Compliance Matters

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.”