Announcements and analysis of key fintech, regulatory and compliance issues as they unfold.
Compliance News: Will SEC Regulation Crowdfunding be Amended Soon?
Some industry insiders speculate that the SEC will be voting on this proposal very soon!
See the Proposal and Press Release below and follow the SEC’s vote here: https://www.sec.gov/about/commission-votes/annual/commission-votes-ap-2020.xml
Press Release – https://www.sec.gov/news/press-release/2020-55
“SEC Proposes Rule Changes to Harmonize, Simplify and Improve the Exempt Offering Framework
Proposed amendments would provide a more rational framework, eliminate complexity and increase access to capital while preserving and enhancing important investor protections
FOR IMMEDIATE RELEASE
2020-55
Washington D.C., March 4, 2020 —
The Securities and Exchange Commission today announced that it has voted to propose a set of amendments that would harmonize, simplify, and improve the exempt offering framework to promote capital formation and expand investment opportunities while preserving and enhancing important investor protections. ….”
*********
“FACT SHEET
Facilitating Capital Formation and Expanding Investment Opportunities by Streamlining Access to Capital for Entrepreneurs
March 4, 2020
The Securities and Exchange Commission today proposed a set of amendments to the exemptive framework under the Securities Act of 1933 that would simplify, harmonize, and improve certain aspects of the framework to promote capital formation while preserving or enhancing important investor protections.
The proposed amendments would:
address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the Commission’s experience with the rules, marketplace practices, capital raising trends, and comments received;
provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and
harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.
Background
A majority of entrepreneurs and emerging businesses raise capital using the exempt offering framework under the Securities Act, from raising seed capital for new business to funding growth on the path to an initial public offering. The scope of exempt offerings has evolved over time through legislative changes and Commission rules, resulting in a current offering framework that is complex and made up of differing requirements and conditions for exemption, which may be confusing and difficult for issuers to navigate. In June 2019, the Commission issued a concept release that solicited public comment on possible ways to simplify, harmonize, and improve the exempt offering framework under the Securities Act. Informed by the comments received, as well as other feedback including recommendations of the Commission’s advisory committees, the SEC’s Government-Business Forum on Small Business Capital Formation, direct outreach to, and engagement with, investors and entrepreneurs, and Congressional feedback, the Commission’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.
Highlights
Offering and Investment Limits. The Commission proposed revisions to the current offering and investment limits for certain exemptions.
For Regulation A:
raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.
For Regulation Crowdfunding:
raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
amend the investment limits for investors in Regulation Crowdfunding offerings by:
not applying any investment limits to accredited investors; and
revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.
For Rule 504 of Regulation D:
raise the maximum offering amount from $5 million to $10 million.
“Test-the-Waters” and “Demo Day” Communications. The Commission proposed several amendments relating to offering communications, including:
a proposed new rule that would permit an issuer to use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities;
a proposed rule amendment that would permit Regulation Crowdfunding issuers to “test-the-waters” prior to filing an offering document with the Commission in a manner similar to current Regulation A; and
a proposed new rule that would provide that certain “demo day” communications would not be deemed general solicitation or general advertising.
Regulation A and Regulation Crowdfunding Eligibility. The proposal includes amendments to the eligibility restrictions in Regulation Crowdfunding and Regulation A. These proposed rules would permit the use of certain special purpose vehicles to facilitate investing in Regulation Crowdfunding issuers, and would limit the types of securities that may be offered and sold in reliance on Regulation Crowdfunding.
Integration Framework. The current Securities Act integration framework for registered and exempt offerings consists of a mixture of rules and Commission guidance for determining whether multiple securities transactions should be considered part of the same offering.
The Commission proposed changes to the framework to better facilitate this determination by providing a general principle of integration that looks to the particular facts and circumstances of the offering, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.
The Commission also proposed four non-exclusive safe harbors from integration:
Safe Harbor 1 Any offering made more than 30 calendar days before the commencement of any other offering, or more than 30 calendar days after the termination or completion of any other offering, would not be integrated with another offering; provided that, for an exempt offering for which general solicitation is not permitted, the purchasers either were not solicited through the use of general solicitation, or established a substantive relationship with the issuer prior to the commencement of the offering for which general solicitation is not permitted.
Safe Harbor 2 Offers and sales made in compliance with Rule 701, pursuant to an employee benefit plan, or in compliance with Regulation S would not be integrated with other offerings.
Safe Harbor 3 An offering for which a Securities Act registration statement has been filed would not be integrated with another offering if made subsequent to: (i) a terminated or completed offering for which general solicitation is not permitted; (ii) a terminated or completed offering for which general solicitation is permitted and made only to qualified institutional buyers and institutional accredited investors; or (iii) an offering that terminated or completed more than 30 calendar days prior to the commencement of the registered offering.
Safe Harbor 4 Offers and sales made in reliance on an exemption for which general solicitation is permitted would not be integrated with another offering if made subsequent to any prior terminated or completed offering.
Other Improvements to Specific Exemptions. The amendments also would:
change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings;
add a new item to the non-exclusive list of verification methods in Rule 506(c);
simplify certain requirements for Regulation A offerings and establish greater consistency between Regulation A and registered offerings; and
harmonize the bad actor disqualification provisions in Regulation D, Regulation A, and Regulation Crowdfunding.
What’s Next?
The comment period for the proposal will remain open for 60 days following publication in the Federal Register.
