On June 1, 2018, the Securities and Exchange Commission’s Division of Investment Management issued a No-Action Letter to the Investment Company Institute. The ICI asked the Division to assure that it would not recommend enforcement against a mutual fund or its transfer agent if the transfer agent temporarily withheld a disbursement from a “Specified Adult’s” mutual fund account based on a reasonable suspicion that the Specified Adult is being or is about to be financially exploited. According to FINRA Rule 2165, which is cited in the No-Action Letter, a “Specified Adult” is “a natural person age 65 and older; or … a natural person age 18 and older and who the transfer agent reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.” Continue reading
The Securities Exchange Commission (“SEC”) recently released a no-action letter allowing sub-advisers in certain situations to avoid the annual surprise examination requirement of Rule 206(4)-2 for investment advisers with custody of client funds or securities. Going forward, sub-advisers who do not have actual custody of client assets but are deemed to have custody because they are related to the qualified custodian and primary adviser will no longer have to comply with this burdensome requirement, so long as certain conditions are met.
As a review, custody is defined by Rule 206(4)-2 under the Investment Advisers Act of 1940 as the holding, directly or indirectly, of client funds or securities, or having any authority to obtain possession of them. This includes situations where a “related person,” or a person controlled by you or under common control with you, has custody of client funds. Pursuant to SEC Rule 206(4)-2, investment advisers with custody of client funds must take certain steps to safeguard such client assets. Those steps include: 1) maintaining assets with a qualified custodian; 2) notifying clients about the qualified custodian; 3) ensuring that the qualified custodian sends quarterly account statements to client; and 4) obtaining an annual surprise examination by an independent public accountant.
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.
In 2005, an American Bar Association task force published an exhaustively researched report that highlighted a huge “gray market” of unregistered brokerage activity, conducted by people that sometimes refer to themselves as “finders,” that is critical to the development of early stage companies, but operating in technical violation of the Securities Exchange Act of 1934 (“ABA Report”). Other than occasional enforcement actions against bad actors, the SEC did little to address this problem until early 2014, when it issued a No-Action letter which blessed certain restricted activities of merger and acquisition brokers (“M&A Brokers”). The SEC’s approach to other private placement brokers has been to restrict their activities even further. Compare Paul Anka, SEC No-Action Letter (July 24, 1991) (granting legal “finder” status) with Brumberg, Mackey & Wall, PLC., SEC No-Action Letter (May 17, 2010) (restricting “finder” status). Courts have not always agreed with the SEC. See SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011) (proposing a non-exhaustive six-factor test for registration).
On January 6th, the first day of the 114th Congress’s new session, the House of Representatives considered H.R. 37. This bill proposes again multiple pieces of legislation that passed the House in the previous congress but were not taken up by the Senate. The bill has now been remanded to the House Committee process. H.R. 37 contains eleven separate items which would affect the current financial regulatory landscape. One of the proposed provisions responds to concerns about financial intermediaries such as finders that participate in mergers and acquisitions. This blog post advocates that Congress, while considering legalization of M&A Brokers, should also legalize a limited class of private placement brokers.