Announcements and analysis of key fintech, regulatory and compliance issues as they unfold.
Regulatory Update: SEC’s First-Ever Enforcement Actions Regarding Duties of Municipal Advisors
The SEC has charged a Muni Advisory firm and its two principals with violating numerous duties under MSRB Rule G-42.
The allegations include, among other things, the following:
Violation of fiduciary duties and engaged in unregistered municipal advisory activities;
Engaging in municipal advisory activities when not registered with the SEC or the MSRB;
Prohibited fee-splitting arrangement with their former employer;
Engaging in muni underwriting and muni advisory for same client;
Lack of conflict of interest disclosures regarding fee-splitting arrangement and relationship with the underwriting firm;
Excessive fees charged to client for underwriting and advisory services.
Please see the SEC compliant and release for additional details, which include allegations that the Principals violation Sections 15B(a)(5) and 15B(c)(1) of the Securities Exchange Act of 1934 (“Exchange
Act”) and MSRB Rules G-17 and G-42. Additionally, the allegations that the Firm violated Section 15B(a)(1) of the Exchange Act and MSRB Rule A-12, and the Principals aided and abetted the Firm’s violations of Sections 15B(a)(1) and 15B(c)(1) of the Exchange Act and MSRB Rule A-12.
Ref: SEC Compliant – https://www.sec.gov/litigation/complaints/2021/comp-pr2021-188.pdf
Ref: SEC Release – https://www.sec.gov/news/press-release/2021-188?utm_medium=email&utm_source=govdelivery
Ref: SEC Order – https://www.sec.gov/litigation/admin/2021/34-93105.pdf
Regulatory Update: SEC’s First Case Involving Regulation Crowdfunding
The SEC filed its first Complaint regarding Reg CF and has charged the Funding Portal, Issuer and related Individuals for fraudulent offerings. The allegations include, among other things, the following:
Related to the Issuer:
fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies;
misuse of offering proceeds and diverting investor funds for personal use rather than using the funds for the purposes disclosed to investors;
false and misleading representations and omissions to investors.
Related to the Funding Portal:
failed to address red flags related to criminal history;
failed to reduce the risk of fraud to investors.
Alleged violations included the following rules and regulations:
Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)]
Rule 10b-5 thereunder [17 C.F.R. 240.10b-5]
Sections 5(a) and (c) of the Securities Act [15 U.S.C. §§ 77e(a) and (c)]
Section 17(a) of the Securities Act
Section 4A(a)(5) of the Securities Act and Rules 301(c)(2) Thereunder [15 U.S.C. § 77d–1(a)(5) and 17 C.F.R. 17 C.F.R. § 227.301(c)(2)]
Ref: SEC Compliant – https://www.sec.gov/litigation/complaints/2021/comp-pr2021-182.pdf
SEC Red Flag Resources:
Regulatory Update: FINRA Reminds Firms of their Supervisory Obligations Related to Outsourcing to Third-Party Vendors
Regulatory Notice 21-29
FINRA Reminds Firms of their Supervisory Obligations Related to Outsourcing to Third-Party Vendors
“Member firms are increasingly using third-party vendors to perform a wide range of core business and regulatory oversight functions. FINRA is publishing this Notice to remind member firms of their obligation to establish and maintain a supervisory system, including written supervisory procedures (WSPs), for any activities or functions performed by third-party vendors, including any sub-vendors (collectively, Vendors) that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. This Notice reiterates applicable regulatory obligations; summarizes recent trends in examination findings, observations and disciplinary actions; and provides questions member firms may consider when evaluating their systems, procedures and controls relating to Vendor management.”
Read further here: Ref: https://www.finra.org/rules-guidance/notices/21-29
Regulatory Update: SEC Risk Alert – Fixed Income Principal and Cross Trades – Examination Initiative
Observations Regarding Fixed Income Principal and Cross Trades by Investment Advisers from an Examination Initiative
On September 4, 2019, the Division of Examinations (the “Division”) published a Risk Alert highlighting the most common compliance issues observed by the staff related to principal and agency cross trades under the Investment Advisers Act of 1940 (“Principal Transactions Risk Alert”). In this follow-up Risk Alert, the Division supplements the staff’s observations made in the Principal Transactions Risk Alert by providing greater detail on certain compliance issues. These observations are derived from an examination initiative that focused on SEC-registered investment advisers that engaged in cross trades, principal trades, or both, involving fixed income securities. The Division encourages advisers to review their written policies and procedures regarding principal and cross trades, including the implementation of those policies and procedures, to ensure that they are consistent with the Advisers Act and the rules thereunder.