“
Source: https://www.sec.gov/news/press-release/2020-55
Regulatory Update: SEC Issues Select COVID-19 Compliance Risks for Broker-Dealers and Investment Advisers
Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers (August 12, 2020)
The Risk Alert is intended to share some of these observations with Firms, investors, and the public generally. OCIE’s observations and recommendations fall broadly into the following
six categories: (1) protection of investors’ assets; (2) supervision of personnel; (3) practices relating to fees, expenses, and financial transactions; (4) investment fraud; (5) business continuity; and (6) the protection of investor and other sensitive information.
Visit the SEC’s Release Here: https://www.sec.gov/files/Risk%20Alert%20-%20COVID-19%20Compliance.pdf
Regulatory Update: FINRA NTM 20-21 Private Placement Communications
FINRA Issued Notice to Members (NTM) 20-21 to remind member firms of the requirements to compliance with FINRA communication rules when marketing private placements. The following are some select excerpts from the NTM. The NTM addresses communications, fair and balance considerations, internal rates of return, forecasts, distribution rates, third-party materials and more. Please see the full NTM for complete details. https://www.finra.org/sites/default/files/2020-06/Regulatory-Notice-20-21.pdf
“Private placements are unregistered, non-public securities offerings that rely on an available exemption from registration with the Securities and Exchange Commission (SEC) under either Sections 3 or 4 of the Securities Act of 1933 (Securities Act).1 Most private offerings, however, are sold pursuant to one of three “safe harbors” under Rules 504, 506(b), and 506(c) of Securities Act Regulation D (Reg D).”
“FINRA Rule 2210(d)(1) requires that all member firm communications be fair, balanced and not misleading. Communications that promote the potential rewards of an investment also must disclose the associated risks in a balanced manner.”
“FINRA disciplinary actions demonstrate that member firms can be liable for violations of Rule 2210 when distributing or using noncompliant retail communications prepared by a third party.”
“Rule 2210 requires communications that discuss the benefits of an investment also to include a discussion of its risks.”
“Rule 2210(d)(1)(F) generally prohibits the use of any prediction or projection of performance, as well as any exaggerated or unwarranted claim, opinion or forecast.13 Accordingly, retail communications concerning private placements may not project or predict returns to investors such as yields, income, dividends, capital appreciation percentages or any other future investment performance.”
Regulatory Update: Municipal Advisors – Temporary Conditional Exemption from the Broker Registration Requirements
The Temporary Conditional Exemptive Order [Release No. 34-89074] is intended to address disruption in the municipal securities markets as a result of COVID-19 and permits registered municipal advisors to solicit banks, their wholly-owned subsidiaries that are engaged in commercial lending and financing activities, and credit unions (“Qualified Providers”) in connection with direct placements of securities issued by their municipal issuer clients, subject to the requirements of the Order. Note that the” direct placement of securities” is an activity that triggers broker-dealer registration requirements.
The Order permits a Registered Municipal Advisor to 1) engage in “Permitted Activities”—i.e., solicitation—of one or more Qualified Providers in connection with a potential Direct Placement of municipal securities by its Municipal Issuer client, and 2) receive transaction-based compensation for services provided in connection with that Direct Placement, without being required to register as a broker under Section 15(a) of the Exchange Act, so long as all of the conditions in this Order are met.
Read the full Order Granting a Temporary Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Registered Municipal Advisors: https://www.sec.gov/rules/exorders/2020/34-89074.pdf
Crowdfunding News: SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings
SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings
FOR IMMEDIATE RELEASE
2020-101
Washington D.C., May 4, 2020 —
The Securities and Exchange Commission today announced that it is providing temporary, conditional relief for established smaller companies affected by COVID-19 that may look to meet their urgent funding needs through a Regulation Crowdfunding offering. Today’s actions, which follow suggestions made by members of the SEC’s Small Business Capital Formation Advisory Committee, will expedite the offering process for eligible companies by providing relief from certain rules with respect to the timing of a company’s offering and the financial statements required. To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between the effective date of the temporary rules and Aug. 31, 2020.
https://www.sec.gov/news/press-release/2020-101
The following table summarizes the current rules and today’s temporary amendments:
Requirement Existing Regulation Crowdfunding Temporary Amendment Eligibility The exemption is not available to:
Non-U.S. issuers;
Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
Investment companies;
Blank check companies;
Issuers that are disqualified under Regulation Crowdfunding’s disqualification rules; and
Issuers that have failed to file the annual reports required under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement.
To rely on the temporary rules, issuers must meet the existingeligibility criteria PLUS:
The issuer cannot have been organized and cannot have been operating less than six months prior to the commencement of the offering; and
An issuer that has sold securities in a Regulation Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules.
Offers permitted After filing of offering statement (including financial statements) After filing of offering statement, but financial statements may be initially omitted (if not otherwise available) Investment commitments accepted After filing of offering statement (including financial statements) After filing of offering statement that includes financial statements or amended offering statement that includes financial statements Financial statements required when issuer is offering more than $107,000 and not more than $250,000 in a 12-month period Financial statements of the issuer reviewed by a public accountant that is independent of the issuer Financial statements of the issuer and certain information from the issuer’s Federal income tax returns, both certified by the principal executive officer Sales permitted After the information in an offering statement is publicly available for at least 21 days As soon as an issuer has received binding investment commitments covering the target offering amount (note: commitments are not binding until 48 hours after they are given) Early closing permitted Once target amount is reached if:
The offering remains open for a minimum of 21 days;
The intermediary provides notice about the new offering deadline at least five business days prior to the new offering deadline;
Investors are given the opportunity to reconsider their investment decision and to cancel their investment commitment until 48 hours prior to the new offering deadline; and
At the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount.
