA. The RIA can then run the 30‑day clock for notification itself or via the service provider.

It is important to note that there is a broader scope for customer information, which includes not only an RIA’s customers but also information about customers of other financial institutions that may be in that RIA’s possession, Chandrasekhar emphasized. As with all SEC frameworks, there are new recordkeeping requirements and uplifts on policies and procedures, she added.

It is unlikely that any significant cybersecurity rules will be promulgated under the second Trump administration, Chandrasekhar opined. It is also unlikely that the extensive rule proposals created during Gensler’s tenure will be revived. The proposed rules were extensive and onerous but still represent cybersecurity best practices, so they could be a useful roadmap for RIAs that want best-in-class cybersecurity programs, she said.

See “SEC Staff Discuss Regulation S‑P Amendments and Related Examination Processes” (Oct. 23, 2025).

AI Regulation

States have taken various approaches to AI regulation, Chandrasekhar commented. Generally, states, such as Connecticut and Washington, that try to pass comprehensive AI legislation are unsuccessful. On the other hand, states proposing narrower laws that target specific harm have had more success. For example, California enacted two bills that address the online safety of minors in the context of AI. The Colorado AI Act is the only comprehensive legislation that regulates high-risk AI that is used for consequential decisions, although the effective date has been delayed to mid‑2026, she added.

At the federal level, an AI preemption provision contained in the tax bill was not passed, Chandrasekhar noted. The Senate is considering the Sandbox Act, which would create a federal AI regulatory sandbox run by the White House Office of Science and Technology Policy, which is consistent with the second Trump administration's innovation-first approach to AI, she observed.

SEC Exams

As mentioned, RIAs are subject to Regulation S‑P and often hold pockets of customer information, Chandrasekhar said. Requests related to Regulation S‑P compliance will probably be tagged onto broader exam requests. Private fund advisers are also subject to Regulation S‑ID, which is an identity theft prevention rule for distributions to third parties, and is another area to consider, she noted.

AI exams have been conducted and are likely to be part of broader exam requests going forward, although there may not be standalone AI exams under the new administration, Chandrasekhar opined.

For a look at the SEC’s 2026 examination priorities, see “Compliance Corner Q1‑2026: Regulatory Filings and Other Considerations Hedge Fund Advisers Should Note in the Coming Quarter” (Dec. 18, 2025).

The U.S. District Court for the Western District of Wisconsin (Court) has entered a final judgment against Michael G. Hull and Christopher J. Nohl, as well as the private fund and management companies they control, awarding the SEC nearly $27.6 million in financial remedies in connection with an alleged long-running offering and valuation fraud. The defendants allegedly engaged in undisclosed self-dealing and related party transactions and made material misrepresentations and/or omissions regarding how a private fund was operated, how it valued assets and the value of those assets. This article discusses the action and its resolution.

See “SEC Enters Final Judgments Against Premium Point and Individual Defendants in Valuation Fraud Matter” (Sep. 14, 2023).

Defendants and Other Relevant Entities

In February 2020, the SEC filed a civil enforcement complaint (Complaint) against Hull, Nohl and the following five entities (together, Defendants):

1. Bluepoint Investment Counsel, LLC (Bluepoint);
2. Chrysalis Financial LLC (Chrysalis);
3. GP Rare Earth Trading Account LLC (GP);
4. Greenpoint Asset Management II LLC (GAM); and
5. Greenpoint Tactical Income Fund LLC (Fund).

The Fund is a private investment fund that, at relevant times, was controlled and managed by Hull, Nohl, GAM and Chrysalis. Its stated strategy was “generating a strong, stable balance of current cash flow and capital gains.” From April 2014 through June 2019, the Defendants raised nearly $52.8 million for the Fund from approximately 129 investors in 10 states, according to the Complaint.

Hull, through an entity owned by him and his brother, controls GAM, which was one of the Fund’s co-managers. Nohl owns and controls Chrysalis, which was the other Fund co-manager. GP Chemical LLC (GP), a wholly owned subsidiary of the Fund, held the Fund’s interests in gems and minerals.

Bluepoint, which was registered with the SEC as an investment adviser from June 2012 through March 2019, was also owned by Hull and his brother. During that period, Hull controlled Bluepoint and served as a principal and investment adviser representative. Bluepoint reported 162 accounts and $124.5 million in assets under management in its 2018 Form ADV.

Hull, through various entities, also co-managed, with two other unnamed individuals, non-parties Greenpoint Global Mittelstand Fund I (GGMF), and Greenpoint Fine Art Fund (GFAF). Hull formed the Fund, GGMF and GFAF (collectively, Greenpoint Funds) in 2013.

