Articles Posted in Compliance

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Commissioner Luis A. Aguilar of the Securities and Exchange Commission (SEC) spoke at the recent NASAA/SEC Rule 19(d) Conference in Washington D.C. He addressed the importance of cooperation and collaboration between federal and state securities regulatory agencies in order to improve investor protection. Commissioner Aguilar also expressed a desire to have a continuing collaborative relationship between the SEC and the North American Securities Administrators Association (NASAA). “I continue to be interested in exploring more opportunities and avenues for the SEC and NASAA to partner and leverage our collective resources to protect investors,” Commissioner Aguilar said, “At a time when regulators are under greater constraints than ever, it makes sense for us to come closer together to further our common goals.”

Commissioner Aguilar discussed four areas in which the SEC and NASAA have worked together to improve investor protection. These areas include the transition of advisers to state regulation, crowdfunding, financial exploitation of the elderly and the creation of the Investor Advisory Committee.
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The Missouri Securities Commissioner, Robin Carnahan, issued an advisory release to alert entrepreneurs of the impact of the new crowdfunding exemption contained in the recently passed Jumpstart Our Business Startups (JOBS) Act. The exemption will allow entrepreneurs to use crowdfunding over the Internet to raise capital for small businesses. The purpose of the alert is to inform entrepreneurs of the changes and issues that arise with the passage of the exemption.

The purpose of the exemption is to allow small business owners to raise $1 million in a 12-month period through any medium, including the Internet. Under the exemption, investors whose net income is less than $100,000 can only invest the greater of $2,000 or 5% of their annual income, while investors whose net income is greater than $100,000 may not invest more than the greater of 10% of their annual income or $100,000. The crowdfunding exemption also requires that crowdfunding securities be sold through a broker or a “funding portal,” which will be defined by rules to be adopted by the Securities and Exchange Commission (SEC). Also, the broker or “funding portal” and the small business will still be responsible for making proper disclosures to the SEC and potential investors.
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The Financial Industry Regulatory Authority (FINRA) has proposed a rule which would allow individuals who are not named as parties to a customer-initiated arbitration case to seek expungement relief by initiating “In re” expungement proceedings. Currently, unnamed persons do not have a prescribed way to seek these types of expungements, and must seek relief by:

  • Asking their current or former firm that is a party to the arbitration to request expungement on their behalf;
  • Seeking to intervene in the arbitration filed by the customer; or
  • Initiating a new arbitration case in which the unnamed person requests expungement relief and names the customer or firm as respondent.

According to Regulatory Notice 12-8, “FINRA believes that the current options do not always adequately address a number of issues that can arise in connection with expungement requests.”
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As a result of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), mid-sized firms of less than $100 million in assets under management should make the switch from Securities and Exchange Commission (SEC) oversight to state regulatory oversight. Most advisers know that under the newly adopted SEC rules, mid-sized advisers that were SEC registered prior to Dodd-Frank must remain SEC registered through the first quarter of 2012, and then complete their switch to state regulation by June 28, 2012. Firms wishing to switch should have already completed the state registration process to become effective in the state or states in which the adviser is registering.

It was estimated by this time that 3,200 firms would have made the switch to state regulation. However, spokesman John Nester for the SEC announced that as of April 5, a little more than 1,900 firms claimed that they were no longer eligible for SEC registration and needed to make the switch.
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The Florida Legislature has recently passed a law which imposes harsher penalties for those who sell unregistered securities. The bill, HB 777, was signed into law by Governor Rick Scott on April 6, 2012. The bill will take effect July 1, 2012. As a result, the lowest permissible sentence for violations is increased.

The bill provides that all those who do not register securities offerings with the state’s Office of Financial Regulation may be charged with a third-degree felony at a higher level than previously allowed. A third-degree felony in the state of Florida carries up to a five year prison sentence. Broker-dealers, appointed persons, and issuers of securities who do not register with the Office of Financial Regulation are also subject to the same penalty.
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In a previous blog, Georgia Securities Commissioner Proposes Rule Amendments, we discussed the proposed amendments to rules previously promulgated under the Georgia Uniform Securities Act of 2008. The amendments were recently adopted and became effective on March 29, 2012.

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 the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

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The Colorado Securities Division recently declined to issue a no-action letter in connection with a company that intends to educate and train people in stock market trading. Mark Espy, owner of MarkEspyMentorin.com, sent a letter to the Colorado Division of Securities on January 17, 2012 asking for either a no-action letter or the Staff’s clarification that he and his company do not need to be licensed as an investment adviser in Colorado. Espy plans to tutor people on how to use various tools in order to trade in the stock market. The course will be taught through webinars, and students will pay a fee to enroll.

According to Espy, the instruction provided in the course will include curriculum designed to teach various techniques and procedures to measure an equity’s viability for trading or investing, portfolio management, the importance of diversification, explanations of indicators, trading strategies, and building a trading plan, among other topics. Espy has also been approved to teach an adult education class on the stock market at a local community college.
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The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was “an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support.” President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
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The Commodity Futures Trading Commission (CFTC) showed this week that it may be increasing scrutiny of firms in connection with customer funds. This may be a result of the MF Global collapse last fall, in which the firm had misplaced more than $1 billion in customer funds. Since then, the CFTC has adopted stricter rules designed to better ensure the segregation of client funds from firm money.

On March 13, the CFTC brought numerous enforcement actions against firms to show that it plans to monitor firms’ treatment of customer funds more closely. These actions come during the same week in which the Futures Industry Association conference in Boca Raton was held. A former chief trial attorney for the CFTC, Allison Lurton, stated it has used trade conferences in the past as a means to drive home a point, so it may be no coincidence that the CFTC waited until the week of the conference to bring disciplinary actions. She stated, “They want to make sure that they’re sending the message to the market that they’re still on the beat and serious about protecting customer funds.”
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The Securities and Exchange Commission (SEC) has decided to increase regulation of the private equity industry, which has previously faced less regulatory scrutiny than other industries such as banking and hedge funds. At the end of 2012, the SEC sent several letters to private equity funds as “informal inquiries.” It is unclear which firms actually received the letters. The SEC maintains that its actions are not a result of suspecting any particular wrongdoing by specific firms, and it claims that its goal is to investigate possible violations of securities laws.

In the letter, the SEC requested information from private equity firms in relation to 12 broad areas including:

  • Financial statements;
  • Support for valuations of fund assets;
  • Documents setting forth a value of any assets owned by a fund over the past three years; and
  • Information on agreements between the firms and those that value fund assets.

The SEC is placing greater emphasis on the valuation of private equity firms since the firms are not publically traded and there is no listing price on the stock market. As a result, there is no easily ascertainable price for private companies. This allows for subjective judgments to play a large role in valuation. Private equity managers use varying, complex methodologies to value their holdings, which are often private companies bought using debt.
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