A Nightmare on Swap Street: Zero In on 5 October Stories

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New Jersey wants the Supreme Court to let states treat sports event contracts like any other bet, and its Kalshi case has drawn quite a fan club. Thirty-nine states, 145 tribal groups, Chris Dodd, and Gary Gensler have filed briefs in its corner, and on October 8, the NFL joined in. Firmly on the other side, the CFTC proposed calling those contracts swaps the next day.Meanwhile, the SEC gave Hester Peirce a busy last week as a commissioner: a custody overhaul that could change who audits your fund, an exam handbook with the deadlines in one place, a plan to let more investors pay your performance fee, and a staff statement aimed at private credit marks. Fittingly for October, most of it looks scarier than it is.

Are Prediction Market Event Contracts Swaps Now?

Not officially, but the CFTC is working on it. Its October 9 proposal would write sports, political, cultural, and weather contracts into the swap definition, though the Supreme Court could still have the last word.

Bet or Swap? Depends Where You Place It

A companion interim final rule pulls sportsbook wagers and casino games out of the swap definition. So a call on Sunday’s game is a bet at a sportsbook and would be a swap on an exchange. Both releases take comments for 30 days. The circuits are split (3rd for Kalshi, 6th and 9th for the states).

What It Means for Your Fund

Less than you’d think on registration, more on taxes. Event contracts already count toward CPO status and the Rule 4.13(a)(3) de minimis test, whatever they’re called. But Section 1256 leaves swaps out of 60/40 treatment, and practitioners doubted it applied even before the CFTC called them swaps in August. We wouldn’t count on it.

What Would the SEC’s Custody Proposal Change for Your Audit?

Nothing for your 2026 year-end. The October 1 proposal would drop the custody rule’s PCAOB requirement for auditors, give funds-of-funds more time, and let advisers hold crypto themselves under tight conditions.

Who Gets to Sign Your Audit

Full disclosure: we’re PCAOB-registered, so salt to taste. We’d still keep that requirement, since it’s the only outside check on auditor quality in Rule 206(4)-2. Release IA-7023, the package we flagged last month, would also require U.S. GAAP for every audit except foreign pools and drop the surprise exam for SLOA-only custody, per the fact sheet. Comments run 60 days from publication.

Crypto Self-Custody, With Training Wheels

With the CLARITY Act stuck after a 49-50 cloture vote, this is the nearest thing to federal crypto custody rules this year. Advisers could hold their own keys only if no permitted custodian is available, with two-person sign-off and an accountant’s control report within six months. Atkins noted custodians can lag new tokens by months, Commissioner Mark T. Uyeda conceded the “inherent conflict of interest,” and Commissioner Peirce wished it were called “shelf-custody.”

What’s in the SEC’s New Exam Handbook?

Two weeks for the first document request, a deficiency letter at the end of most exams, and 30 days to answer it. It’s all in the exam handbook the SEC published October 1, and it’s worth a skim.

Deadlines You Can Plan Around

The SEC expects records within 24 hours in most cases but usually gives two weeks on the first request. Take the two weeks, but keep your books ready for a one-day turnaround. Staff owes you a disposition letter within 180 days of on-site work ending or your last production, whichever is later (15 U.S.C. 78d-5). And silence after your deficiency response isn’t agreement.

Who Else Examiners Will Call

Examiners can go straight to your custodian, administrator, and auditor, so make sure their stories match. And skip the AI notetaker, which staff won’t allow. The SEC accepts privilege logs. NFA, if you’re registered there too, has a longstanding policy of not letting privilege keep documents out of its exams. Michael Coglianese audited firms for the NFA before starting ours, so we’ve seen both sides of the table.

Can You Charge a Performance Fee to Any Accredited Investor?

Not yet. A September 30 proposal would fold accredited investors into Rule 205-3’s “qualified client” definition and scrap the $1.4 million AUM and $2.7 million net-worth tests, the reason many 3(c)(1) funds run two share classes.

The Rest of the Package

The performance-fee piece rode along with an interval-fund overhaul and five notices on new routes to accredited status, from a FINRA-developed exam to a U.S. CPA license, a comment letter we’ll recuse ourselves from. Atkins tied it all to the 401(k) alternatives executive order.

Before You Merge Share Classes

If you’re an emerging manager running a no-performance-fee class for accredited investors who aren’t qualified clients, adoption could let you fold it in. Leave your fund documents alone for now, and check whether your state exemption follows suit. The other half of the policy showed up the same day, when the SEC charged Meyer Global Management with defrauding retail investors in funds holding SpaceX and other pre-IPO stakes.

What Does the SEC Want From Private Credit Valuations?

SEC staff want marks that start at the deal price and move with the market, plus Level 3 disclosure written for your book. Chief Accountant Kurt Hohl and Investment Management Director Brian Daly spelled it out in a September 28 statement.

Thin Data Is No Excuse

Private credit inside registered funds grew from $170 billion to $270 billion in five years, and the staff noticed. The statement’s ASC 820 points apply to private funds just as much. Thin borrower data doesn’t excuse you from estimating fair value, and disclosures should cover Level 3 inputs, PIK interest, and non-accruals. It has no legal force, though it warns auditors off “less than persuasive evidence.”

Tender Season Meets Audit Season

Cliffwater Corporate Lending Fund capped third-quarter repurchases at 5% against 16% in requests, Blue Owl’s tech BDC drew requests for 39% of shares, and the biggest retail funds met less than half on average. Your LPs read those headlines, and your auditor read the staff statement. So if a loan tripped a covenant in June and the memo still says cost approximates fair value, fix it before year-end fieldwork.

What October Leaves on Your Desk

October thus far has been more of a reading assignment than a nightmare. Outside the CFTC’s casino carve-out, it’s little else besides proposals, a pending petition, and staff guidance with no legal force. Comment where a proposal touches your economics, then close the books on today’s rules and let the proposals catch up.That’s where we come in at Michael Coglianese CPA, P.C. for firms like yours:

Audits & Assurance: Explicitly built for alternative investment firms, not retrofitted from corporate templates. We know your compliance requirements inside out and deliver clean audits that hold up when regulators come knocking.
NFA Regulatory Compliance & Consulting: The NFA and CFTC don’t mess around, and neither do we. If you’re dealing with commodities, we’ll keep you compliant without the usual regulatory stress eating into your day.
Tax Preparation: You can’t get anyone at the IRS on the phone right now. Good thing we already know how to handle your K-1s, performance allocations, and whatever complex structure you’re running.
Audit, Tax, and Regulatory Support for Crypto Entities: Crypto just went from niche to normal overnight. If you’re trading, mining, or running a fund, we know the rules (even the ones they’re still writing).
Prediction Markets: Venues need audits that get customer funds right, traders need the accounting, and we do both.
Industry-Specific Advisory: We’ve spent decades serving alternative investment firms, from hedge funds to private equity to real estate. Get personalized solutions from advisors who speak your language and understand your specific challenges.

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October 21 | News