View the Risk Alert: Observations Regarding Fixed Income Principal and Cross Trades by Investment Advisers from an Examination Initiative
Read the Risk Alert here: https://www.sec.gov/files/fixed-income-principal-and-cross-trades-risk-alert.pdf
Regulatory Update: SEC Risk Alert – Investment Advisers Managing Client Accounts That Participate In Wrap Fee Programs
Observations from Examinations of Investment Advisers Managing Client Accounts That Participate In Wrap Fee Programs
The Division of Examinations (“The Division”) focused on wrap fee programs because of the continued growth of investor assets participating in such programs and the conflicts and disclosure practices observed during previous examinations. This Risk Alert discusses the most frequently cited deficiencies and other staff observations from the Division’s Wrap Fee Initiative examinations. In sharing the information in this Risk Alert, the Division encourages advisers that recommend wrap fee programs to consider and adopt policies and procedures to address those risks, conflicts, and challenges.
View the Risk Alert: Observations from Examinations of Investment Advisers Managing Client Accounts That Participate In Wrap Fee Programs
Read more here: https://www.sec.gov/files/wrap-fee-programs-risk-alert_0.pdf
Regulatory Update: SEC Risk Alert – Environmental, Social, and Governance (“ESG”) Investing
The SEC Division of Examinations has issues a Risk Alert – SEC Risk Alert – Environmental, Social, and Governance (“ESG”) Investing:
“The Risk Alert provides observations of deficiencies and internal control weaknesses from examinations of investment advisers and funds regarding ESG investing. It also provides observations of effective practices from such examinations. The Risk Alert is intended to highlight risk areas and assist firms in developing and enhancing their compliance practices. In addition, the staff seeks to provide transparency regarding the Division’s focus areas during examinations on this topic observed that firms approach ESG investing in various ways. In making investment decisions, some advisers and funds consider ESG factors alongside many other factors, such as macroeconomic trends or company-specific factors like a price-to-earnings ratio, to seek to enhance performance and manage investment risks. Others focus on ESG practices because they believe investments with favorable ESG profiles may provide higher returns or result in better ESG-related outcomes.”
View it here: https://www.sec.gov/files/esg-risk-alert.pdf
Regulatory Update: FINRA Supervision Frequently Asked Questions (FAQ)
FINRA has updated it’s FAQs on supervision. It has added the following Q&A:
https://www.finra.org/rules-guidance/key-topics/supervision/faq?utm_source=MM&utm_medium=email&utm_campaign=O%5FWeekly%5FUpdate%5F040721%5FFINAL#3-7
“7. How can member firms change the date on which their Rule 3130 annual certification is due?”
“8. What is the difference between the FINRA Rule 3120 report and the FINRA Rule 3130 report? Updated”
“10. What are the timetables for the FINRA Rules 3120 and 3130 reports and the Rule 3130 certification? Updated”
Visit here for the answers:
https://www.finra.org/rules-guidance/key-topics/supervision/faq?utm_source=MM&utm_medium=email&utm_campaign=O%5FWeekly%5FUpdate%5F040721%5FFINAL#3-7
Regulatory Update: SEC Broker-Dealer Risk Alert Regarding AML Suspicious Activity Monitoring and Reporting
The SEC’s Division of Examinations (“EXAMS”) has issued a Risk Alert regarding their compliance findings related to anti-money laundering (“AML”) requirements. In sharing its observations from these examinations of broker-dealers, EXAMS is seeking to remind firms of their obligations under AML rules and regulations and to assist broker-dealers in reviewing and enhancing their AML programs, in particular their monitoring for and reporting of suspicious activity to law enforcement and financial regulators. Mutual funds also may benefit from the examination observations discussed here. The Risk Alert states the following and notes the following areas that need enhancement at broker-dealers.