Non-party H Informatics LLC, which is owned by Hull and a Fund investor, provided information to Fund investors and received a fee of 0.85% of the Fund’s net assets. Alt Asset Portfolio Services LLC (AAPS) is an entity owned by Hull and Nohl that employed the Fund’s accountant.

From April 2014 through March 2019, the Fund paid more than $13.7 million in management and other fees to Chrysalis, GAM, Bluepoint, H Informatics and AAPS. Because the Fund did not generate significant returns, most of those fees were paid out of money from new investors, according to the Complaint.

Fund Holdings

The Fund’s holdings consisted primarily of a collection of gems and minerals and an investment in Amiran Technologies, Inc. (Amiran), an environmental remediation company, which it held through non-party GP. From 2013 to 2015, the Fund, through GP, assembled a collection of approximately 3,000 gems and fine mineral specimens, for an aggregate cost of approximately $21.9 million. From October 2015 to June 2018, the Fund, through GP, amassed a 42% stake in Amiran for $9 million.

At the time the SEC filed the Complaint, the last available financial statements for the Fund were for the quarter ending June 30, 2018. They reflected a net asset value of $135 million, including purported unrealized gains of approximately $93 million, consisting of:

• a collection of gems and minerals worth $68.3 million, including $46.4 million in unrealized gains; and
• Amiran securities worth $46.2 million, including $37.2 million in unrealized gains.

However, more than 95% of the Fund’s gains were “based on the Defendants’ improper valuations,” charged the SEC.

Material Misrepresentations

Investment Strategy

During the relevant period, the Fund engaged in at least three rounds of fundraising. At various times, it allegedly represented that the proceeds would be used for investments in:

• distressed real estate assets;
• real assets;
• mining, minerals and precious stones;
• intellectual property;
• private businesses with high income or high income potential; and
• factoring.

Defendants also allegedly represented that the Fund sought to provide returns through “a combination of current income, capital gains and capital appreciation” and invested “primarily in assets that produce investment return through interest payments, trading profits or operational cash flows,” asserts the Complaint.

In fact, the Fund’s holdings were “almost entirely non-income-generating and illiquid assets,” alleged the SEC. As of June 30, 2018, 52% of the Fund’s assets consisted of gems and minerals; most of the rest (approximately 46%) was its position in Amiran.

See “Ignoring Investment Mandate Results in SEC Fraud Charges for Portfolio Manager” (Oct. 13, 2022).

Business Prospects

The Fund also allegedly made material misrepresentations about the state of the gem and mineral market, its holdings and its pending investments. For example, at various times, it falsely claimed:

• the Fund’s current holdings of minerals and gems were “short term in nature and provide strong cash flow”;
• the Fund was in the process of making large acquisitions of gems and minerals “at a fraction of their current value”;
• it was poised to sell from $10 million to $30 million of its gem and mineral collection to a single collector;
• it would capitalize on internet sales; and
• notwithstanding Amiran’s ongoing financial distress:
  • all the Fund’s portfolio companies were experiencing strong growth; and
  • the value at which the Fund carried its Amiran investment on its books was well below Amiran’s current market value.

Valuation

Gems and Minerals

Fund Inflated Values

The Fund’s operating agreement required each asset to be valued at its purchase price for the year in which the asset was acquired. Thereafter, the asset would be valued at its appraised value. Nevertheless, the Fund often used appraised values for gems and minerals for the year in which it acquired them – and most such appraised values were higher than the purchase prices. For example, in 2014, the Fund appraised 22 minerals it purchased that year. The appraisals of 21 of the minerals were higher than their purchase prices, resulting in an unrealized gain of $4.4 million, which, in turn, improperly increased the management fee payable by the Fund.

Similarly, in February 2015, the Fund entered into a contract with an unnamed dealer to purchase three specimens – which would be the Fund’s most valuable – for $6.8 million, payable in five installments. The Fund “recorded large, unrealized gains on the three specimens” even though it did not make the payments according to schedule, had not paid for them in full and did not have possession of the pieces, claimed the SEC.

See “SBAI’s New Standards and Guidance on Valuing Illiquid Assets” (Aug. 28, 2025).

Fund Ignored Valuation Procedures

The Fund’s audited financial statements, starting in 2015, said the Fund valued its gem and mineral holdings using third-party appraisals based on “market driven” transactions. However, many appraisals were not based on market-driven data. For example, one appraiser’s process was “to look at a specimen for a few seconds and write down a value,” claimed the SEC. Additionally, Nohl pressured a second appraiser to increase the values of certain sets of minerals without any objective basis for doing so. He also used two appraisers to value certain minerals and then cherry-picked the more favorable appraisals.

