RIA Compliance BlogA new limited broker/dealer classification framework at the federal level has been created as the result of a recent SEC Order approving a FINRA rule proposal seeking to address the longstanding industry desire for augmented exemptive relief and/or limited registration classifications for broker/dealers that restrict their activities to certain designated corporate finance transactions. The new federal broker/dealer registration category known as Capital Acquisition Brokers (“CABs”), which some observers have dubbed a “lite” form of broker/dealer registration, is the latest development in this area of securities regulation, and follows a recent string of federal and state no-action letters providing exemptive relief to so-called Mergers and Acquisitions (“M&A”) Brokers. However, enthusiasm for the new CAB Rules should be tempered somewhat in that: (1) the CAB Rules do not provide exemptive relief—i.e., they do not allow firms to avoid registration but instead set up a form of registration that is meant to be somewhat less onerous; (2) CAB registration still requires that CAB firms adhere to many of the same strictures required of full broker/dealers; and (3) opting to be regulated as a CAB may require reassessment as time goes on to the extent that a firm’s business activities change. While formally approved by the SEC, FINRA’s CAB Rules are not as yet effective. FINRA will publish the effective date in an upcoming Regulatory Notice. The full set of CAB Rules approved by the SEC may be found online at http://www.finra.org/sites/default/files/SR-FINRA-2015-054-amendment-2.pdf.
Articles Tagged with Broker-Dealer
Private Equity Fund Adviser Sanctioned for Acting as Unregistered Broker-Dealer
Last month the Securities and Exchange Commission (“SEC”) sanctioned a registered investment adviser and its managing member for violating the Investment Adviser’s Act of 1940 (“Adviser’s Act”) and for acting as an unregistered broker-dealer in connection with the services the adviser provided to a private fund that it managed and the fees charged for those services.
Blackstreet Capital Management, LLC (“Blackstreet”) serves as the manager of two private equity funds (the “Funds”). In the Funds’ governing documents, Blackstreet disclosed to the Funds’ investors that it would charge fees for brokerage services rendered in connection with acquiring portfolio companies. Blackstreet did, in fact, perform brokerage services including soliciting transactions, identifying buyers and sellers, negotiating and structuring transactions, arranging for financing, and executing transactions. In exchange for those services it received over $1.8 million.
SEC Fines Broker-Dealer for Failing to Protect Confidential Client Information
Increased focus on cybersecurity by the Security Exchange Commission’s (“SEC”) continues as it recently issued charges against Morgan Stanley Smith Barney (“Morgan Stanley”) for failing to adopt written policies and procedures reasonably designed to protect confidential client information. These charges stemmed from a cybersecurity breach which began in 2011 and continued until 2014, resulting in the misappropriation of confidential client information in over 730,000 client accounts.
Broker-dealers and investment advisers are required pursuant to Regulation S-P and comparable regulation of the Federal Trade Commission to adopt written policies and procedures reasonably designed to protect client records and information. These policies and procedures must address the administrative, technical, and physical safeguards in place, and must be reasonably designed to insure the security and confidentiality of client records and information, protect against unanticipated threats, and prevent unauthorized access.
FINRA Suspends and Fines Adviser for Altering CRM Record
Last month, the Financial Industry Regulatory Authority (“FINRA”) suspended an Ameriprise registered representative for one year and fined him $50,000 for altering a record in the client relationship management (“CRM”) software that the adviser used in his Ameriprise office. This enforcement case points to the dangers for broker-dealer representatives and registered investment adviser representatives alike, in editing or altering records relating to interactions with clients.
SEC Releases Examination Priorities for 2016
The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities Exchange Commission (“SEC”) recently released its Examination Priorities for 2016. These examination priorities provide valuable insight into what OCIE perceives to be the greatest risk to investors and what it will be focusing its efforts on throughout the year. This year its overall goals stayed approximately the same as last year: 1) protecting investors saving for retirement; 2) assessing market-wide risks; and 3) using data analytics to identify and examine illegal activity.
In regards to its goal of protecting investors saving for retirement, OCIE intends to continue its Retirement-Targeted Industry Reviews and Examinations (“ReTIRE”) initiative which focuses on the suitability of investment recommendations made to investors, supervision and compliance procedures, conflicts of interest, and marketing practices. It will also continue to review the supervision procedures of branch offices of SEC-registered entities and fee selections which can lead to reverse churning. New areas of focus include exchange-traded funds (“ETFs”) which OCIE intends to examine for compliance with various regulatory requirements. It will focus on sales strategies, trading practices, disclosures, excessive portfolio concentration, and suitability, and will pay particularly close attention to niche or leveraged/inverse ETFs. In addition, variable annuities have become a large part of many investors’ retirement plans and OCIE intends to assess the suitability of these sales as well as the adequacy of disclosures. Lastly, OCIE will examine public pension advisers to ensure these advisers are not engaging in any pay-to-play activities or giving undisclosed gifts in return for appointments or other favors.
