SEC Implements the “Bad Actor” Disqualification Provisions of Dodd-Frank

Previously, I summarized the Securities and Exchange Commission’s implementing regulations of Title II of the JOBS Act, lifting the ban on general solicitation for offerings exempt under Rule 506 of Regulation D, which were finalized on July 10, 2013.  At the same meeting, the SEC also finalized regulations which implement Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC to exclude certain felons and other “bad actors” from reliance on Rule 506.

Release No. 33-9414, entitled “Disqualification of Felons and Other ‘Bad Actors’ from Rule 506 Offerings,” is the final version of the rule and can be found here. “Bad actor” (or “bad boy”) disqualification provisions disqualify securities offerings from reliance on an exemption from registration if the issuer or other key persons (such as underwriters, placement agents, or directors, officers, or significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws. While such provisions can be found elsewhere in federal and state securities regulations, Rule 506 did not previously include any. [Read more…]

Unlikely Coalition Comes Together in Opposition to the Creation of an SRO for Investment Advisers

As part of the Dodd-Frank Act, Congress directed the SEC to review whether a so-called “self-regulatory organization” (or “SRO”) should be created to regulate investment advisers. Doing so would make investment adviser regulation more akin to the way broker-dealers are regulated.

Under securities laws, broker-dealers must register with the SEC by filing Form BD.  But Form BD is a relatively minor step in the process of registering a broker-dealer, because broker-dealers are also required to become a member of the Financial Industry Regulatory Authority (“FINRA”).  The membership application for FINRA is the most time-consuming step in creating a new broker-dealer.  After a broker-dealer is registered, FINRA also takes the primary role in regulating the activities of the broker-dealer.

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Maryland Securities Commissioner Issues New Order Adopting a Private Fund Exemption Based on Model NASAA Rule

On June 15, 2012, the Maryland Securities Commissioner issued an order adopting the NASAA model rule exemption for investment advisers to private funds.

Like the model rule, the new order issued by the Maryland Securities Commissioner, provides for an exemption from registration for “private fund advisers”, which is any investment adviser who provides advice solely to one or more private funds (i.e. a 3(c)(1) fund or a 3(c)(7) fund).   A private fund adviser must not be subject to disqualification from prior bad acts such as fraud or other securities law violations.  The private fund adviser must also make the same Form ADV filings as an exempt reporting adviser would. [Read more…]

Missouri Commissioner of Securities Proposes New Private Fund Exemption Based on Model NASAA Rule

On April 26, 2012, the Missouri Commissioner of Securities proposed revised regulations exempting certain private fund managers from investment adviser registration with the State of Missouri.

Background

Prior to the repeal of the federal 15-client exemption, Missouri had an exemption for fund managers who were exempt under the old federal 15-client exemption and who managed investments solely for private funds with at least $5 million under management.  After the repeal of the federal 15-client exemption, fund managers have relied on a No-Action Determination by the Missouri Commissioner of Securities dated July 20, 2011, which allowed private fund managers in Missouri to continue to rely on Missouri’s old exemption, until the earlier of June 28, 2012 or the promulgation of a new exemption, notwithstanding the repeal of the federal 15-client exemption.  Now, it appears that the Missouri Commissioner of Securities is ready to adopt that new exemption. [Read more…]

Massachusetts Securities Division Adopts Final Private Fund Adviser Exemption Based Upon NASAA Model Rule

Previously, I reported that the Massachusetts Securities Division had proposed an exemption from investment adviser registration for advisers to private funds.  In late winter, the division adopted these regulations as final (with small changes).  They are, more or less, identical to the NASAA model rule and include the model rule’s grandfathering provisions.

As part of the rule, advisers to 3(c)(1) private funds (that are not venture capital funds) must, among other requirements, accept only qualified clients (as defined in SEC regulations) as investors.  However, under the grandfathering provision, an adviser to a 3(c)(1) private fund may have non-qualified clients as investors only if the fund ceased to accept non-qualified clients as of February 3, 2012.  (In the previous proposed rule, this date was March 30, 2012). [Read more…]