AML Policies and Procedures and Internal Controls
Suspicious Activity Monitoring and Reporting
The Bank Secrecy Act (“BSA”) and implementing regulations establish the basic framework for AML obligations imposed on financial institutions.2 The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Department of Treasury, adopted the “AML Program Rule” and the “SAR Rule” to implement AML programs and suspicious activity monitoring and reporting requirements for broker-dealers Rule 17a-8 under the Securities Exchange Act of 1934 (“Exchange Act”) requires broker-dealers to comply with the reporting, recordkeeping, and record retention requirements of the BSA, including those regarding Suspicious Activity Reports (“SARs”).
See the full alert here: https://www.sec.gov/files/aml-risk-alert.pdf
Regulatory Update: SEC Reg CF and NEW Form C Filing FAQ
In light of the Reg CF rule amendment that became effective on March 15, 2021, the SEC released an Announcement regarding new Form C guidance in an FAQ format. Below is a link to the SEC Announcement and referenced Reg CF Rule Amendment. The FAQ guidance addresses the following questions:
Is a crowdfunding vehicle required to file its own Form C, separate from the Form C filed by the crowdfunding issuer?
Does the crowdfunding vehicle need to have its own filer identification number (called a “Central Index Key” or “CIK” number) and EDGAR access codes?
What information about the crowdfunding vehicle is required to be provided in the XML-based portion of the Form C?
The crowdfunding vehicle and its principal executive officer or officers, its principal financial officer, its controller or principal accounting officer and at least a majority of the board of directors or persons performing similar functions are required to sign the Form C. How should those signatures be provided?
SEC Announcement here: https://www.sec.gov/corpfin/announcement/staff-guidance-edgar-filing-form-c
Regulation Crowdfunding Amendment: Release No. 33-10884 https://www.sec.gov/rules/final/2020/33-10884.pdf
Regulatory Update: 2021 SEC Examination Priorities: Broker-Dealers and Municipal Advisors
The Securities and Exchange Commission’s Division of Examinations today announced its 2021 examination priorities, including greater focus on MUNICIPAL ADVISORS and BROKER-DEALERS. Areas of focus include the following:
Municipal Advisor Examinations:
The Division will examine, in light of the COVID-19 pandemic and its potential impact on municipal advisors and their clients, how municipal advisors may have adjusted their practices. The Division will also examine whether municipal advisors have met their fiduciary duty obligations to municipal entity clients, including the disclosing of and managing conflicts of interest and documentation of the scope of their client engagements.
Broker-Dealer Examinations:
Examination of broker-dealers will continue to focus on compliance with the Customer Protection Rule and the Net Capital Rule, including the adequacy of internal processes, procedures, controls, and compliance with requirements for borrowing securities from customers. Broker-dealer examinations will also focus on compliance with best execution in a zero commission environment, recently amended Rule 606 order routing disclosure rules, and market-maker compliance with Reg SHO.
Financial Technology (Fintech) and Innovation, Including Digital Assets – Among other areas, examinations will focus on evaluating whether registrants are operating consistently with their representations, whether firms are handling customer orders in accordance with their instructions, and review compliance around trade recommendations made in mobile applications. Examinations of market participants engaged with digital assets will continue to assess the following: whether investments are in the best interests of investors; portfolio management and trading practices; safety of client funds and assets; pricing and valuation; effectiveness of compliance programs and controls; and supervision of representatives’ outside business activities.
Anti-Money Laundering Programs – The Division will continue to review for compliance with applicable anti-money laundering (AML) requirements, including evaluating whether broker-dealers and registered investment companies have adequate policies and procedures in place that are reasonably designed to identify suspicious activity and illegal money-laundering activities.
Retail Investors, Including Seniors and Those Saving for Retirement, Through Reg. BI and Fiduciary Duty Compliance – The Division will focus on compliance with Regulation Best Interest, Form CRS, and whether registered investment advisers have fulfilled their fiduciary duties of care and loyalty. The Division will examine whether firms are appropriately mitigating conflicts of interest and, where necessary, providing disclosure of conflicts that is sufficient to enable informed consent by retail investors. With respect to those investments heavily used by retail investors or those that may present elevated risks, the Division will continue to prioritize these products, including mutual funds, exchange-traded funds (ETFs), municipal securities and other fixed income securities, variable annuities, private placements, and microcap securities.