As soon as binding commitments are received reaching target amount if:
The issuer has complied with the disclosure requirements in temporary Rule 201(z);
The intermediary provides notice that the target offering amount has been met; and
At the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount.
Cancellations of investment commitments permitted For any reason until 48 hours prior to the deadline identified in the issuer’s offering materials. Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event of a material change to the offering). For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate). After such 48 hour period, an investment commitment may not be cancelled unless there is a material change to the offering.
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Speaking Engagement: Municipal Advisor & Broker-Dealer Exam Priorities and Best Practices
National Society of Compliance Processional’s (NSCP)
Join Brandon Klerk, Founder of Halyard Compliance LLC, at the NSCP’s 2020 National Conference for an interactive session on Broker-Dealer and Municipal Advisor Exam Best Practices.
Attendees will learn how to best prepare for a regulatory exam, including reviewing exam priorities, recent request lists, interview tips, records production, tracking, and when and how to respond to prospective findings and deficiencies. Case studies and hypothetical situations will allow attendees to apply hands-on application of the learning objectives.
Learning Objectives:
Understand the various examination types and regulatory objectives
Learn how high-risk representatives and activities will impact examinations
Discuss best practices for managing the examination process and the use of external resources (i.e. consultants, attorney’s, tech support, etc.)
Identify when, and when not, to address findings with examiners
Register Here: https://national.nscpconferences.org/
Regulatory Update: MSRB Notice 2020-09 – Extends Deadlines and other Relief
Municipal Advisors and Municipal Broker Dealers
The Municipal Securities Rulemaking Board (MSRB) filed a proposed rule change with the U.S. Securities and Exchange Commission (SEC) to provide regulatory relief on a temporary basis to brokers, dealers and municipal securities dealers (“dealers”) and municipal advisors (collectively, “regulated entities”) in light of the operational challenges due to the disruptions to normal business operations as a result of the coronavirus disease (COVID19) pandemic.
Please see the notice of complete details. Here are some highlights:
Dealers & Advisors – Rule G-3: Annual continuing education program (“firm element”);
Dealers – Rule G-3: Annual continuing education program (“regulatory element”);
Dealers – Rule G-27: office inspections;
Dealers – Rule G-27: Annual Compliance Meeting;
Dealers – Rule G-27: Annual Compliance Program Review/Controls Testing:
Dealers & Advisors – Rule A-11 & A-12: Suspension of Certain Late Fees;
Advisors – Rule G-3: Series 54 deadline for Municipal Advisor Principals;
Advisors – Rule G-44(d): Annual CEO Certification,
and more….
Ref: http://msrb.org/~/media/Files/Regulatory-Notices/Announcements/2020-09.ashx??n=1
Compliance News: Financial Industry Coronavirus (COVID-19) Resources (Update 033120)
Financial Industry Coronavirus (COVID-19) Resources
Regulator Updates
SEC
SEC Provides Additional Temporary Regulatory Relief and Assistance to Market Participants Affected by COVID-19 (3/26/2020)
Temporary Exemptive Order: Regarding Rule 606 of Regulation NMS Under the Exchange Act in Response to the Effects of COVID-19 (3/25/2020)
Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (3/24/2020)
Conditional Exemptive Order: Relief for Registered Transfer Agents and Certain Other Persons Affected by COVID-19
Immediate Effectiveness of Proposed Rule Change: Facilitating NYSE Electronic Auctions in Light of Temporary Closure of Physical Trading Floor
Staff No Action Letter: Affiliated Purchases under Rule 17a-9 of the Investment Company Act (3/19/2020)
Staff Guidance: New and Updated Frequently Asked Questions for Investment Advisers on: Conducting Investment Advisory Business from a Temporary Location (Form ADV Item 1.F) & Inadvertent Adviser Custody During a Temporary Office Closure (Question II.1) (3/16/2020)
Staff No Action Letter: Consolidated Audit Trail Reporting (3/16/2020)
Immediate Effectiveness of Proposed Rule Change: Facilitating Continued Operations of the Cboe Options Exchange In Light Of Temporary Suspension of Cboe Physical Trading Floor (3/14/2020)
Conditional Exemptive Order: Targeted Action to Assist Funds and Advisers, Permit Virtual Board Meetings and Provide Conditional Relief From Certain Filing Procedures for Funds and Investment Advisers Affected by COVID-19 (3/13/2020)
Staff Guidance: Providing Guidance to Facilitate Continued Shareholder Engagement, Including at Virtual Annual Meetings, for Companies and Funds Affected by COVID-19 (3/13/2020)
Staff Statement: Fund Board Meetings and Unforeseen or Emergency Circumstances Related to COVID-19 (3/4/2020)
Conditional Exemptive Order: Providing Conditional Regulatory Relief and Assistance for Companies Affected by COVID-19 (3/4/2020)
Joint Statement: Effects of the Coronavirus on Financial Reporting 2/19/2020
Statement from Chairman Clayton: Impact of the Coronavirus 1/30/2020
FINRA
MSRB
CFTC/NFA
FCA
FFIEC
Exchange & CCP Guidance
CBOE
CME Group
ICE/NYSE
OCC
Common Practices
Cybersecurity and Infrastructure Security Agency (CISA)
Industry Operations
DTCC: Coronavirus Disease (COVID-19) – Physical Securities Processing
Tradeweb: TW SEF and DW SEF Covid-19-related CFTC Filing and Notifications
General Coronavirus (COVID-19) Resources
World Health Organization (WHO)
Centers for Disease Control and Prevention (CDC)
Government Resources
State Government Resources
MultiState Associates
National Governors Association (NGA)
National Conference of State Legislatures (NCSL)
North American State Securities Administrators Association
Quick Links to State-Specific Information
Common Practices
Market Close Information
Industry Operations
Industry Associations
Other
Compliance News: SEC Provides Additional Temporary Regulatory Relief to Market Participants
The Securities and Exchange Commission announced that it is providing additional temporary regulatory relief to market participants in response to the effects of the Coronavirus Disease 2019 (COVID-19). The actions announced today involve (1) parties needing to gain access to make filings on the EDGAR system, (2) certain company filing obligations under Regulation A and Regulation Crowdfunding, and (3) a filing requirement for municipal advisors.