SEC Announces Cybersecurity Enforcement Action Against RIA
On September 22, the Securities and Exchange Commission (“SEC”) announced an important cybersecurity enforcement action that has broad implications to registered investment advisers. In a Settlement Order, the SEC found R.T. Jones Capital Equities Management, a St. Louis-based investment adviser, “willfully violated” the Safeguards Rule. From September 2009 through July 2013, the firm stored unencrypted, sensitive personally identifiable information (“PII”) of clients and others on its unencrypted, third party-hosted, web server.
In requiring that brokers-dealers, investment companies, and registered investment advisers guard against cybersecurity breaches, the SEC has relied on its authority under Sections 501, 504, and 505 of the Gramm-Leach-Bliley Act of 1999, to create the new regulations. The “Safeguard Rule” is Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)). Enforcement actions initiated by the SEC relating to computer security are often grounded in violations of the Safeguard Rule.
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OCIE Announces 2015 Priorities in Second Round of Cybersecurity Examinations: New Risks for Securities Firms in Cybersecurity Compliance
The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) on Sept. 15, 2015 issued Risk Alert to announce its new focus on cybersecurity of securities firms and registered investment advisers. Cybersecurity programs of securities firms had best be strengthened, otherwise they may be subject to additional regulatory scrutiny according to the Risk Alert, which is meant to serve as helpful guidance for firms that need to create or heighten a cybersecurity program. The National Exam Program in 2014 conducted cybersecurity examinations on 106 securities firms. As a follow-up to the 2014 SEC security examinations The Risk Alert highlights certain additional measures the national registered entities need to be aware of when the SEC is conducting examinations.
A sample examination request with a list of information that the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations may review in conducting examinations of registered entities regarding cybersecurity matters may be viewed here.
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How NASAA’s Proposed Model Rule Exempting M&A Brokers Stacks Up Against Other Efforts
The Broker-Dealer section of the North American Securities Administrators Association (“NASAA”) recently sent out a notice of request for comment on a proposed uniform state model rule (“Model Rule”) that would exempt merger and acquisition brokers (“M&A Brokers”) from state securities registration if certain requirements were met. While NASAA’s proposed Model Rule is similar to the recent SEC No-Action letter concerning M&A Brokers and the exemption for M&A Brokers provided by HR 37, there are some notable differences. Comments on the Model Rule must be submitted to NASAA by February 16, 2015.
First, this post will lay out the three current proposals by SEC staff, Congress, and NASAA to create an M&A Broker registration exemption. Second, a comparison between all three will be made in order to highlight how each body plans to regulate and define the scope of the exemption for M&A Brokers. Each comparison will be broken up into key aspects of each proposal’s efforts to create an exemption for M&A Brokers. Third, this post will emphasize the need to create an exemption, along with M&A Brokers, that will encompass other important unregistered actors: Private Placement Brokers.
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Michigan: First State to Create Alternative Market for Private Crowdfunding
On October 22, 2014, Michigan took a significant step to increase investment crowdfunding opportunities for Michigan businesses by becoming the first state to establish an intrastate market where broker-dealers can sell securities of Michigan-based companies. While “crowdfunding” can have different meanings, including rewards-based fundraising campaigns on sites like Kickstarter and Indiegogo, “investment crowdfunding” generally refers to small businesses seeking investment capital in small amounts from a large number of investors.
The signing of House Bill 5273 by Governor Rick Snyder, along with the state’s preexisting registration exemption for securities issued by Michigan businesses under the Michigan Invests Locally Exemption (“MILE Act”), allows Michigan business to raise capital over the Internet or though general solicitation by selling the exempt securities within a newly-created alternative intrastate market.
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Non-Registered Crowdfunding Site Reaches Settlement with SEC
In a settlement that underscores the SEC’s increased scrutiny of crowdfunding sites and whether they are acting as broker-dealers, the SEC agreed to a settlement with Eureeca Capital SPC (“Eureeca”), on November 10, 2014, over charges alleging willful violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The settlement involves Eureeca’s failure to register as a broker-dealer and to conform with the exemption from securities registration provided by Rule 506(c). According to the terms of the settlement, Eureeca, while neither admitting nor denying the SEC’s allegations, consented to the cease and desist order and the accompanying sanctions.
Eureeca is a crowdfunding portal organized in the Cayman Islands. The site connects issuers with potential investors looking to invest in businesses in exchange for equity. Eureeca receives a percentage of the funds raised in successful offerings as compensation. During the period of time covered by the settlement agreement, the offerings of securities listed on Eureeca’s website were neither registered with the SEC nor did they meet the registration exemption of Rule 506(c) that allows for the sale of unregistered securities for which general solicitation occurs.
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