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Christmas Message from CEO of Cobalt Intelligence

Plus Regulatory Updates - Winter 2023

Hope you're having a wonderful holiday season and a merry Christmas!

It’s only been a few months since we started sending this newsletter related to Alternative Finance and AI. We hope you are finding value to what we do.

The year 2023 has been an extraordinary journey in our industry, marked by significant achievements not only in Financial Technology but also Regulatory Technology and Artificial Intelligence.

We launched our AI-ready free financial apps and provided relevant news to our community, demonstrating our commitment to ease your access to FinTech and AI Automations trends.

As we embrace this new year, we commit to persistently surpass boundaries by creating AI Financial Tools for you. I hope you join us as we wholeheartedly embrace the endless possibilities that lie ahead.

Your support has been instrumental in our motivation to continue, and we express our sincerest thanks.

As we bid farewell to 2023, I wish you and your loved ones a joyous Merry Christmas and the Happiest New Year. On behalf of Cobalt Intelligence, thank you for being a cherished part of our small but valued community.

Jordan Hansen

Stay Compliant: Regulatory Updates - Winter 2023

The update also covers the Department of Labor's fiduciary rule proposal, providing insights into current state IAR CE requirements and the SEC's recent updates to the ADV FAQ. This comprehensive update is crucial for understanding the evolving regulatory landscape affecting alternative funders

So we breakdown the lengthy and complex document for you. Here are the 10 Updates Alternative Funders should know and why.

1) 2023 SEC Enforcement Results:

The SEC’s 2023 Annual Report reveals 784 enforcement actions, a slight increase from 2022. Total penalties decreased from the previous year’s record, with $4.494 billion collected. Notably, the SEC focused on securities offerings, investment advisers, and insider trading. Key actions included penalties against 25 advisory firms for record-keeping violations and settlements with nine investment advisers for marketing rule violations. The report underscores the SEC’s continued emphasis on regulatory compliance, highlighting the importance for alternative funders to maintain stringent compliance and record-keeping practices.

2) DOL’s Fiduciary Rule Proposal:

The DOL proposed the Retirement Security Rule, expanding ERISA fiduciary obligations to include advice for 401(k) rollovers and other retirement investments. The proposal aims to ensure advice prioritizes investors' best interests, potentially impacting financial advisers, broker-dealers, and private fund managers. This change could significantly affect how alternative funders advise on retirement investments, requiring stricter adherence to fiduciary standards and possibly altering current advisory practices.

3) FinCEN’s Anti-Money Laundering Rule:

The Corporate Transparency Act (CTA), part of the Anti-Money Laundering Act of 2020, requires companies to report beneficial ownership information. Key exempt entities include SEC-registered investment advisers and certain large operating companies. The rule aims to prevent money laundering and tax fraud, especially in entities like startups and shell companies. This regulation is particularly relevant for alternative funders in terms of compliance, especially for those managing funds not on Form ADV or by state-registered or unregistered advisers.

4) Modernization of Beneficial Ownership Reporting:

The SEC’s amendments to Regulation 13D-G affect beneficial ownership reporting in equity securities. These amendments establish earlier filing deadlines for initial filings and amendments to Schedules 13D and 13G, necessitating quicker response times from investors. For alternative funders, this means more stringent monitoring of equity positions and quicker reporting, impacting investment strategies and administrative processes.

5) NYDFS Cybersecurity Regulations:

The NYDFS has finalized amendments to its 2018 cybersecurity regulations, extending requirements like multi-factor authentication and comprehensive asset inventories. While these changes primarily affect entities under NYDFS jurisdiction, they highlight the growing importance of robust cybersecurity measures in the financial sector. Alternative funders, especially those with affiliated activities in regulated sectors like banking or insurance, should strengthen their cybersecurity infrastructure to mitigate risks and comply with evolving standards.

6) State IAR Continuing Education Requirements:

Several states have adopted the NASAA model rule for Investment Adviser Representative (IAR) Continuing Education, requiring 12 credits annually, with specific focuses on ethics and product/practice knowledge. For alternative funders, particularly those operating in or with clients in these states, it’s crucial to ensure their IARs meet these education requirements to maintain compliance and uphold professional standards.

7) Updates to Form ADV FAQ:

The SEC’s Division of Investment Management added new FAQs and revised existing ones for Form ADV. This includes clarifications on categorizing ETFs and discussing material changes in Form ADV Part 2A. These updates underscore the need for alternative funders to stay informed about Form ADV requirements, ensuring accurate and comprehensive disclosures in their filings.

8) Securities Lending Reporting Obligations:

The SEC’s new Rule 10c-1a requires reporting of securities lending transactions to FINRA. This rule aims to enhance market transparency and applies to various market participants, including those acting as intermediaries in securities loans. Alternative funders involved in securities lending must adapt to these new reporting requirements, potentially affecting their operational and compliance processes.

9) Monthly Reporting of Short Sale Data:

Institutional investment managers must now report short sale data monthly to the SEC if certain thresholds are met. This requirement, stemming from the Dodd-Frank Act, aims to increase transparency in short selling activities. Alternative funders engaged in short selling must ensure compliance with these reporting requirements, which could impact trading strategies and administrative burdens.

10) CCO Liability Update:

The SEC outlined scenarios likely leading to enforcement action against Chief Compliance Officers, including active participation in misconduct, misleading regulators, and failure to fulfill compliance responsibilities. This update emphasizes the critical role of compliance personnel in maintaining regulatory standards, urging alternative funders to strengthen their compliance frameworks and ensure diligent oversight of their activities.

Headlines You Don’t Want to Miss

US Justice Department Targets Colony Ridge for Alleged Predatory Lending The company is accused of using deceptive practices that targeted minority homebuyers, such as Spanish-speaking customers, who they allegedly misinformed about the terms of their loans. Colony Ridge and its related entities allegedly violated the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The justice department seeks monetary damages for those affected and civil penalties against the company.

Prudent Funding - Revolutionizing the SMB Lending Industry with Credit Card Processing Expertise Prudent Funding is set to provide expertise in credit card processing to the fragmented SMB lending industry. The company intends to implement its unique high-risk underwriting model, a method developed over many years. A 'Risk Mitigation Program' forms a part of this model, effectively minimizing the chances of credit card processing interruption, thereby helping SMB's overcome critical cash flow issues. The company’s deep experience in the industry positions them ideally for providing valuable solutions to the sector.

Top Lending Protocol Expands to Sui for First Launch Outside of Solana Jet Protocol wishes to develop its system as the go-to choice for borrowing and lending, starting with Solana users. The protocol's integration with SUI allows it to offer a decentralized trading platform for cross-chain assets. Users can now utilize the SUI interface to lend, borrow, and earn using Jet Protocol. This move is expected to provide the users with the highest yield rates.

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