Finally, Defendants represented that the Fund was prohibited from conducting any business with its appraisers other than appraisals of Fund assets. Nevertheless, the Fund obtained appraisals from an appraiser from which the Fund also purchased minerals.

See “Private Fund Adviser Sanctioned for Inadequate Valuation Policies” (Feb. 1, 2024); and “SEC, CFTC and DOJ Take Action Against Alleged $1‑Billion Valuation Fraud” (Mar. 17, 2022).

Amiran

“Hull and Nohl’s valuations of Amiran were misleading, unreasonable, lacked an objective basis, and ignored significant negative facts,” alleges the Complaint. They repeatedly based their valuations on a $40‑million valuation of Amiran from a 2010 offering of 1,000 shares – 10% of its outstanding stock – at $4,000 per share. However, Amiran did not sell all 1,000 shares offered, and none of the shares were sold at the full offering price. Moreover, the valuation was premised on the anticipated award of a huge U.S. government contract, which Amiran did not obtain.

Additionally, the Fund was chronically late in paying for the Amiran securities it acquired, which “caused Amiran financial distress,” according to the Complaint. From 2016 through 2018, Hull and Nohl knew Amiran was in increasingly severe financial distress. Nevertheless, they repeatedly increased their valuation of the Fund’s stake based on false claims about its business prospects. By June 2018, they valued the Fund’s stake at more than $46 million – even as one of Amiran’s lenders was foreclosing on a loan to the company.

See “SEC Sanctions and Bars Adviser’s Principal and Three Employees for Fraudulent Valuation Practices” (Dec. 2, 2021); and “Valuation, Conflicts and Misleading Disclosures Feature Prominently in SEC Settlements with Advisers’ Principals” (Apr. 29, 2021).

Income

At trial, the SEC established that, in addition to inflating the value of the Fund’s holdings, the Defendants “intentionally misled investors by reporting that the Fund was generating income,” noted the Court in its September 2025 opinion and order (Post-Trial Order) on the SEC’s post-trial motion. The Fund sent investors statements purporting to show they had earned significant income on their investments, even though the purported income consisted primarily of unrealized, inflated gains. However, “over time, [the Fund] began to operate like a Ponzi scheme, using new investors’ money to pay early complaining investors,” said the Court.

See “Unregistered Adviser Liable in Ponzi‑Like Scheme That Defrauded Hedge Funds” (May 27, 2021).

Undisclosed Related-Party Transactions

Hull and Nohl allegedly failed to disclose multiple transactions involving the Greenpoint Funds and themselves and/or the entities Hull and Nohl controlled, including:

• commission payments to Nohl and/or Bluepoint by GFAF;
• loans to Hull from the Fund;
• loan origination fees to Nohl;
• loans from Hull, Nohl and Chrysalis to the Fund at exorbitant interest rates;
• loans from GGMF to the Fund;
• loans from a Fund investor to the Fund at exorbitant interest rates; and
• transactions between GP and/or the Fund and Hull and/or Nohl.

In January 2018, the Fund retained H Informatics “to purportedly provide information to the Fund’s investors,” according to the Complaint. This conflict was approved by a “Conflicts Committee Chair” – who happened to be the father of the investor who co-owned the company with Hull. Additionally, the Fund paid AAPS $100,000 more than AAPS paid the accountant it employed. It did not disclose either arrangement to investors.

See “SEC Sanctions Adviser for Undisclosed Conflicts and Misrepresentations to Investors” (Nov. 20, 2025); and “Adviser Penalized for Undisclosed Conflicts and Principal Transactions” (Oct. 10, 2024).

Hull’s Breach of Fiduciary Duty

Hull recommended to a majority of Bluepoint’s clients that they invest all assets managed by Bluepoint in the Greenpoint Funds. He made such recommendations “without regard for the individual investor’s needs and circumstances,” alleged the SEC. He allegedly misrepresented that the Fund often arranged the sale of minerals even before it committed to purchasing them. He also allegedly misrepresented that investments in the Fund:

• were safe;
• would generate high returns; and
• could be withdrawn as needed.

See our three-part series on navigating the SEC’s interpretation of advisers’ fiduciary duty: “What It Means to Be a Fiduciary” (Oct. 17, 2019); “Six Tools to Systematically Identify Conflicts of Interest” (Oct. 24, 2019); and “Three Tools to Systematically Monitor Conflicts of Interest” (Nov. 7, 2019).

