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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.

On February 4, 2015, the SEC issued cease and desist orders against three investment advisers that fraudulently maintained registration with the SEC by listing Wyoming as their principal place of business on their Forms ADV. These three incidences highlight Wyoming’s unusual landscape for investment advisers.

In order to explain the uniqueness of these orders, some background on investment adviser regulation will be provided. Originally, investment advisers were prohibited from registering with the SEC under the Investment Advisers Act if it managed under $25 million in assets or met a designated exemption. In July 2011, that threshold was increased to $100 million. If an investment adviser does not meet or exceed the $100 million threshold, it is still required to register with the states in which they maintain their principal place of business. Wyoming is unique in that it does not regulate investment advisers. Any investment adviser with its principal place of business in Wyoming must therefore, according to the amendments to Section 203A of the Investment Advisers Act, register with the SEC.
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On December 15, 2014, the North American Securities Administrators Association (“NASAA”) launched an online electronic filing system to be used for issuers filling Form D, Rule 506 offerings with state securities regulators. The purposes of this new electronic filing depository (“EFD”) website, according to NASAA president William Beatty, are to provide an efficient and streamlined process for regulatory filings and to allow for increased transparency for investors.

Issuers seeking an exemption under Rule 506 must meet certain requirements in order to avoid having to register their public or private offerings with the SEC or state regulators. However, those issuers must still file a notice of exempt offering of securities, or “Form D,” with the SEC and state securities regulators. Instead of the longer and more tedious process of registering with securities regulators, Form D requires only limited information about the issuer, the investors, and the securities offered.
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Earlier this month, the Securities and Exchange Commission (SEC) approved a change to Financial Industry Regulatory Authority (FINRA) Rule 5210. The rule now requires member broker-dealers to implement and enforce policies and procedures “reasonably designed” to monitor and prevent “self-trading” activity. See SEC Release No. 34-72067.

The rule, in its amended form, is designed to provide FINRA with increased ability to monitor and limit the “unintentional” interaction of orders that come from the same firm. This issue is distinct from any self-trading that are the products of fraudulent or manipulative design. Rather, FINRA’s rule will attempt to limit the misleading impact that this unintentional self-trading has on marketplace data and trade volume of a security.

The rule change will place new restrictions on self-trading activity that occurs as a result from one or related algorithms or that originate in one or related trading desks. Self-trading, as used by FINRA, does not result in a change in beneficial ownership and may or may not be a bona fide trade. The agency believes that self-trading, even conducted without fraudulent or manipulative intent, may be disruptive to the marketplace and distort information on a given security. The agency points to data it has collected that show self-trading of this kind may account for five percent or more of a security’s daily trading volume.
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The Commodities Future Trading Commission (CFTC) has adopted a final rule that makes several amendments to Regulation 4.5, which relates to commodity pool operators. The amendments add new limitations to an exclusion from the definition of a commodity pool operator (CPO) upon which registered investment companies have commonly relied. Currently, the rule excludes from the CPO definition entities that operate under other regulatory regimes, such as registered investment companies, banks, certain pension funds and insurance companies.

The amended regulations now impose two restrictions on registered investment companies that seek to use this exclusion. The first restriction is a trading threshold which would require an adviser to a registered investment company to either certify in a notice of eligibility filed with the NFT that it uses commodity futures, options or swaps only for “bona fide hedging purposes,” or, alternatively, that it meets one of the following two tests:

  • Five percent test: In relation to positions in commodity futures, commodity option contracts or swaps, the aggregate initial margin and premiums required to establish those positions will not exceed five percent of the liquidation value of its portfolio, after taking into account unrealized profits and unrealized losses; or
  • Net notional value test: the aggregate net notional value of commodity futures, commodity option contracts or swap position not solely used for “bona fide hedging purposes,” determined at the time the most recent position was established, does not exceed 100 percent of the liquidation value of the registered investment company’s portfolio, after taking into account unrealized profits and unrealized losses. The net notional value is calculated as described in CFTC Regulation 4.13(a)(ii)(B)(1) and 4.13(a)(ii)(B)(2).

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In a hilariously naïve opinion piece called Over-regulated America, the February 18, 2012 edition of The Economist makes “a plea for simplicity” to replace what it characterizes as the U.S.’s overly regulated financial system. In place of Sarbanes-Oxley and Dodd-Frank, it proposes that regulations not contain specific rules but rather merely “lay down broad goals” and “leave the regulators to enforce them.”

This is the so-called “principles-based regulation” that they have in Europe – the envy of the world when it comes to banking. America should return to its European roots, The Economist is saying. After all, the U.S. is “the home of laissez-faire.” (You would think the editors could have sent a fact-checker through the Chunnel to the Bibliothèque de la Sorbonne, but the point is not lost for the error). According to The Economist, there is nothing wrong with the American banking system that a big dose of European regulation won’t cure.

So instead of having a regulations manual that says, for instance, banks cannot engage in specified levels of leverage in proprietary trading, The Economist thinks it would be good enough to have a regulation that says to banks: “don’t put your capital at risk.” Although we tried that already, let’s humor (or humour) The Economist and pretend we haven’t. What would that be like?

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The Securities and Exchange Commission (SEC) has adopted a new rule that redefines the standard for “accredited” investors. Required by the Dodd-Frank legislation enacted in 2010, the accredited investor standard is intended to protect less sophisticated investors in less regulated investments. The rule change, which eliminates an investor’s principal residence from consideration in determining accredited status, may dramatically affect whether some potential investors remain eligible for Regulation D offerings.

Most of the accredited investor qualification criteria remain the same, but the net worth criteria has changed. In order to qualify as an accredited investor, the qualifying net worth amount remains $1,000,000; however, the value of the investor’s principal residence must now be excluded from the calculation of the investor’s assets. In addition, subject to some exceptions, the amount of the mortgage debt on the principal residence is also excluded from the investor’s liability calculation. The overall purpose of the changes is to insure that accredited investor status is determined without regard to the value of any equity in the principal residence.
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More and more brokers and investment advisers are becoming familiar with the applicable social media regulations, including those described in FINRA Regulatory Notice 10-06, to put into place procedures that permit the wide use of social media for marketing purposes. These social media sites are proving an invaluable way to create and build client relationships, referral networks and other marketing opportunities. While this guidance was welcomed by firms, much of FINRA’s guidance is proving incomplete, as broker-dealers struggle to find ways, for example, to implement procedures to comply with FINRA’s record-keeping and other requirements.

Subject firms wishing to employ greater social media need to make sure that they follow FINRA’s requirements and those of the Exchange Act, the Investment Adviser’s Act and applicable state law. The most important factor is, of course, full, accurate, fair, complete and honest disclosures particularly on those pages that are permanent as opposed to transient messages. As FINRA made clear, all social media records, even Tweets and Facebook wall postings, must be maintained by the firm as part of their supervision. Additionally, a firm needs to set a written social media policy and follow the policy thoroughly.

From a compliance standpoint, for entities subject to FINRA rules, it is important to realize that blog posts, websites, banner ads, bulletin boards and static content on social media sites are considered advertisements under Rule 2210 and thus subject to the detailed requirements of that rule, including principal review or approval prior to posting for publication. This includes profile, background and wall information.
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