Articles Tagged with Proposed Rules

The Massachusetts Securities Division (“MSD”) has announced the adoption of new rules requiring that investment advisers registered with the MSD provide, to clients and prospective clients, an additional one-page stand-alone disclosure document specifically detailing the adviser’s fee schedule. This new disclosure document or “Fee Table” will need to be “updated and delivered consistent with the existing requirements for Form ADV (including the Brochure).” The new rules, which were adopted pursuant to the MSD’s notice and comment process, take effect—and will be enforced—commencing on January 1, 2020.

While only applicable to advisers registered with the MSD, the new rules requiring the Fee Table could portend similar future action by additional states. Moreover, the new rules come on the heels of the SEC’s June 5th high profile standard-of-conduct releases (which we have previously chronicled) that also include a new stand-alone disclosure document for SEC-registered advisers to be known as Form CRS. If the MSD’s actions here are in fact echoed by additional states, it could cause potential headaches for the RIA industry, as this would require RIAs operating in multiple states to conform to multiple differing disclosure document regimes. Additionally, with the new Form CRS (applicable to SEC-registered advisers only) beginning to circulate at about the same time, an assortment of new documents being presented to clients may cause marketplace confusion as well.  Continue reading

The North American Securities Administrators Association—also known as “NASAA”—a cooperative association consisting of the chief securities regulators for each of the 50 United States, as well as Canadian and Mexican jurisdictions, has recently voted to adopt a model information security rule. NASAA’s new model information security rule could—if widely implemented by the individual NASAA Member jurisdictions—ultimately have a broad impact on the compliance programs of state-registered investment advisers.

Among its many roles as a confederation of individual regulators, NASAA frequently drafts and circulates “model rules” to its Members, who eventually vote on and adopt these draft rules for use by the various Member jurisdictions. A “model rule” is a familiar regulatory tool, which essentially provides a template upon which laws, rules, and other regulations can be drafted. For example, many of the individual states’ securities acts are variants of the Uniform Securities Act of 2002, a model act created by a group of legal scholars, regulators and veteran attorneys. NASAA’s new model rule is just such a template for regulators. Individual states and other jurisdictions may—at their discretion—adopt it in whole, in part, or not at all. That said, we believe that, especially given the growing importance of cybersecurity issues, it will be used more likely than not as the states come around to developing rules to parallel those already in place at the federal (SEC) level.  Continue reading

Oregon requires all investment advisers and broker-dealers to maintain errors and omissions insurance for at least $1 million. Under Section 59.175 “every applicant for a license or renewal of a license as a broker-dealer or state investment adviser shall file with the director proof that the applicant maintains an errors and omissions insurance policy.”  This law provides investors with recourse if they suffer losses because of an uninsured investment adviser. Presently, investment advisers in Oregon may obtain errors and omissions insurance through either the Oregon surplus lines, the Oregon risk retention markets, or both.  However, according to the Oregon Secretary of State’s Department of Consumer and Business Services, which oversees the Division of Finance and Securities Regulation, neither of those groups is “admitted” or authorized to conduct insurance business in Oregon.  As a result, the Department has decided that a temporary rule is necessary to help both Oregon investment advisers and insurance producers understand the steps they need to take to provide proof of insurance. Continue reading

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.

Earlier this month, FINRA issued a regulatory notice advising that it has proposed various changes to the rules relating to gifts, gratuities and non-cash compensation.  If adopted, the proposal would amend FINRA Rule 3220 (the “Gifts Rule”) and would create two new rules, Rule 3221 (“Non-Cash Compensation”) and Rule 3222 (“Business Entertainment”).