You can read the SEC 2021 Exam Priorities Report here: https://www.sec.gov/files/2021-exam-priorities.pdf / https://www.sec.gov/files/2021-exam-priorities.pdf
Regulatory Update: 2021 FINRA Examination Priorities
FINRA issued its 2021 Report on FINRA’s Examination and Risk Monitoring Program
Report Combines and Replaces Annual Exam and Risk Monitoring Findings Report, Priorities Letter:
The Report identifies the applicable rule and key related considerations for member firm compliance programs, summarizes noteworthy findings from recent examinations, outlines effective practices that FINRA observed during its oversight, and provides additional resources that may be helpful to member firms in fulfilling their compliance obligations.
The Report addresses 18 regulatory areas organized into four categories: Firm Operations, Communications and Sales, Market Integrity and Financial Management. These topics include:
Firm Operations
Anti-Money Laundering
Cybersecurity and Technology Governance
Outside Business Activities and Private Securities Transactions
Books and Records
Regulatory Events Reporting
Fixed Income Mark-up Disclosure
Communications and Sales
Reg BI and Form CRS
Communications with the Public
Private Placements
Variable Annuities
Market Integrity
CAT
Best Execution
Large Trader Reporting
Market Access
Vendor Display Rule
Financial Management
Net Capital
Liquidity Management
Credit Risk Management
Segregation of Assets and Customer Protection
As in prior years, FINRA will also adapt the areas of focus for its Examinations and Risk Monitoring programs during 2021 to address emerging regulatory concerns and risks for investors that may arise throughout the year.
Read the Report here: https://www.finra.org/rules-guidance/guidance/reports/2021-finras-examination-and-risk-monitoring-program
News and Notes: 2020 Crowdfunding and Capital Formation Overview
Insightful information from The SEC’s Office of the Advocate for Small Business Capital Formation and the SEC Small Business Capital Formation Advisory Committee.
2020 Capital Formation
• 504 = $171mill raised (median raise $100k)
• 506(b) = $1.4T raised (median raise $1.8mill)
• 506(c) = $69bill raised (median raise $900k)
• Reg A = $1.3bill raised (median raise $2.1mill)
• Ref CF = $88mill raised (median raise $100k)
• Other Exempt Offerings = $1.2T raised
• IPOs = $60B raised (median raise $150mill)
• Other Registered Offerings = $1.5T raised (median raise $9mill)
Capital raise statistics and by State and exemption. https://www.sec.gov/spotlight/sbcfac/overview-2020-oasb-annual-report.pdf
SEC Office of the Advocate for Small Business Formation Annual Report: https://www.sec.gov/files/2020-oasb-annual-report.pdf
Press Release – Small Business Capital Formation Advisory Committee Jan. 29 Meeting to Focus on Smaller Public Company Markets: https://www.sec.gov/news/press-release/2021-14
Regulatory Update: REG CF RULE AMENDMENTS – EFFECTIVE MARCH 15, 2021
Great News and a Big Day for the industry!
The rule amendments to Reg CF (and other SEC rules) have been filed in the Federal Register this morning!
As previously discussed, the amendments to Regulation CF will be effective 60 days from today, which makes the effective date March 15, 2021.
