Digital Assets, Tokenization & Blockchain

Bruce Leto:

Hello and welcome to “The SEC’s Regulatory Reset: Staying Ahead of the Curve.” I’m Bruce Leto. I’m one of the executive partners at Stradley Ronon Stevens & Young in Philadelphia, and I practice in the investment management area. Stradley Ronon, for 100 years, has been on the cutting-edge of innovation in the asset management industry, representing our industry-leading clients. And I’m joined today by two of my partners from our D.C. office, Sara Crovitz and Jan Folena, both of whom spent a fair amount of time at the SEC before joining Stradley Ronon. Sara was the former deputy chief counsel and associate director in the Division of Investment Management, and Jan was the former supervisory assistant chief litigation counsel in the Enforcement Division at the SEC. I think we’ll get right into it.

Unlike the prior administration, there had not been a lot of investment management–related rule proposals under Chair Atkins. One proposal that came out really recently relates to potential changes to Form N-PORT. There also were parallel staff updates to the Names Rule frequently asked questions.

Sara, can you give us some background on these issues? Let’s start with N-PORT.

Sara Crovitz:

Sure. On N-PORT, there were a couple of changes that I think really revert back to an earlier version of N-PORT to most degrees. The proposals would extend the filing deadline from 30 to 45 days after month-end and would revert to requiring public disclosure of registered fund portfolio holdings only quarterly rather than monthly, with a 60-day delay. The proposal also would narrow the scope of reporting with regard to the Names Rule and some other items, but it also would add some requirements relating to reporting for ETF share classes.

Bruce Leto:

And what about the Names Rule frequently asked questions?

Sara Crovitz:

Sure. So there were four new FAQs. These came out the same day as the N-PORT proposal. And really, these FAQs are responding to some industry questions that had been brewing for a while. I think the one that’s the most impactful is a recognition that names describing investment techniques, such as merger or merger arbitrage, do not require an 80% names policy. However, the FAQs did not address other terms, I think, where there have been questions, such as managed future strategy. There’s some good information there, but it doesn’t answer every question that the industry sort of has been asking for a while now.

Also, for retail alternative funds, a fund can now count as qualifying for the 80% basket cash or cash equivalents that are held to cover unfunded commitments to invest in private funds or SPVs, so long as the fund reasonably expects the commitments to be called in the future. So that one I think is really helpful for the retail alternative funds.

Bruce Leto:

Thanks, Sara.

Jan, should funds expect exams to ask about the Names Rule compliance once it comes into effect?

Jan Folena:

Sure. Thanks, Bruce. Great question. I don’t think the playbook has changed for exams with respect to new rules. The first thing the SEC has always done and I expect will continue to do is make sure that the very basics of the rule are complied with. So these are things like you have to file a new form or you have to check a box or you have to add a new disclosure. They’ll first look at those. It’s what the SEC calls the low-hanging fruit. Now, how they target that might look a little different now, but nonetheless, where registrants fail to implement these very basic requirements of the rule, the SEC is going to let you know about it.

Then secondly, they dig deeper. They start to look for the more substantive violations to ensure that the new rule is in fact being complied with. The administration could recognize that perhaps frequently asked questions are the best way to address even the more substantive failures. Some other administrations may choose the enforcement route.

Third, as with every new rule, you absolutely have to consider whether the rule or a portion of it — namely the portion that’s impacting you — has been properly promulgated. Don’t assume that the SEC has done all of that work ahead of time. There could be many things at work at the commission that causes the agency to promulgate rules, and those pressures sometimes outweigh a thoughtful analysis of whether the rule is actually within the agency’s statutory authority. Our clients are raising these issues again and again, and we have consistently been working with them to closely examine the SEC’s rulemaking authority, especially after the Supreme Court’s decision in Loper Bright.

Bruce Leto:

Thanks, Jan.

Let’s pivot to innovation. Stradley is celebrating its 100th year as a firm in 2026, and while we’re very proud of our history, we’re always looking ahead for clients. Sara, what will innovation look like for asset managers in 2026?

Sara Crovitz:

I think there are a few things going on in 2026 in the innovation space. First, gen AI — I mean, I think this is the year for gen AI. We’ve seen clients for a while now using it in operations and back office, operational efficiency, data mining, chatbots, marketing, but we’re really starting to see more use in the investment research process. And I think their firms are balancing efficiencies and risk management and oversight. It’s not just about whether there are hallucinations, but really practically how to integrate gen AI with existing IT systems that are at the firms. That’s a big one.

The other space that I think is really big is tokenization. Tokenization is really taking off. We’ve seen tokenized money market funds in the past, and we are seeing innovations in that space as well. For example, WisdomTree got relief, I think about a week ago, to engage in 24/7 trading and instant settlement, bypassing end-of-day NAV calculation for its money market fund. But we’re also seeing the beginnings of a move to tokenize ETFs. So BlackRock has announced plans to explore tokenizing traditional ETFs, like iShares, which would reduce fees and facilitate building model portfolios.

And Bruce, is that something that you’d want to comment on, the iShares innovation?

