On March 23, 2016, the Securities and Exchange Commission (“SEC”) approved the adoption of FINRA Rule 2273, a rule first proposed by the Financial Industry Regulatory Authority (“FINRA”) on December 16, 2015.  Rule 2273 provides that member firms who hire or associate with a registered representative must provide an “educational communication” to the representative’s former and current customers.  The education communication is designed to provide customers with guidance regarding their decision whether to remain customers of that representative.  Rule 2273 went into effect on November 11, 2016.

FINRA’s stated purpose for proposing Rule 2273 was to provide “customers with a more complete picture of the potential implications of a decision to transfer assets.”  The belief was that otherwise, customers would simply rely on their “experience and confidence” with the representative.  FINRA found that such experiences alone do not always guarantee that staying with the representative will be in the customers’ best interests.  Thus, FINRA proposed the educational communication, which contains a number of questions that FINRA believes customers should ask themselves before deciding to remain with the representative. Continue reading

On November 23, 2016, Wells Fargo successfully defended a class action lawsuit relating to the recent fake account scandal, Mitchell v. Wells Fargo Bank NA.  This class action lawsuit, filed by three Wells Fargo customers in the United States District Court for the District of Utah, called for at least $5 million in damages, as well as potential punitive damages, stemming from the bank’s opening of at least 2 million accounts that its customers did not authorize.  However, Wells Fargo succeeded in having the case referred to arbitration, citing clauses in its account agreements compelling arbitration in the event of a dispute, as well as a September 2015 case from the United States District Court for the Northern District of California that also involved Wells Fargo’s alleged opening of unauthorized accounts. Continue reading

On November 17, 2016, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a Letter of Acceptance, Waiver and Consent (“AWC”), in which Oppenheimer & Co., Inc. (“Oppenheimer”) agreed to settle numerous charges.  Pursuant to the AWC, Oppenheimer will be fined $1.575 million.  It will also be required to make remediation payments of $703,122 to seven arbitration claimants and $1,142,619 to customers who qualified for but did not receive applicable sales charge waivers pertaining to mutual funds.

Many of the violations related to FINRA Rule 4530. Rule 4530(f) requires FINRA members promptly to provide FINRA with copies of certain civil complaints and arbitration claims.  Rule 4530(b) provides that if a FINRA member realizes that it or an associated person has violated any securities or investment-related laws that have widespread or potential widespread impact to the firm, the member must notify FINRA.  The notification should take place within either 30 calendar days after the determination is made or 30 calendar days after it reasonably should have been made.

According to FINRA’s findings, Oppenheimer failed to file in excess of 350 of these required filings.  Moreover, FINRA found that when Oppenheimer did make the required filings, the disclosures were, on average, more than four years late.

On October 26, 2016, the SEC adopted final rules in a year-long administrative rulemaking proceeding seeking to modernize the decades-old federal securities registration exemptions applicable to intrastate (i.e., within the borders of one state) offerings and certain small ($1-5 million) offerings.  The SEC’s adopting order in this proceeding both amends the current intrastate offering “safe harbor” found at Rule 147 under the Securities Act of 1933 (“1933 Act”) and creates a new free-standing intrastate exemption designated Rule 147A.  The newly-released order also impacts small exempt offerings by increasing the offering limit for capital raises conducted pursuant to Rule 504 under Reg D of the 1933 Act to $5 million from $1 million.  Finally, the order repeals the sparsely-utilized Reg D Rule 505.

The primary impetus for this rulemaking and its oft-stated goal of “modernizing” the SEC’s regulatory regime regarding intrastate offerings clearly has been the spread of intrastate crowdfunding exemptions recently adopted pursuant to state “blue sky” securities laws.  Notably, 42 states have currently enacted, or are in some stage of enacting, an intrastate crowdfunding exemption—the vast majority of these relying upon 1933 Act section 3(a)(11) (the statutory provision for which Rule 147 acts as a safe harbor).  Intrastate crowdfunding, however, despite its quick proliferation over the last four years, has not been immune to controversy.  Perhaps the biggest issue has been how to properly fit 21st century securities offerings based on internet communications and marketing/sales platforms onto a securities exemption crafted in 1933.

Section 3(a)(11) provides an exemption from federal registration for “[a]ny security which is part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory.”  Accordingly, it has been the SEC’s contention that any kind of general advertising or solicitation must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and Rule 147 be made only to persons resident within the state or territory of which the issuer is a resident.  In a published 2014 pronouncement, the SEC has stated that while use of the internet would not be incompatible with a claim of exemption under Rule 147, crowdfunding portals would need to implement adequate measures so that offers of securities are made only to persons resident in the relevant state or territory.

The U.S. Circuit Court of Appeals for the District of Columbia recently denied a motion brought by the National Association for Fixed Annuities (NAFA) to enjoin the implementation of the new Department of Labor (DOL) fiduciary rule. This is the first court decision on a legal challenge to the rule. There are currently several other lawsuits against the DOL seeking to overrule the new DOL fiduciary rule that await decision.

NAFA is an insurance trade association that represents insurance companies, independent marketing organizations, and individual insurance agents. NAFA has been very vocal in its opposition to the new DOL fiduciary rule, stating that the new rule will have “catastrophic consequences for the fixed indexed annuities industry” and that meeting the April 2017 deadline is “almost an impossibility for the industry.” Along with other opponents to the rule, NAFA believes the rule will lead to higher compliance costs and will greatly increase litigation risk.