The Rule Effective Date is: 03/15/2021
Publication Date: 01/14/2021
Document Citation: 86 FR 3496
Agency/Docket Numbers:
Release Nos. 33-10884; 34-90300; IC-34082
File No. S7-05-20
RIN: 3235-AM27
Document Number:2020-24749
SUMMARY
This effects Reg A, Reg D, Reg CF and other rules related to capital raises. For Regulation Crowdfunding (Reg CF), the amendments include:
raising the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
amend the investment limits for investors in Regulation Crowdfunding offerings by:
removing investment limits for accredited investors; and
using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
extending for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
The following link provides a summary of the forthcoming amendments: https://www.sec.gov/news/press-release/2020-273
The final rule linked here details the amendments specifically: https://www.sec.gov/rules/final/2020/33-10844.pdf
Regulatory Update: SEC Guidance on Custody of Digital Asset Securities / (SEC Request for Comment)
On December 23, 2020, thehe SEC issued a statement (Custody of Digital Asset Securities by Special Purpose Broker-Dealers) outlining how broker-dealers must operate when acting as custodians of digital asset securities in order to avoid enforcement action. Ref: https://www.sec.gov/rules/policy/2020/34-90788.pdf
In July 2019, the SEC issued a joint staff statement with FINRA that highlighted the importance of compliance by broker-dealers custodying digital assets with Rule 15c3-3 of the Securities Exchange Act of 1934 (the Customer Protection Rule). The Joint Statement had emphasized how digital asset securities are susceptible to being lost due to cyberfraud, cybertheft, loss of a private key, or a faulty blockchain transaction. Ref: https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities
SIFMA has previously critizized for lack of guidance. Review thier Paper here: (Current Regulatory and Operational Considerations for Broker-Dealers and a Look Towards the Future), RE: https://www.sifma.org/wp-content/uploads/2020/11/Securitytokens-Paper.pdf
Regulatory Update: FINRA Rule 3110 now effective granting Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and 2021
Pursuant to SR-FINRA-2020-040, FINRA has adopted temporary Supplementary Material .17 (Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) under FINRA Rule 3110 (Supervision) to provide member firms the option, subject to specified requirements under the supplementary material, to complete remotely their calendar year 2020 and calendar year 2021 inspection obligations under FINRA Rule 3110(c) (Internal Inspections), without an on-site visit to the office or location.
Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to adopt temporary Supplementary Material .17 (Temporary Relief to Allow Remote Inspections for Calendar Year 2020 and Calendar Year 2021) under FINRA Rule 3110 (Supervision) to provide member firms the option, subject to specified requirements under the proposed supplementary material, to complete remotely their calendar year 2020 and calendar year 2021 inspection obligations under FINRA Rule 3110(c) (Internal Inspections), without an on-site visit to the office or location. The temporary rule change is necessitated by the compelling health and safety concerns and the operational challenges member firms are facing due to the sustained COVID-19 pandemic.
Regulatory Update: SEC Investment Advisor Compliance Program RISK ALERT
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued this Risk Alert provides an overview of notable compliance issues related to Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”). Below are examples of notable deficiencies or weaknesses identified by OCIE staff in connection with the Compliance Rule:
“Inadequate Compliance Resources. OCIE staff observed advisers that did not devote adequate resources, such as information technology, staff and training, to their compliance programs…
Insufficient Authority of CCOs. OCIE staff observed CCOs who lacked sufficient authority within the adviser to develop and enforce appropriate policies and procedures for the adviser…
Annual Review Deficiencies. OCIE staff observed advisers that were unable to demonstrate that they performed an annual review or whose annual reviews failed to identify significant existing compliance or regulatory problems….
Implementing Actions Required by Written Policies and Procedures. OCIE staff observed advisers that did not implement or perform actions required by their written policies and procedures…..
Maintaining Accurate and Complete Information in Policies and Procedures. The staff observed advisers’ policies and procedures that contained outdated or inaccurate information about the adviser….
Maintaining or Establishing Reasonably Designed Written Policies and Procedures. OCIE staff observed advisers that did not maintain written policies and procedures or that failed to establish, implement, or appropriately tailor written policies and procedures that were reasonably designed to prevent violations of the Advisers Act. For example, staff observed advisers that claimed to rely on cursory or informal processes instead of maintaining written policies and procedures. In addition, staff observed advisers that utilized policies of an affiliated entity, such as a broker-dealer, that were not tailored to the business of the advisers….”
Review the Risk Alert here: https://www.sec.gov/files/Risk%20Alert%20IA%20Compliance%20Programs_0.pdf
Regulatory Update: SEC Amendments to Regulation CF, Reg D, Reg A and more are APPROVED!
Today the SEC voted to approve the long anticipated amendments to Regulation Crowdfunding (Reg CF)! The amendments will be effective 60 days after publication in the Federal Register.
SUMMARY
This effects Reg A, Reg D, Reg CF and other rules related to capital raises. For Regulation Crowdfunding (Reg CF), the amendments include:
raising the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;
amend the investment limits for investors in Regulation Crowdfunding offerings by:
removing investment limits for accredited investors; and
using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors; and
extending for 18 months the existing temporary relief providing an exemption from certain Regulation Crowdfunding financial statement review requirements for issuers offering $250,000 or less of securities in reliance on the exemption within a 12-month period.