SEC Provides Additional Temporary Regulatory Relief and Assistance to Market Participants Affected by COVID-19 – https://www.sec.gov/news/press-release/2020-74
“SEC continues to closely monitor the impact of COVID-19 on investors and capital markets
FOR IMMEDIATE RELEASE
2020-74
Washington D.C., March 26, 2020 —
Today, the Securities and Exchange Commission announced that it is providing additional temporary regulatory relief to market participants in response to the effects of the Coronavirus Disease 2019 (COVID-19). The actions announced today involve (1) parties needing to gain access to make filings on the EDGAR system, (2) certain company filing obligations under Regulation A and Regulation Crowdfunding, and (3) a filing requirement for municipal advisors.
Temporary Relief from Form ID Notarization Requirement
The first set of relief seeks to address potential issues filers may have in securing the notarization required to gain access to make filings on the EDGAR system. The Commission has adopted a temporary final rule that provides relief from the notarization requirement from March 26, 2020 through July 1, 2020, subject to certain conditions. Among those conditions are that the filer indicates on its manually signed Form ID that it could not provide the required notarization due to circumstances relating to COVID-19, and that the filer submits a PDF copy of the notarized manually signed document within 90 days of obtaining an EDGAR account.
Compliance with Regulation A and Regulation Crowdfunding
To address potential compliance issues for Regulation A and Regulation Crowdfunding issuers, the Commission adopted temporary final rules that extend the filing deadlines for specified reports and forms that companies must file pursuant to those regulations. The rules provide, subject to certain conditions, affected companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 26, 2020 and May 31, 2020. Among other conditions, a company relying on the temporary final rules must promptly disclose to its investors such reliance and when a company files the required report or form, it must disclose that it is relying on the temporary final rules and state the reasons why, in good faith, it could not file such report or form on a timely basis.
Annual Update to Form MA for Municipal Advisors
To address potential compliance issues municipal advisors may have in timely submitting annual update filings (Form MA-A), the Commission issued a temporary conditional exemptive order that provides, subject to certain conditions, affected municipal advisors with an additional 45 days to file annual updates to Form MA that would have otherwise been due between March 26, 2020 and June 30, 2020. Among other conditions, the municipal advisor must be unable to meet the filing deadline for its annual update to Form MA due to circumstances related to current or potential effects of COVID-19 and must provide a brief description of the reasons why it could not timely file.”
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Compliance News: FINRA Coronavirus (COVID-19) Pandemic Resources & FAQs
Due to the coronavirus pandemic (COVID-19), FINRA has provided temporary relief for member firms from rules and requirements in the Frequently Asked Questions page linked below. The relief provided does not extend beyond the identified rules and requirements. F
As coronavirus-related risks decrease, member firms should expect to return to meeting any regulatory obligations for which relief has been provided. When appropriate, FINRA will publish a Regulatory Notice announcing a termination date for the regulatory relief that will provide member firms with time to make necessary operational adjustments.
Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic
https://www.finra.org/rules-guidance/key-topics/covid-19/faq
FINRA Coronavirus Pandemic Page
https://www.finra.org/rules-guidance/key-topics/covid-19
Compliance News: Employee Remote Working Considerations and COVID-19
As companies encourage employees to work remotely in unprecedented numbers, Compliance Departments as well as IT and HR Departments will be faced with increased challenges, such as those related to:
Cybersecurity
Communication Networks
Office Supervision and Business Disruptions
Business Continuity Planning
The following is a high-level summary of some of the potential considerations that may apply to your firm depending upon your business model and regulator(s).
Cybersecurity
Employees working remotely will access company networks through a number of networks, including Office/365, Outlook Web Access (OWA), Citrix and more. Remote access increases companies potential explosion to cybercriminals. Companies will want to assess their cybersecurity policies and procedures in light of increased employee usage. Policy and procedure reviews may include assessments of system and network vulnerability, firewalls, penetration testing, user authentication and more.
The Cybersecurity and Infrastructure Security Agency (CISA) warns individuals to remain vigilant for scams related to Coronavirus Disease 2019 (COVID-19). Cyber actors may send emails with malicious attachments or links to fraudulent websites to trick victims into revealing sensitive information or donating to fraudulent charities or causes. Exercise caution in handling any email with a COVID-19-related subject line, attachment, or hyperlink, and be wary of social media pleas, texts, or calls related to COVID-19.
CISA encourages individuals to remain vigilant and take the following precautions.
Avoid clicking on links in unsolicited emails and be wary of email attachments. See Using Caution with Email Attachments and Avoiding Social Engineering and Phishing Scams for more information.