Bruce Leto:

I mean, it’s very, very early days. And so I don’t know much more than what’s been in the press about it, but certainly it’s early days. But we do have other clients that have been in this space for a number of years, particularly in the money market space. We have one of our long-term clients, Franklin Templeton, who’s had a money market fund that registers shares on the blockchain. Now exclusively, they ran parallel for about five, six years and spent a lot of time educating the regulators on the blockchain and the safety with the blockchain, and then turned it on a couple years ago so that now that’s the exclusive way that shares are registered. And it seems to be working fine. I’ve heard of no problems with it. And I think the SEC was very happy to be educated by that particular experience.

Sara Crovitz:

That’s great. And I think the other place that we can talk about for innovation is with regard to exchange-traded funds or exchange-traded products. We’re certainly seeing a ton of new ETPs. I think there were over a hundred ETPs in 2025 with inflows of about $50 billion. The ETP wrapper really helps democratize investing in the cryptoasset class for those who don’t want to deal with a digital wallet directly. So I anticipate this trend will continue for our clients and generally in the industry.

Then the other clearly big innovation in this space is the ETF share class relief. Bruce, do you want to comment on that at all?

Bruce Leto:

Sure, having been on the cutting-edge of that for about five or six years. The SEC has now granted exemptive relief to about 47 asset managers out of the 90 or so that filed exemptive applications seeking to establish ETF classes of shares for existing open-end funds. This follows, of course, the initial exemptive order that was granted back in the fall to Dimensional Fund Advisors, actually granted in the middle of November, to Dimensional Fund Advisors and the Dimensional Funds.

ETF classes of shares are an efficient and less cumbersome way for asset managers to enter the ETF space as opposed to establishing standalone ETFs. With ETF classes of shares, there’s existing scale, there’s an existing track record for the product and the creation of the classes also helps a fund with built-up unrealized capital gains, which is really one of the driving forces here. Since ETFs sell and redeem shares largely in kind, and since redemptions in kind are tax-free of the redeeming fund, doing redemptions in-kind of the ETF class with appreciated securities from the open-end fund’s portfolio can help the fund to avoid realizing gains, thereby reducing capital gains distributions for all shareholders.

It is definitely a huge development in the asset management area, but ETF share classes are really not for every single fund, and there’s a host of unresolved issues, both regulatory and operational. On the regulatory side, there are main limitations on paying financial intermediaries for distributing ETFs, whether classes of shares or standalone. And the industry is working on that with the SEC, but there has been not a lot of movement there, at least that we’ve heard about publicly, but we suspect that the SEC will eventually grant that relief, but it’s not on the books yet. And so of course, if it’s a fund group that’s used to paying financial intermediaries to sell their products, this is an area that might put the brakes on establishing ETF class of shares.

Then, from an operational perspective, the transfer agents, as well as the omnibus account holders, are working to develop an automated solution for exchanges from the open-end fund class to the ETF class, but those solutions are not yet ready. We’re hearing that they are working hard and fast and that something should be available by Q3 or Q4 of this year.

So there are still some brakes on the ETF class of shares. A train that’s rolling down the hill, but certainly it is a huge innovation. And for the appropriate types of funds, it’s something that I think a lot of fund groups will look at. I’m pretty sure that what we’ll see is laser-like use of this as opposed to putting ETF class of shares on all funds because not every fund is an appropriate fund for this structure.

Jan, how about from the enforcement angle on some of these innovations? What do you have to tell us?

Jan Folena:

Yeah, this is interesting, Bruce. I would say during the Clayton commission, innovation was a very big part of the agenda, and I think it is here as well. If you look at Chair Atkins’ December speech at the New York Stock Exchange, he emphasized how important it was for the SEC to ensure that the financial markets continue to move forward and that they do so with common-sense guardrails. So that takes us to, what are those guardrails? Whenever new products or technology emerge, so do new violations of the securities laws. That has always been the case. And whether we’re talking about disclosures or technology failures or compliance programs, the SEC will attempt in the most serious circumstances to apply the current laws to these new areas. This SEC has been pretty clear that it’s not going to look to discourage or halt innovation through enforcement, but it does have to make sure that any new products or new technology are safe for investors.

So our job as lawyers is to make sure that when the SEC applies its laws, that they do so appropriately with respect to the new technology and the facts that are relevant. Here it’s where it’s critical: that you ensure that the SEC, whether it’s in an exam, whether it’s an enforcement investigation, even if you’re a third party to an enforcement investigation, ensure that the agency is properly applying the text, the text of the statutes and the rules to the new issue. And then it’s not relying on policy statements, releases, settled cases or guidance because as we know, those are not enforceable. And they shouldn’t be enforceable whether you’re dealing with the SEC in a settled context, and they certainly will not be enforceable in a litigated one.

Again, I can’t emphasize enough that today’s disclosures, today’s technology failures and today’s compliance plans can form the basis for tomorrow’s enforcement actions. This commission can only do so much to foster innovation today and at the same time curb potential enforcement actions tomorrow when a new commission might be in place.

