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Regulation and Compliance > Federal Regulation > SEC

Compliance Matters

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Several notable compliance-related measures have been approved—or tabled—by the Securities and Exchange Commission, Financial Industry Regulatory Authority and state securities regulators over the past couple of months that should be on advisors’ and brokers’ radar.

First was the SEC’s decision to lift the ban on advertising by hedge funds and private equity firms. The rule, approved by a 4-1 vote by the Commission in mid-July, was a congressionally mandated rule required by the Jumpstart Our Business Startups (JOBS) Act.

SEC Chairwoman Mary Jo White said in her remarks that under the rule, “only ‘accredited investors’ would be permitted to actually invest in these offerings.” Accredited investors are defined as those who have a net worth of at least $1 million, excluding the value of their home, or earn at least $200,000 annually.

SEC Commissioner Luis Aguilar cast the dissenting vote on the measure, arguing that the Commission was moving ahead “recklessly.”

However, White argued that given the explicit language of the JOBS Act as well as the statutory deadline that passed last July, “the Commission should act without any further delay.”

Congress mandated that the SEC eliminate the ban on general solicitation in Rule 506 securities offerings. Once the ban is lifted, White said, “issuers will be able to use a number of previously unavailable solicitation and advertising methods when seeking potential investors.”

The SEC also adopted by a 3-2 vote a plan that will allow the agency to collect additional data on how the new rule affects the private offering market and the offering practices that develop under the new rule, including fraud.

But both the North American Securities Administrators Association and the Investment Company Institute were quick to express their disappointment with the SEC vote.

Heath Abshure, NASAA president and Arkansas securities commissioner, said that the SEC approved lifting the hedge fund and private equity advertising ban “before approving safeguards,” which “needlessly puts investors in harm’s way.” The decision to lift the ban, he said, “without simultaneous adoption of appropriate limits, guidance and investor protections for the most common product leading to enforcement actions by state securities regulators underscores the prospect that investors and issuers alike will be exposed to an indeterminate gap in protection.”

Therefore, he said, NASAA “strongly urges the SEC to move as -expeditiously as possible to adopt the proposed amendments to Regulation D and Form D.”

ICI President and CEO Paul Schott Stevens said that the SEC’s final rule fails to include investor protection measures recommended by ICI, consumer groups and many others. “Instead, the SEC put forward a proposal to consider whether investor protections should be added at a later date,” he said.

The SEC’s Division of Economic and Risk Analysis released a study the same month as the vote investigating the use of private placements. The report found that the private placement market exceeded the public market in 2012 ($1.7 trillion raised versus $1.2 trillion raised) and that Regulation D offerings occur with far greater frequency.

The report indicates that hedge funds and private equity funds accounted for more than 83% of private placement capital raised since 2009, and that 99% of private placements utilize Rule 506, which avoids blue sky registrations. Also, non-accredited investors participated in only 10% of private placements, and hedge funds utilized intermediaries in only 6% of offerings. In reaction to the report, Cipperman Compliance Services said that “less regulation, lower costs and speed to market all play a factor” in why private offerings “have become the dominant tool for capital formation.” Private placements, Cipperman said, “have become critical to the investment funds business.”

Galvin Cracks Down on Alts Sales to Seniors

As the SEC lifted the hedge fund advertising ban, Massachusetts Securities Regulator William Galvin was subpoenaing broker-dealers to divulge how they’re selling alternative investments—including private placements under Rule 506—to seniors.

Subpoenas went to Morgan Stanley & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated Securities, UBS Securities, Fidelity Brokerage Services, Charles Schwab & Co. Inc., Wells Fargo Advisors, TD Ameritrade, ING Financial Partners Inc., LPL Financial, Commonwealth Financial Network, MML Investor Services, Investors Capital Corp., Signator Investors Inc., Meyers Associates and WFG Investments.

However, Galvin noted that “being included on the list is not an indication of wrongdoing at this time.”

The alternative investments under Galvin’s radar besides the private placements under Rule 506 include REITs, oil and gas partnerships, structured products, tenancy-in-common and other securities carried on the broker-dealers’ non-traditional product platforms.

FINRA Tables Broker Bonus Vote but Passes Other Measures

FINRA’s decision to postpone considering an updated rule to require that brokers’ recruitment compensation be disclosed when they switch firms has attorney Patrick Burns questioning whether the rule “is going to get killed through delays.”

FINRA CEO Richard Ketchum said in late May that FINRA’s broker bonus disclosure plan would be brought up at the self-regulator’s July 11 board meeting. However, a FINRA spokesperson said the day before that “due to scheduling considerations,” the rule had been pushed to a later date.

FINRA’s board did decide at its July 11 meeting, however, to allow FINRA to file with the SEC proposed amendments to FINRA Rule 8312, which would require that nonregistered firms and reps be included in its BrokerCheck database, and approved a rule to require that debt analysts disclose the conflict-of-interest information they reveal to equity investors. The rule must be ratified by the SEC before it takes effect.

FINRA’s broker bonus proposal states that “customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms.” Under the plan, brokerage firms would have to inform customers about any special incentive package given to a recruit that totals more than $50,000.

In early March, Burns told Investment Advisor that with SIFMA’s support, “a rule in this area seems to be a foregone conclusion,” and “the only thing to be worked out is the details of the rule.” Even three of the top wirehouses—Merrill Lynch, Morgan Stanley and UBS—gave their OK to FINRA’s plan.

However, FINRA may have postponed the rule in order to iron out any potential kinks.

The SEC also approved in late June amendments to FINRA Rule 8313 that allows the self-regulator to air more information about brokers who are the subjects of disciplinary actions and complaints. FINRA can now release on its Disciplinary Actions online database a copy of any disciplinary complaint or decision it issues, bringing it in line with the practices of other federal regulators.


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