Use trusted sources—such as legitimate, government websites—for up-to-date, fact-based information about COVID-19.
Do not reveal personal or financial information in email, and do not respond to email solicitations for this information.
Verify a charity’s authenticity before making donations. Review the Federal Trade Commission’s page on Charity Scams for more information.
Review CISA Insights on Risk Management for COVID-19 for more information.
Communication Networks
Companies may consider reminding employees of company approved communication channels (e.g., corporate Outlook email, Bloomberg messaging, etc.), as most regulatory regimes (e.g., broker-dealers, investment advisors, etc.) have supervisory and records maintenance requirements. Companies may consider conducting electronic communication reviews through their compliance systems to ensure that employees are communicating through approved communication channels. Additionally, it is important that companies ensure that their employees have access to the company network to access these approved communication channels. Compliance Departments may also consider remote employee attestations and/or checklists to assist in ensuring that employees have the resources they need, and an understanding of current compliance policies and procedures, to conduct their job compliantly.
Office Supervision and Business Disruptions
A number of regulators have issued reminders of supervisory requirements since the spread of COVID-19 began. Please feel free to visit www.HalyardCompliance.com for a helpful list of notices and announcements that the regulators and government agencies have issued to date. As an enhancement, in certain circumstances companies may consider a reasonable risk based approach to supplement current policies and procedures, such as ‘compliance check-ups’ via webinars, emails, phone, network and system checks and other means of auditing certain processes and procedures remotely. It is important to remember that until additional regulatory guidance is issued to the contrary, companies are required to adhere to current rules and regulations applicable under their respective regulatory regime(s).
Business Continuity Planning
Companies should ensure that their Business Continuity Plan (BCP) is adequate in addressing global pandemics. The BCP should consider related topics, such as restrictions on travel, working remotely, working from alternative office locations and other measure to help prevent the spread of COVID-19.
Compliance News: Financial Industry Coronavirus (COVID-19) Resources
Financial Industry Coronavirus (COVID-19) Resources
Regulator Updates
SEC Provides Temporary, Conditional Relief to Allow Small Businesses to Pursue Expedited Crowdfunding Offerings (5/4/20)
SEC Provides Additional Temporary Regulatory Relief and Assistance to Market Participants Affected by COVID-19 (3/26/2020)
Temporary Exemptive Order: Regarding Rule 606 of Regulation NMS Under the Exchange Act in Response to the Effects of COVID-19 (3/25/2020)
Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (3/24/2020)
Conditional Exemptive Order: Relief for Registered Transfer Agents and Certain Other Persons Affected by COVID-19
Immediate Effectiveness of Proposed Rule Change: Facilitating NYSE Electronic Auctions in Light of Temporary Closure of Physical Trading Floor
Staff No Action Letter: Affiliated Purchases under Rule 17a-9 of the Investment Company Act (3/19/2020)
Staff Guidance: New and Updated Frequently Asked Questions for Investment Advisers on: Conducting Investment Advisory Business from a Temporary Location (Form ADV Item 1.F) & Inadvertent Adviser Custody During a Temporary Office Closure (Question II.1) (3/16/2020)
Staff No Action Letter: Consolidated Audit Trail Reporting (3/16/2020)
Immediate Effectiveness of Proposed Rule Change: Facilitating Continued Operations of the Cboe Options Exchange In Light Of Temporary Suspension of Cboe Physical Trading Floor (3/14/2020)
Conditional Exemptive Order: Targeted Action to Assist Funds and Advisers, Permit Virtual Board Meetings and Provide Conditional Relief From Certain Filing Procedures for Funds and Investment Advisers Affected by COVID-19 (3/13/2020)
Staff Guidance: Providing Guidance to Facilitate Continued Shareholder Engagement, Including at Virtual Annual Meetings, for Companies and Funds Affected by COVID-19 (3/13/2020)
Staff Statement: Fund Board Meetings and Unforeseen or Emergency Circumstances Related to COVID-19 (3/4/2020)
Conditional Exemptive Order: Providing Conditional Regulatory Relief and Assistance for Companies Affected by COVID-19 (3/4/2020)
Joint Statement: Effects of the Coronavirus on Financial Reporting 2/19/2020
Statement from Chairman Clayton: Impact of the Coronavirus 1/30/2020
Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers (8/12/20) Visit the SEC’s Release Here: https://www.sec.gov/files/Risk%20Alert%20-%20COVID-19%20Compliance.pdf
FINRA
CFTC/NFA
FCA
FFIEC
Exchange & CCP Guidance
CBOE
CME Group
ICE/NYSE
OCC
Common Practices
Cybersecurity and Infrastructure Security Agency (CISA)
Industry Operations
DTCC: Coronavirus Disease (COVID-19) – Physical Securities Processing
Tradeweb: TW SEF and DW SEF Covid-19-related CFTC Filing and Notifications
General Coronavirus (COVID-19) Resources
World Health Organization (WHO)
Centers for Disease Control and Prevention (CDC)
Government Resources
State Government Resources
MultiState Associates
National Governors Association (NGA)
National Conference of State Legislatures (NCSL)
North American State Securities Administrators Association
Quick Links to State-Specific Information
Common Practices
Market Close Information
Industry Operations
Industry Associations
Other
Compliance News: FINRA, SEC, MSRB and NFA Issue Regulatory Notices Regarding Coronavirus
In light of recent public health concerns regarding the spread of Coronavirus, U.S. regulators have issued a number of Regulatory Notices and public announcements related to Coronavirus. Topics include supervision, branch offices, cybersecurity, business continuity planning, regulatory filings, cooperation with regulators and more. You may find links to these notices below.