Bruce Leto:

Thanks, Jan. Let’s pivot to compliance. While the tone from the top of the SEC is one of encouraging experimentation and moving away from compliance deficiencies as standalone violations, the exam staff is still conducting exams and issuing deficiency letters.

Sara, where do we see exams focusing?

Sara Crovitz:

I think we can look here back at the priorities that came out last fall. And we see, for instance, as Jan mentioned with regard to the Names Rule, when we have new rules, we will see exams focusing there. One area on the priority list was Regulation S-P compliance. For large asset managers, the effective date for that rule was in December of ’25, and we’re already starting to see some questions on exams about Reg S-P. And there, I think, that the 72-hour disclosure requirement for third-party vendors can be pretty tricky, particularly for smaller vendors.

I think exams, the priorities, they also mentioned being focused on alternative assets and retail products. This is clearly an area of focus for the SEC. And one that I thought was really interesting, and Bruce, I’d love your views on this, the focus on asset manager mergers and acquisitions. I know you’ve been involved in a number of those over your years. What do you think that the SEC is going to be looking at there?

Bruce Leto:

Well, I think two areas in particular that come to my mind when you mention that or when the SEC mentions that is consolidating compliance functions, so kind of making sure that you line up the compliance functions to make sure that you’re kind of doing things consistently, or at least there aren’t gaps in one versus the other. In all of these mergers and acquisitions, there’s always some desire to consolidate the operations, whether it’s investments, marketing, whatever. So if you have different compliance functions, it can be cumbersome. And so I think there tends to be a navigation towards consistency in those.

Then the second thing would be operational considerations. I think that there, it kind of cuts both ways. So if you have different third-party vendors, that can be challenging because anytime there’s a transition in third-party vendors, there’s the possibility of problems, there’s the possibility of breaches, whatever. And then if you have the same, so you’re familiar with the organizations, but then you can have the same issue of, do the contracts say the same thing?

I think operationally, the third parties, and then on the compliance function, those would be two areas that I think are, in particular, things that companies should, asset managers should, think about when there’s a consolidation.

Sara Crovitz:

That’s really helpful. We saw the priorities from exams, and then I guess we also hear what kind of exam questions the industry is talking about. I think, from that perspective, again, there’s definitely been a focus, starting to be a focus in exams on investments in private assets. And then the other area that I think is interesting is despite a fair number of pronouncements from senior staff at the SEC about proxy voting and use of proxy advisory firms, we have not seen or heard really about exams that are focused on voting practices, but I would not be surprised to see that coming down the road.

Bruce Leto:

Jan, what can advisers do to prepare in advance for examinations and what should their strategy be when Examinations targets an adviser with a regular or a sweep exam?

Jan Folena:

Sure. Thanks, Bruce. We are still seeing some targeted exams, and it’s not a one-size-fits-all answer. Whether you are a fund or a fiduciary, each case has its own individual facts and merits. How we’re responding to exams, I don’t think it has really changed. I always say there are two things to this. One, be prepared, and two, have a strategic plan. What does that mean? It means we like to think beyond the basic document production and focus more on the narrative responses that the SEC often asks you to give in an exam, whether it’s in writing or during the onsite. You want to try to identify and anticipate the SEC’s concerns, what they might be, and how to eliminate them before the SEC raises those in either a deficiency letter or a referral to enforcement.

So while exams is becoming more involved in some of the more routine violations that enforcement would otherwise handle, I think you can still make a huge impact by being prepared because you can decrease the size and the number of issues raised in that deficiency letter, and you can certainly, in this administration, ward off an enforcement action, but use caution in your responses. Your responses in an exam are statements and they can work against you at a later time. You want to be responsive to the exam staff, but not overly broad or imprecise. Take the time to really answer the question and get it right. The most important thing is that the statute of limitations for the SEC is five or 10 years, depending on the violation, and that time will outlast this commission.

So I would not handle exams, investigations, or enforcement really any differently now than we really have in the past. We need to understand what the boundaries are of the law, what the SEC is looking at and how your facts really fit — and whether they fit — within the text of the statutes and the rules because that’s your defense, and exams is the time to really start putting that defense together. Don’t assume that the commission’s messaging in either this new enforcement manual, which has a few new items, or the statements of the chair or his enforcement director have reached every corner of the SEC’s nationwide exams and enforcement program.

Look, the SEC is still a fairly large organization, and some of the new priorities that are in the enforcement manual and in the speeches are really sea changes for the enforcement staff and the exam staff. So keep your eyes open for a disconnect between the leadership statements and how the staff’s implementing those statements, and always watch out for legal positions that we know the courts will not approve.

Bruce Leto:

Thanks, Jan. That’s great.

We hope we’ve given you some things to consider as the Atkins SEC moves forward with its agenda and priorities. We stand ready to bring our 100 years of experience in assisting our asset management clients in navigating the environment, then facing challenges on the regulatory front, on the compliance front, in examinations or, hopefully not, from the Enforcement Division. We hope to see you soon at the Investment Adviser Association or Investment Company Institute conferences.

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