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Nebraska has proposed multiple changes to its securities laws, including changes to investment adviser registration requirements, changes related to broker dealers and agents, and changes relating to securities registration procedures.

As the proposed changes relate to investment advisers, Nebraska proposes to eliminate the Form IAR and to substitute registration through the CRD/IARD system.  An original application for registration would be required to contain Form ADV, Part 2 for the firm and a brochure supplement for each investment adviser representative.  An original application would also be required to contain copies of all other promotional or disclosure literature expected to be provided to clients and perspective clients in Nebraska.  The proposed rule would eliminate from the registration renewal requirements, the current requirements of submission of Form IAR and the promotional and disclosure literature.  The rules would align Nebraska with the annual updating amendment requirements of other states, by requiring submission of annual updating amendments to Form ADV within 90 days of the end of the fiscal year.  Additionally, the rule would require firms to submit other-than-annual amendments to Form ADV as required by the Form ADV instructions.

The proposed rule would also require brochure delivery to clients in a manner consistent with the requirements of most other states.  For example, delivery of Part 2 and a brochure supplement for each individual that provides investment advice and has direct contact with the client, or exercises discretion over the client’s assets in Nebraska either at the time of entering into an advisory contract or within 48 hours before entering into the contract.  If the delivery is made at the time the contract is entered into, the client must be given the right to terminate the contract without penalty within 5 days of entering into the contract.  Either an annual update or summary of material changes must be delivered to each client within 120 days after the end of the firm’s fiscal year.

In October 2015, the Financial Services Industry Regulatory Authority, Inc. (“FINRA”) requested comments on a proposal (“Proposal”) to amend its Customer Account Information Rule (“Rule 4512”) and to adopt a new Financial Exploitation of Specified Adults Rule (“Proposed Rule 2165”).  Based on a study published in 2011 and a survey published in 2013, FINRA determined that financial exploitation of seniors and other vulnerable adults is a serious and growing problem that must be addressed.  As of now, a small number of states have already enacted legislation that is designed to help detect and prevent financial exploitation of seniors.  As discussed previously,  the North American Securities Administrators Association (“NASAA”) recently adopted a model act that is intended to provide states with guidance for drafting legislation or regulations to protect seniors and other vulnerable adults from financial exploitation.

FINRA, however, believes there needs to be a uniform, national standard regarding a financial institution’s obligations in helping to prevent financial exploitation of seniors and other vulnerable adults.  Thus, FINRA first published its Proposal in October 2015 and requested comments on it.  After receiving 40 comment letters from both individuals and institutions, FINRA filed the Proposal with the Securities and Exchange Commission in October 2016.  The SEC began a comment period on November 7, 2016, and it will end on November 28, 2016.

The proposed amendments to Rule 4512 and Proposed Rule 2165 pertain to the accounts of “Specified Adults.”  A “Specified Adult” is defined as “a natural person age 65 or older or a natural person age 18 or older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.”  Thus, the Proposal applies to accounts held by seniors and other vulnerable adults.

On October 17, 2016, FINRA published Regulatory Notice 16-37 setting an effective date for implementation of its new Capital Acquisition Broker (“CAB”) rules (“CAB Rules”).  The CAB Rules, which codify the creation and regulation of a new FINRA Membership category designed for broker/dealers that restrict their activities to certain designated corporate finance transactions, are discussed in greater detail in a recent Parker MacIntyre blog post (see “SEC Approves FINRA’s Capital Acquisition Broker Rules (“CAB Rules”)”).  Continue reading

Parker MacIntyre welcomes Thomas W. Zagorsky as a guest contributor to the RIA Compliance Blog.  Tom is a long-time friend of, and collaborator with, our firm.  His wealth of legal experience includes serving as Assistant Commissioner of Securities for the State of Georgia from 2013 to 2015 and a practice of law, both with private law firms and investment banking and private funds, for nearly 15 years.  He specializes in hedge fund formation, private securities offerings and other aspects of securities and investment services law.  Tom is well-versed in the rules and regulations relating to investment advisers, including private fund advisers, managers of private equity funds and other pooled investment vehicles.

Tom has kept a keen eye on recent statutory and rule developments impacting issues such as crowdfunding, private placement reform, and other statutory and regulatory innovations relating to corporate finance and capital formation.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.

The Department of Labor (DOL) recently released its first set of rolling FAQ guidance regarding its new rules expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), adopting new prohibited transaction exemptions (PTEs), and amending certain previously existing PTEs. The DOL answered questions regarding the new PTEs and the amendments to existing PTEs under ERISA and the Code. The DOL also reaffirmed the applicability date of April 10, 2017, stating that this date provided adequate time for financial service providers to adjust to the rule changes.

One common area of confusion regarding the new rules was the extent to which the new Best Interest Contract (BIC) exemption would be available for use by discretionary investment managers. One of the conditions to use of the BIC exemption is that the fiduciary not have any discretionary authority or control with respect to the recommended transaction. This excludes a large portion of investment advisers that serve as discretionary investment managers. However, there are limited circumstances in which they can receive protection under the BIC exemption.

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