FINRA Regulatory Notice 20-08 – Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief (https://www.finra.org/rules-guidance/notices/20-08)
MSRB Notice 2020-07 – MSRB Reminds Regulated Entities of Application of Supervisory Requirements in Light of Coronavirus (http://www.msrb.org/~/media/Files/Regulatory-Notices/Announcements/2020-07.ashx??n=1 )
NFA Notice I-20-10: Information on Coronavirus/COVID-19 (https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5208)
SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19) ( https://www.sec.gov/news/press-release/2020-53)
Please continue to monitor your respective regulator’s communications for additional information.
Regulatory Update: SEC Proposal – Improvements to Regulation CF, Reg D and Reg A
On March 4th, 2020, The Securities and Exchange Commission (SEC) proposed a set of amendments to the exemptive framework under the Securities Act of 1933 that is intended to simplify, harmonize, and improve certain aspects of the framework to promote capital formation while preserving or enhancing important investor protections.
Regulation CF / Title III – Highlights:
No Investment Limits for Accredited Investors…
Capital Raise Limit Increased to $5mill…
Special-Purpose-Vehicles (SPV) Allowed…
SAFEs No Longer Allowed…
Testing the Waters Allowable…
And much more….
You can read the SEC’s summary here: https://www.sec.gov/news/press-release/2020-55
You can read the complete text here: https://www.sec.gov/rules/proposed/2020/33-10763.pdf
NOTE: This is not a complete discussion of the proposal and should not be construed as regulatory advise. Please contact us for additional information.
News & Notes: SEC Cybersecurity and Resiliency Observations Report
2020 OCIE Cybersecurity and Resiliency Observations Report
Topic: OCIE has observed various industry practices and approaches to managing and combating cybersecurity risk and the maintenance and enhancement of operational resiliency.
Key takeaway: OCIE encourages market participants to review their practices, policies and procedures with respect to cybersecurity and operational resiliency.
https://www.sec.gov/report/ocie-cybersecurity-resiliency-observations
https://www.sec.gov/files/OCIE%20Cybersecurity%20and%20Resiliency%20Observations.pdf
Regulatory Update: FINRA’s 2020 Examination Priorities Letter
FINRA’s 2020 Risk Monitoring and Examination Priorities Letter describes areas of focus for FINRA’s 2020 risk monitoring, surveillance and examination programs. FINRA member firms are now grouped into one of five main firm business models: Retail, Capital Markets, Carrying and Clearing, Trading and Execution, and Diversified. FINRA 2020 priorities include:
Regulation Best Interest (Reg BI) and Form CRS
Communications with the Public
Private Placement Retail Communications
Cash Management and Bank Sweep Programs
Sales of Initial Public Offering (IPO) Shares
Trading Authorization
Direct Market Access Controls
Best Execution
Disclosure of Order Routing Information
Vendor Display Rule
Digital Assets
Contractual Commitment Arising From Underwriting Activities
and much more…
You may read the full letter here: https://www.finra.org/rules-guidance/communications-firms/2020-risk-monitoring-and-examination-priorities-letter
Regulatory Update: SEC Office of Compliance Inspections and Examinations Announces 2020 Examination Priorities
The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) announces examination priorities for fiscal year (FY) 2020. Priorities include:
OCIE’s 2020 examination priorities are found in the OCIE Press Release:
“Retail Investors, Including Seniors and Those Saving for Retirement – OCIE will continue its focus on the protection of retail investors, including the various intermediaries that serve and interact with retail investors and the investments marketed to, or designed for, retail investors. Examinations in these areas will include reviews of disclosures relating to fees, expenses, and conflicts of interest.
Market Infrastructure – OCIE will continue its focus on entities that provide services critical to the functioning of our capital markets, including clearing agencies, national securities exchanges, alternative trading systems, and transfer agents. Particular attention will be focused on the security and resiliency of entities’ systems.
Information Security – OCIE will continue to prioritize cyber and other information security risks across the entire examination program.
Focus Areas Relating to Investment Advisers, Investment Companies, Broker-Dealers, and Municipal Advisors – OCIE will continue its risk-based examinations for each type of these registered entities. In particular, examinations of registered investment advisers (RIAs) will focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. These examinations will include RIAs advising retail investors as well as private funds. Investment company examinations will focus on mutual funds and exchange-traded funds, the activities of their RIAs, and the oversight practices of their boards of directors. Broker-dealer examinations will focus on issues relating to the preparation for and implementation of recent rulemaking, along with trading practices. Municipal advisor examinations will include review of registration and continuing education requirements and municipal advisor fiduciary duty obligations to municipal entity clients.
Anti-Money Laundering Programs – OCIE will continue to review for compliance with applicable anti-money laundering (AML) requirements, including whether entities are appropriately adapting their AML programs to address their regulatory obligations.
Financial Technology (Fintech) and Innovation, Including Digital Assets and Electronic Investment Advice – OCIE recognizes that advancements in financial technologies, methods of capital formation and market structures, as well as registered firms’ use of new sources of data (often referred to as “alternative data”), warrant ongoing attention and review. OCIE also will continue to identify and examine SEC-registered firms engaged in the digital asset space, as well as RIAs that provide services to clients through automated investment tools and platforms, often referred to as “robo-advisers.”
