Articles Tagged with Proposed Rules

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 Under the amendment, the use of the NASAA Policies is now mandatory, the “may” having been replaced by “shall” in both cases.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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In a previous blog, we discussed the Financial Industry Regulatory Authority’s (FINRA’s) proposed Rule 2210 regarding social media. FINRA responded to comments by amending the proposed rule, and filing it with the SEC for approval. The amended rule was designed to respond to concerns about whether certain types of communications should be considered correspondence or public appearances.

In the rule as originally proposed, interactive social media communications would be classified as public appearances such as television interviews, and would have to be filed with regulators. As a result of comments to the proposal, FINRA amended the rule to exclude messages on online interactive forums from a post-use filing requirement.

FINRA explains that the reasoning behind this change is due to the belief that participation in online forums occur in real-time, that it is not practical to require pre-use approval of such postings by a principal, and that these types of communications should be classified as retail communications. According to FINRA, “retail communication would include any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. ‘Retail investor would include any person other than an institutional investor, regardless of whether the person has an account with the member.'” This means that the retail communication category would instead be supervised by broker-dealers in the same manner as correspondence.
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On October 13, 2011 the Georgia Secretary of State published proposed rules under the Georgia Uniform Securities Act of 2008 (“the 2008 Act”). Among the proposed rules are twenty (20) rules governing investment advisers and investment adviser representatives.

Although many of the proposed rules are consistent with the applicable rules under the prior Georgia Securities Act of 1973, quite a few of the proposed rules are new, and are designed to respond to the changing business and regulatory environment, including passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Firms currently registered in Georgia should pay careful attention to the regulatory changes. In addition, formerly SEC-registered advisers that are switching to Georgia registration will find the Georgia regulatory landscape, under both the old rules and the new ones, if adopted, to be quite different than what they are accustomed to.
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Although the US Securities and Exchanges Commission (SEC) has publicly stated that the July 21, 2011 deadline for “Mid-Sized Investment Advisers” to register with the States will likely be moved, as of yet there is no rule formally postponing the deadline. The same looming deadline applies to hedge funds required to register for the first time.

The switch delay is thought to have been driven primarily by Investment Advisor Registration Depository (IARD) programming delays and the logistical issue of collecting asset under management data from all firms in order to qualify them for the switch. Some advisers, out of caution, are registering dually with the SEC and the states so as to cover their bases; they plan on de-registering with the SEC at the appropriate time.

The deadline may be formally moved at the upcoming June 22 SEC meeting, whose agenda identifies consideration of adoptions of new rules and amendments to implement Dodd-Frank; considering Investment Adviser Act exemption rules for venture capital funds and advisers with assets under management of less than $150 million; and considering the proposed rule defining “family offices” that will be excluded from the definition of an investment adviser under the Investment Advisers Act.

Yesterday the Securities and Exchange Commission published a notice of intent to issue an order that would increase the performance fee threshold, i.e., the definition of “qualified client” under Adviser’s Act Rule 205-3, to $2.0 Million from $1.5 Million (under the client net worth test), and to $1.5 Million from $750,000 (under the client asset under management test). The SEC also notified that it intended to adopt a rule requiring inflation adjustment reevaluation of these thresholds every five years.

The order proposal is a result of a study required by Section 418 of the Dodd-Frank Act. The proposed inflation-adjustment amendment would require the use of the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”), published by the Department of Commerce. The PCE Index is often used as an indicator of inflation in the personal sector of the U.S. economy.

The proposed amendment to Rule 205-3 would also specify that the value of a prospective client’s personal residence and any debt associated therewith should be excluded in determining net worth for purposes of determining whether he or she is a “qualified client” to whom performance fees may be charged.
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The North American Securities Administrators Association (NASAA) today published for comment a proposed custody rule for investment advisers. The proposed rule modifies the account statement detail requirement in subsection (b)(4)(A) of a proposed rule previously issued by NASAA relating to the same subject.

Comments to the previous proposed rule focused on the requirement that an investment adviser to private funds provide detailed quarterly statements to all clients. In response to these overwhelming comments, NASAA modified subsection (b)(4)(A) to reduce the level of detail to be contained in the quarterly statements that are to be sent to investment fund participants. Under the new proposed rule, the quarterly statements need only contain the quarter-end holdings and transactions during the quarter.

The basic structure of the proposed custody rule is consistent with prior model custody rules proposed by NASAA pursuant to Uniform Securities Acts of 1956 and 2002 and adopted by many states. More specifically, it provides for a number of safekeeping requirements including, among other things, providing notice to the state’s securities administrator, employing a qualified custodian, and giving certain notices to clients. In particular, the NASAA proposed rule requires any investment adviser who sends a statement to a client to urge the client to compare the account statements received from a qualified custodian with those received from the investment adviser. Any adviser who has a reasonable basis for believing that the qualified custodian sent account statements to the investors directly need not provide a separate account statement.
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According to a recent letter addressed to the North American Securities Administrators Association (NASAA) from Robert Plaze, Associate Director for Regulation of the SEC’s Division of Investment Management, a switch in regulators for advisers who manage between $25 million and $100 million in assets that was supposed to start occurring this summer may now be extended to the first quarter of 2012. The reason is that regulators need until the end of 2011 to reprogram a national registration database for advisers.

Advisers are still waiting for the SEC to adopt the proposed rules that will make the regulatory transition official. The extension of the deadline also must be considered in a rule-making procedure by the SEC.

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.