The following link provides a summary of the forthcoming amendments: https://www.sec.gov/news/press-release/2020-273
The final rule linked here details the amendments specifically: https://www.sec.gov/rules/final/2020/33-10844.pdf
EFFECTIVE DATE PENDING
The amendments will be effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register.
Regulatory Update: OFAC Risk Advisory – The Facilitation of Ransomware Payments Risk Violating OFAC Regulations
“Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments
Date: October 1, 2020
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is issuing this
advisory to highlight the sanctions risks associated with ransomware payments related to
malicious cyber-enabled activities. Demand for ransomware payments has increased during the
COVID-19 pandemic as cyber actors target online systems that U.S. persons rely on to continue
conducting business. Companies that facilitate ransomware payments to cyber actors on behalf
of victims, including financial institutions, cyber insurance firms, and companies involved in
digital forensics and incident response, not only encourage future ransomware payment demands
but also may risk violating OFAC regulations. This advisory describes these sanctions risks and
provides information for contacting relevant U.S. government agencies, including OFAC, if
there is a reason to believe the cyber actor demanding ransomware payment may be sanctioned
or otherwise have a sanctions nexus.”
Read more here: https://home.treasury.gov/system/files/126/ofac_ransomware_advisory_10012020_1.pdf
Compliance News: SEC Issues Risk Alert – Cybersecurity and “Credential Stuffing”
September 15, 2020
SEC The Office of Compliance Inspections and Examinations (“OCIE”)
Cybersecurity: Safeguarding Client Accounts against Credential Compromise
“This Risk Alert highlights “credential stuffing” — a method of cyber-attack to client accounts that uses compromised client login credentials, resulting in the possible loss of customer assets and unauthorized disclosure of sensitive personal information.
The Office of Compliance Inspections and Examinations (“OCIE”) has observed in recent examinations an increase in the number of cyber-attacks against SEC-registered investment advisers (“advisers”) and brokers and dealers (“broker-dealers,” and together with advisers, “registrants” or “firms”) using credential stuffing. Credential stuffing is an automated attack on web-based user accounts as well as direct network login account credentials.1 Cyber attackers obtain lists of usernames, email addresses, and corresponding passwords from the dark web2 and then use automated scripts to try the compromised user names and passwords on other websites, such as a registrant’s website, in an attempt to log in and gain unauthorized access to customer accounts….”
Read more here:
https://www.sec.gov/ocie/announcement/risk-alert-credential-compromise
https://www.sec.gov/files/Risk%20Alert%20-%20Credential%20Compromise.pdf
Regulatory Update: SEC Modernizes the Accredited Investor Definition
The SEC issued a press release today announcing the modernization of the definition of “Accredited Investor”. You can find the Press Release as well as the Announcement below. The amendments and order become effective 60 days after publication in the Federal Register.
Press Release: https://www.sec.gov/news/press-release/2020-191
Final Rule: https://www.sec.gov/rules/final/2020/33-10824.pdf
“SEC Modernizes the Accredited Investor Definition
FOR IMMEDIATE RELEASE
2020-191
Washington D.C., Aug. 26, 2020 —
The Securities and Exchange Commission today adopted amendments to the “accredited investor” definition, one of the principal tests for determining who is eligible to participate in our private capital markets. Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in our multifaceted and vast private markets. The amendments update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets. ” …
“Highlights
The amendments revise Rule 501(a), Rule 215, and Rule 144A of the Securities Act.
The amendments to the accredited investor definition in Rule 501(a):
add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. This approach provides the Commission with flexibility to reevaluate or add certifications, designations, or credentials in the future. Members of the public may wish to propose for the Commission’s consideration additional certifications, designations or credentials that satisfy the attributes set out in the new rule;
include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers, and rural business investment companies (RBICs) to the list of entities that may qualify;
add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that own “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.
The amendment to Rule 215 replaces the existing definition with a cross reference to the definition in Rule 501(a).
The amendments expand the definition of “qualified institutional buyer” in Rule 144A to include limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold in the definition. The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” provided they satisfy the $100 million threshold.
The Commission also adopted conforming amendments to Rule 163B under the Securities Act and to Rule 15g-1 under the Exchange Act.
What’s Next?
The amendments and order become effective 60 days after publication in the Federal Register.
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