More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
A few days after Securities and Exchange Commissioner Luis Aguilar lamented the slow adoption of Regulation D safeguards under Rule 506 private offerings, the agency has released some new interpretations of the new “bad actor” rules.
The staff of the SEC’s Division of Corporation Finance on Dec. 4 answered the following question: When is an issuer required to determine whether bad actor disqualification under Rule 506(d) applies?
The staff stated in its answer that funds that continuously offer their securities must update the bad actor inquiry under Rule 506 “periodically through bring-down of representations, questionnaires and certifications, negative consent letters, periodic rechecking of public databases, and other steps, depending on the circumstances.”
The staff also narrowed the definition of “affiliated issuer” to those affiliates participating in the same offering (i.e. subject to offering integration pursuant to Rule 502(a)). With respect to solicitors, the staff defines covered persons as those actively involved including conducting due diligence, preparing offering materials, structuring, or advising the issuer.
The staff also provides additional guidance on some of the technical interpretations around solicitors, disqualifying actions and disclosure.
Cipperman Compliance Services said that it recommends that firms conduct annual “bad actor” due diligence reviews to demonstrate compliance. The SEC’s interpretations “reflect some of the initial questions raised by the industry. Expect more questions and answers as the ‘bad actor’ due diligence becomes embedded in the private offering world.”
The SEC adopted the "bad actor" rule, mandated by Section 926 of the Dodd-Frank Act, in July, the same day the agency lifted the ban on hedge fund advertising. The rule would bar “felons and other bad actors” from participating in a private-placement offering.
Check out SEC's Aguilar Laments Slow Adoption of Reg D Protections on ThinkAdvisor.