Alleged Violations

The 12‑count Complaint alleges:

• Securities Fraud:
  • All Defendants violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 (Securities Act), as well as Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b‑5 thereunder, which make it unlawful to employ any device, scheme or artifice to defraud; make material misstatements or omissions; and engage in any transaction, practice or course of business that operates as a fraud or deceit.
  • All Defendants other than GP violated Section 17(a)(2) of the Securities Act, which makes it unlawful to obtain money or property by means of material misstatements or omissions.
• Investment Adviser Fraud:
  • Hull, Nohl, Bluepoint, Chrysalis and GAM violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act), which prohibit advisers from using fraudulent or deceptive devices or courses of conduct.
  • Hull, Nohl, Chrysalis and GAM violated Section 206(4) of the Advisers Act and Rule 206(4)‑8 thereunder, which make it unlawful for an adviser to engage in fraudulent, deceptive or manipulative conduct with respect to investors in a pooled investment vehicle.
  • Hull and Nohl aided and abetted the Advisers Act violations.

The Complaint sought a permanent injunction prohibiting each Defendant from violating the referenced provisions of the securities laws and the rules thereunder that such Defendant is alleged to have violated; disgorgement of all ill-gotten gains, together with prejudgment interest; and civil monetary penalties.

In November 2021, the SEC voluntarily dismissed its three aiding and abetting claims against Hull and Nohl. On August 2, 2022, after a seven-day jury trial, the jury found for the SEC on the nine remaining direct violations. The SEC then moved for disgorgement, prejudgment interest, injunctive relief and civil penalties.

Final Judgment and Sanctions

The Court, in the Post-Trial Order, granted the SEC’s request for injunctive relief, disgorgement and half the penalties requested by the SEC. It then entered a final judgment against the Defendants, which confirms the jury’s verdict and provides the following:

• The Defendants must pay the following financial sanctions to the SEC, which it may hold as a Sarbanes-Oxley Fair Fund to compensate investors:
  • Hull, Nohl, GAM, Chrysalis and Bluepoint, jointly and severally, must pay $12,560,647 in disgorgement and $3,537,378 in prejudgment interest;
  • Hull and Nohl must each pay a $5‑million civil penalty; and
  • Bluepoint, Chrysalis and GP must each pay a $500,000 civil penalty.
• Hull and Nohl are permanently enjoined from:
  • managing or participating in the Fund and its subsidiaries, “as well as the issuance, purchase, offer, or sale of any other security more generally, including through any entity owned or controlled by them,” other than securities transactions in personal and family accounts; and
  • seeking to collect any fees, directly or indirectly, from the Fund or its subsidiaries.

In October 2019, the Fund and GP filed for Chapter 11 bankruptcy protection, according to the Post-Trial Order. In May 2022, the bankruptcy court approved their plan of reorganization, subject to the SEC’s right to pursue the enforcement action. In November 2021, Hull and GAM also filed for bankruptcy protection, but their cases were ultimately dismissed.

Serge Todorovich has joined Paul Hastings as a partner in the investment funds and private capital practice, based in the New York office. Drawing on his experience as senior in-house counsel and CCO, Todorovich advises private fund managers and investors on fund formation and operations; compliance and regulatory matters; and strategic transactions, with a particular focus on credit and hedge fund platforms.

For insights from other Paul Hastings partners, see “Insiders Tsao, Soltes and Kahn Share Insights on Investigations” (Sep. 14, 2023); and “Messaging Apps Come Under Increasing Regulatory Scrutiny” (Aug. 31, 2023).

A trusted advisor to senior management teams for nearly 20 years, Todorovich represents multi-asset credit, private credit, distressed credit and hedge fund managers across sophisticated fund and related platform matters. He regularly counsels fund managers on strategic transactions, including seeding arrangements, investment management M&A, risk retention solutions, minority general partner stake transactions, revenue-sharing structures and direct lending origination joint ventures. His experience also includes advising on fund financing, derivatives and structured product transactions, including rated note funds.

Prior to joining Paul Hastings, Todorovich served as chief legal officer and CCO at Shenkman Capital Management, a registered investment adviser with traditional and alternative credit strategies. In this role, he advised on the establishment of numerous customized separately managed account and fund-of-one mandates with institutional investors, including insurance companies; corporate and public pension plans; sovereign wealth funds; endowments; foundations; and family offices.

See our two-part series on the CCO hiring process: “Compensation Ranges and Key Attributes for the Role” (Nov. 6, 2025); and “Typical Timeline and Sample Interview Questions” (Nov. 20, 2025).

Todorovich has also held several other in-house roles, including assistant GC at Goldman Sachs and associate GC at Eton Park Capital Management, as well as serving on the Managed Funds Association’s Legal and Compliance Advisory Council.

See “Behind the NSCP’s Proposal of an SEC Compliance Advisory Committee” (Oct. 9, 2025).