More On Legal & Compliancefrom The Advisor's Professional Library
- Use and Misuse of Social Media Social media is an inexpensive and effective way to communicate with established and prospective clients. Nevertheless, when RIAs utilize social media to promote their advisory practices, they risk compliance problems for their firms.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
State securities regulators and consumer advocates on Tuesday called on the Securities and Exchange Commission (SEC) to withdraw its first JOBS Act rulemaking under Rule 506, which lifts the ban on general solicitation and advertising of private securities offerings to accredited investors.
“People don’t seem to think so, but this is a drastic change to the face of securities regulation,” Heath Abshure, president of the North American Securities Administrators Association (NASAA) and Arkansas securities commissioner, said in a conference call. Rule 506 offerings, he said, “already are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse.”
The comment period on the rule proposal ended last week.
Without adequate investor protections to safeguard the integrity of the private placement marketplace, Abshure said that “investors should and will flee from the market, leaving small businesses without an important source of capital.”
Barbara Roper, director of Investor Protection for the Consumer Federation of America (CFA), who was also on the call, said that the SEC “has acknowledged that lifting the ban on general solicitation in private offerings will increase the risk of fraud, potentially harming investors and issuers alike.”
Roper, who also chairs the Investor Issues task force of Americans for Financial Reform, said that while the Commission is required by the JOBS Act to lift the solicitation ban, the agency “also has an obligation to adopt rules that protect investors and promote market integrity and the authority to do so. A number of reasonable, concrete proposals have been suggested that, if adopted, would significantly improve safeguards for investors in private offerings. Its rule proposal completely ignores those suggestions.”
If the SEC fails to issue a revised rule, Roper said, the agency could likely face a slew of lawsuits. “It’s hard to imagine a more slam-dunk case than this one,” she said.
Cristina Martin Firvida, director of Financial Security and Consumer Affairs, Government Affairs for AARP, who was also on the call noted that “unregistered securities have already emerged as one of the main vehicles for fraud involving older investors, and allowing the widespread marketing of these products has the potential to greatly increase the problem.”
The groups also called on the SEC to update the accredited investor standard. “There’s nothing about ‘accredited’ that makes you sophisticated,” Abshure said.