FINRA and MSRB – OCIE will continue its oversight of the Financial Industry Regulatory Authority (FINRA) by focusing examinations on FINRA’s operations, regulatory programs, and the quality of FINRA’s examinations of broker-dealers and municipal advisors. OCIE will also continue to examine the Municipal Securities Rulemaking Board (MSRB) to evaluate the effectiveness of its operations and internal policies, procedures, and controls.
The published priorities for FY 2020 are not exhaustive and will not be the only areas OCIE focuses on in its examinations, risk alerts, and investor and industry outreach. While the priorities drive OCIE’s examinations, the scope of any examination is determined through a risk-based approach that includes analysis of a given entity’s history, operations, services, products offered, and other risk factors.
The collaborative effort to formulate the annual examination priorities starts with feedback from examination staff who are uniquely positioned to identify the practices, products, services and other factors that may pose risk to investors or the financial markets. OCIE staff also takes into account input and advice from the Chairman and other Commissioners, staff from other SEC divisions and offices, and other federal financial regulators.”
https://www.sec.gov/news/press-release/2020-4
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2020.pdf
Regulatory Update: SEC Proposes to Update the Definition of “Accredited Investor”
The SEC is proposing a update to the definition of accredited investor, which would add new categories of qualifying natural persons and entities and to make certain other modifications to the existing definition.
The proposed new categories include:
add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee;”
expand the list of entities that may qualify as accredited investors and allow entities meeting an investments test to qualify;
add family offices with at least $5 million in assets under management and their family clients; and
add the term “spousal equivalent” to the definition.
The SEC’s proposal release states “The proposed amendments are intended to update and improve the definition in order to identify more effectively institutional and individual investors that have the knowledge and expertise to participate in our private capital markets and therefore do not need the additional protections of registration under the Securities Act of 1933. Specifically, the proposed amendments would add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee;” expand the list of entities that may qualify as accredited investors and allow entities meeting an investments test to qualify; add family offices with at least $5 million in assets under management and their family clients; and add the term “spousal equivalent” to the definition. We are also proposing amendments to the qualified institutional buyer definition in Rule 144A under the Securities Act that would expand the list of entities that are eligible to qualify as qualified institutional buyers.” – SEC Release Nos. 33-10734; 34-87784; File No. S7-25-19
https://www.sec.gov/rules/proposed/2019/33-10734.pdf
Regulatory Update: SEC Proposes Significant Amendments to Investment Adviser Advertising Rule
The advertising rule for Investment Advisors, Rule 206(4)-1, has not been amended significantly since it was first adopted in 1961. The changes proposed by the SEC are motivated by the SEC’s desire to create a more “principles-based” approach to advertising regulation. Notice from the SEC follows:
SEC Proposes to Modernize the Advertising and Cash Solicitation Rules for Investment Advisers
FOR IMMEDIATE RELEASE
2019-230
Washington D.C., Nov. 4, 2019 —
The Securities and Exchange Commission today announced that it has voted to propose amendments to modernize the rules under the Investment Advisers Act addressing investment adviser advertisements and payments to solicitors. The proposed amendments are intended to update these rules to reflect changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.
“The advertising and solicitation rules provide important protections when advisers seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago,” said SEC Chairman Jay Clayton. “The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices.”
The proposed amendments to the advertising rule would replace the current rule’s broadly drawn limitations with principles-based provisions. The proposed approach would also permit the use of testimonials, endorsements, and third-party ratings, subject to certain conditions, and would include tailored requirements for the presentation of performance results based on an advertisement’s intended audience.
The proposed amendments to the solicitation rule would expand the current rule to cover solicitation arrangements involving all forms of compensation, rather than only cash, subject to a new de minimis threshold. They also would update other aspects of the rule, such as who is disqualified from acting as a solicitor under the rule.
The public comment period will remain open for 60 days following publication of the proposal in the Federal Register.
* * *
FACT SHEET
Investment Adviser Advertisements; Compensation for Solicitations
Nov. 4, 2019
Highlights
The Commission today voted to propose amendments to the rules that prohibit certain investment adviser advertisements and payments to solicitors, respectively, under the Investment Advisers Act of 1940 (the “Act”). Neither rule has been amended significantly since its adoption in 1961 and 1979, respectively. Since that time, the Commission and our staff have continued to learn about adviser marketing and solicitation practices, as those practices have evolved significantly with advancements in technology and the changes within the asset management industry and its investor base. The proposed amendments to Rule 206(4)-1 and Rule 206(4)-3 are designed to respond to these changes.
The Commission has also voted to propose amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule, which would reflect the changes proposed to the advertising and solicitation rules.
Proposed Amendments to Advertising Rule
The proposed amendments to Rule 206(4)-1 would replace the current rule’s broadly drawn limitations with more principles-based provisions, as described below.
Definition of Advertisement. The proposal would update the definition of “advertisement” so that it is flexible enough to remain relevant and effective in the face of advances in technology and evolving industry practices.
The definition would include any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advised by the adviser.
The Commission proposed exclusions from this definition for: (1) live oral communications that are not broadcast, (2) responses to certain unsolicited requests for specified information, (3) advertisements, other sales material, or sales literature that is about a registered investment company or a business development company and is within the scope of other Commission rules; and (4) information required to be contained in a statutory or regulatory notice, filing, or other communication.
General Prohibitions. The proposed rule would prohibit the following advertising practices:
making an untrue statement of a material fact, or omission of a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;
making a material claim or statement that is unsubstantiated;
making an untrue or misleading implication about, or being reasonably likely to cause an untrue or misleading inference to be drawn concerning, a material fact relating to the investment adviser;
discussing or implying any potential benefits without clear and prominent discussion of associated material risks or other limitations;
referring to specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
being otherwise materially misleading.
