Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Although President Obama only recently signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has actively taken steps to implement the new law.

Remarks of Chairman Shapiro

On July 27, 2010, SEC Chairman Mary L. Shapiro addressed the U.S. Chamber of Commerce.  She noted that Congress has spoken and the issues are not open for re-debate. She noted the SEC is inviting public comment even before the various rules are proposed and before the official comment periods have begun. As part of this process, the SEC has created a series of e-mail inboxes—that can be accessed at—so that anyone interested can easily weigh in on proposed rules before they are published. These mailboxes are organized by topic and have been deployed in tranches, starting with those rules that have the shortest timeframe for implementation.

Ms. Shapiro also sent an important signal to the broker-dealer community. In her speech, she noted, “As it stands now, investors who turn to a financial professional often do not realize there’s a difference between a broker and an adviser—and that the investor can be treated differently based on who they’re getting their investment advice from. In particular, an investment adviser is held to a ‘fiduciary standard,’ meaning they must put the interest of their clients before their own. Whereas a broker-dealer has to observe standards which include an obligation to make recommendations that are ‘suitable ‘for their clients.’”

She also stated that “I have advocated such a uniform fiduciary standard and I am pleased the legislation provides us with the rulemaking authority necessary to implement it.”

Accredited Investors

The Dodd-Frank Act precludes including the value of a primary residence in the $1 million net worth test for accredited investors. The SEC has published Compliance and Disclosure Interpretations with respect to that provision of the Dodd-Frank Act. One such interpretation is set forth below:

Question: Under Section 413(a) of the Dodd-Frank Act, the net worth standard for an accredited investor, as set forth in Securities Act Rules 215 and 501(a)(5), is adjusted to delete from the calculation of net worth the “value of the primary residence” of the investor. How should the value of the primary residence be determined for purposes of calculating an investor’s net worth?

Answer: Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth. [July 23, 2010]

Comments on Obligations of Broker-Dealers and Investment Advisers

The SEC has published a request for public comment to inform its study of the obligations and standards of care of broker-dealers and investment advisers providing personalized investment advice about securities to retail investors.

As required by the Dodd-Frank Act, the SEC is requesting public input, comments, and data on issues related to the effectiveness of existing standards of care for brokers-dealers and investment advisers, and whether there are gaps, shortcomings, or overlaps in the current legal or regulatory standards.

The public comment period will remain open for 30 days, following publication of the comment request in the Federal Register.

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