The current Gifts Rule prohibits any FINRA member or associated person from giving anything of value in excess of $100.00 per year to any person, if such payment is connected with the business of the recipient’s employer.  Under the proposed revised Gifts Rule, the $100.00 limit would be increased to $175.00 per recipient per year.  The proposed increase is designed to account for the rate of inflation since the adoption of the original Gifts Rule.  The current requirements that all associated persons’ gifts must be consolidated with those of the member firm and that records be maintained with respect to all such gifts, will be continued in the new rule.  Continue reading

On April 3, 2014, the SEC asked for comments on proposed Rule 33-9570, titled “Investment Company Advertising: Target Date Retirement Fund Names and Marketing.” The SEC had originally proposed and accepted comments on this rule in 2010, but it never took action on the proposal. “Target date funds” are a hybrid of stocks, bonds and cash, designed for a specified time-frame which is dependent on the particular investor. For example, someone planning for retirement in 2030 might have a target date fund set for that date.

The Dodd-Frank act, passed by Congress in 2012, created an Investor Advisory Committee within the SEC to offer recommendations to the SEC on various issues such as regulation of securities products, regulatory priorities, fee structures, and other initiatives to protect investor interests. The committee is authorized to submit their findings to the SEC for review and consideration. On April 11, 2013 the Committee issued recommendations regarding target date funds.

The recommendations suggested by the Committee include:

i) alterations to the fund’s “glide path illustration;”
ii) adoption of a standard methodology for designing these illustrations;
iii) increased prospectus disclosures;
iv) marketing materials requirements; and
v) expanded fee disclosures.
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The Securities and Exchange Commission (SEC) approved the Financial Industry Regulatory Authority’s (FINRA) Rule 5123 on June 7, 2012. The text of the final rule can be found here. The rule is creates some obligations for broker-dealers when they are engaged in selling private placements of securities. Due to a number of concerns, the SEC did not approve the rule until FINRA made a number of changes to the originally proposed rule. The final rule, which includes three amendments, was approved on an accelerated basis. The rule does not apply to all private placements. Sales to institutional accounts, qualified purchasers, investment companies, and other classes of purchasers are excluded.

The original proposal would have required broker-dealers involved in a private placement transaction to disclose to each of the investors prior to the sale the anticipated use of the proceeds from the offerings and the amount and type of offering expenses and offering compensation. If the disclosure documents did not include this information, the broker-dealer would have had to create a document for the investor containing the information. The proposal also required each broker-dealer to file the document with FINRA within fifteen days of the date of the first sale. If there were any amendments to the documents, then the amendments would also have to be filed with FINRA within fifteen days.
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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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The Georgia Commissioner of Securities has proposed twelve amendments to investment adviser and broker-dealer rules it promulgated late last year under the Georgia Uniform Securities Act. Although some of the amendments deal with housekeeping issues and typographical errors, several are substantive and of interest to industry participants and their counsel.

A proposed change to Rule 590-4-2-.03 would clarify that Rule 505 Form D filings under the Uniform Limited Offering Exemption must be made within 15 days after the first sale of securities in the state, rather than 15 days prior to the sale, as required by the rule as originally adopted.

The second proposed amendment applies to registration of securities by non-profit entities under Rule 590-4-2-.07, often used for so-called “church bonds.” Under the rule as originally adopted, the application of NASAA Statements of Policy relating to church bonds was permissive rather than mandatory: “The Statements of Policy … may be applied, as applicable, to the proposed offer or sale of a security …” and “may serve as the grounds for the disallowance of the exemption” provided by the Act. Under the amendment, the use of the NASAA Policies is now mandatory, the “may” having been replaced by “shall” in both cases.
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One year ago, the Securities and Exchange Commission (SEC) staff recommended that a uniform fiduciary standard be applied to both broker-dealers and investment advisers. Recently, however, the SEC postponed a corresponding rule proposal for a second time.

In January, SEC Chairman Mary Schapiro sent a letter to Congressman Scott Garrett, Chairman of the House Capital Markets Subcommittee, stating that it needs to gather additional information for an economic analysis of the impact of a standard of care regulation. Although the SEC had previously set it for action in 2011, that time frame has now been changed to “date to be determined.” The SEC has already designated specific time frames for 51 other rules and reports required by the Dodd-Frank Act.

In the letter to Rep. Garrett, Chairman Schapiro wrote, “SEC staff are drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. In this request, it is our hope commentators will provide information that will allow commission staff to continue to analyze the various components of the market for retail financial advice.”
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