Testimonials and Endorsements. The proposal would permit testimonials and endorsements, subject to specified disclosures, including whether the person giving the testimonial or endorsement is a client and whether compensation has been provided by or on behalf of the adviser.
Third-Party Ratings. The proposed rule would permit third-party ratings, subject to specified disclosures and certain criteria pertaining to the preparation of the rating.
Performance Information Generally. The proposal would prohibit including in any advertisement:
Gross performance results unless it provides (or offers to provide promptly) a schedule of fees and expenses deducted to calculate net performance;
Any statement that the calculation or presentation of performance results has been approved or reviewed by the Commission;
Performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered or promoted in the advertisement, with limited exceptions;
Performance results of a subset of investments extracted from a portfolio, unless it provides or offers to provide promptly the performance results of all investments in the portfolio; and
Hypothetical performance, unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the financial situation and investment objectives of the recipient and the adviser provides certain specified information underlying the hypothetical performance.
Performance Information in a Retail Advertisement. The proposed rule would provide additional protections for an advertisement targeted to a retail audience: (1)requiring the presentation of net performance alongside any presentation of gross performance, and (2)requiring generally the presentation of the performance results of any portfolio or certain composite aggregations across 1-, 5-, and 10-year periods.
Internal Pre-Use Review and Approval. In addition, the proposed amendments would require advertisements to be reviewed and approved in writing by a designated employee before dissemination, except for advertisements that are: (1) communications disseminated only to a single person or household or to a single investor in a pooled investment vehicle; or (2) live oral communications broadcast on radio, television, the internet, or any other similar medium.
Proposed Amendments to Solicitation Rule
The proposed amendments to Rule 206(4)-3 would largely make refinements in scope, written agreement content, and disclosure requirements, as described below.
Scope.
All Forms of Compensation. The proposed rule would apply regardless of whether an adviser pays cash or non-cash compensation to a solicitor. Non-cash compensation would include directed brokerage, awards or other prizes, and free or discounted services.
Private Fund Solicitors. The proposed rule would apply to the solicitation of current and prospective investors in private funds, rather than only to the solicitation of current and prospective clients of the adviser.
Exempt Arrangements. The proposed rule would substantially retain the current rule’s partial exemptions for (1) solicitors that refer investors for impersonal investment advice, and (2) solicitors that are employees or otherwise affiliated with the adviser. However, these arrangements would no longer be subject to the current rule’s written agreement requirement. The proposal would also add two new full exemptions for: (1) de minimis compensation to solicitors, and (2) advisers that participate in certain nonprofit programs.
Disqualified Solicitors. The proposed rule contains an expanded list of disciplinary events for which persons would be disqualified from acting as a solicitor, with a limited exception.
Written Agreement. Under the proposed rule, an adviser that compensates a solicitor for solicitation activities would be required to enter into written agreement with the solicitor, unless an exemption applies. The proposed rule would require that the written agreement include: (1) a description of the solicitation activities and compensation, (2) a requirement that the solicitor perform its solicitation activities in accordance with certain provisions of the Advisers Act, and (3) a requirement that solicitor disclosure be delivered to investors. The proposed rule would eliminate the current rule’s requirements that the solicitor agree to deliver the adviser’s Form ADV brochure and perform its solicitation activities consistent with the instructions of the adviser.
Disclosure Requirements. The solicitor disclosure required under the proposed rule would continue to highlight for investors the solicitor’s financial interest in the client’s choice of an investment adviser. Our proposal would modify the current solicitor disclosure to include additional information about a solicitor’s conflict of interest. Our proposal would eliminate the current rule’s requirement that the adviser obtain from each investor acknowledgments of receipt of the disclosures.
Oversight of Solicitors. The proposed rule would require that the adviser have a reasonable basis for believing that the solicitor has complied with the rule’s written agreement, including complying with the solicitor disclosure requirement. This requirement would be largely the same as the current rule.
Proposed Amendments to the Books and Records Rule and to Form ADV
The proposed amendments to Rule 204-2 relate to the proposed amendments to the advertising and solicitation rules.
Finally, today’s proposal would amend Form ADV to provide additional information regarding advisers’ advertising practices to help facilitate the Commission’s inspection and enforcement capabilities.
Review of Relevant Staff Guidance
Staff in the Division of Investment Management have issued a number of no-action letters and other guidance addressing the application of the current advertising and solicitation rules. The Commission’s release accompanying the proposed amendments includes a list of the relevant letters and guidance. The staff is reviewing these letters to determine whether any should be withdrawn in connection with any adoption of the proposed amendments.
What’s Next?
The proposed amendments will be published on the Commission’s website and in the Federal Register. The public comment period will remain open for 60 days after publication in the Federal Register.
The Commission also approved for use two short-form tear sheets (“feedback flyers”) to gather information. Investors are encouraged to submit additional feedback about their experiences with adviser marketing on the investor feedback flyer. Smaller advisers are encouraged to submit additional feedback about how the proposed rules would affect them on the adviser feedback flyer The feedback flyers are available on the Commission’s website.
Regulatory Update: Regulation Best Interest (Reg BI) Compliance Resource Center
FINRA and The Securities and Exchange Commission (SEC) have released a number of resources for broker-dealers and investment advisers to assist them in complying with the recently adopted Regulation Best Interest (Reg BI) and Form CRS. Here are some helpful links to the various resources issued to date.
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