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

On May 20, 2015, the Securities and Exchange Commission (SEC) released several proposals, “Amendments to Form ADV and Investment Advisers Act Rules,” that would require investment advisers to provide additional information on Form ADV. Form ADV is the uniform form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities.

Specifically, the SEC proposals would impose additional reporting requirements for Separately Managed Accounts (SMAs), require new disclosures for investment advisers and their businesses, clarify the use of “umbrella” registration for private fund and certain other advisers, and expand the books and records required to be kept by the adviser. The purpose of the proposals is to improve the quality of information that investors and the SEC receive, as well as to fill gaps identified by the SEC and facilitate risk-monitoring initiatives.

SEPARATELY MANAGED ACCOUNTS

Under Form ADV, SMAs are advisory accounts other than pooled investment vehicles. Form ADV currently requires considerably more disclosure for pooled investment vehicles than for SMAs. The SEC’s proposals would increase the disclosure requirements for SMAs to more closely match the level of disclosure for pooled investment vehicles. Any investment adviser that has SMA regulatory assets under management (RAUM) will be required to make disclosures related to: (a) the types of assets held, (b) the adviser’s use of derivatives and borrowings, and (c) the role of custodians.

TYPE OF ASSETS HELD

Each adviser of a SMA would be required to provide the approximate percentage of its SMA RAUM in ten broad asset categories specified under the proposal. Financial advisers would need to make annual disclosures of SMA RAUM percentages. However, the level of detail required to be provided annually will vary depending on the size of the adviser. For example, advisers with at least $10 billion in SMA RAUM will be required to provide its SMA RAUM percentages as of two specified dates each year when making their annual filings.

DERIVATIVES AND BORROWINGS

The SEC proposals also would require advisers to report on their use of borrowing and derivatives in their SMAs. The level of disclosure again depends on the amount of SMA RAUM. Advisors with at least $150 million but less than $10 billion in RAUM attributable to SMAs will be required to:

(1) categorize their SMAs annually based on the net asset value and gross notional exposurepercentage of each account; and

(2) calculate and report the weighted average amount of borrowing within each category.

In addition to the obligations listed in the previous sentence, advisers with at least $10 billion in SMA

RAUM would also need to:

(1) report average derivatives exposures within six different types of derivatives for each category of SMA; and

(2) annually report borrowing and derivatives information for two dates per year: mid-year and end-of-year.

CUSTODIANS

Advisors would be required to identify any custodian that accounts for at least 10% of the adviser’s SMA RAUM, with certain exceptions, and the amount held by such custodian.

ADDITIONAL INVESTMENT ADVISER INFORMATION

The SEC’s proposed changes to Form ADV include requirements for additional information regarding a financial adviser including, but not limited to, the following:

  • Item 1.F would be expanded to request the total number of offices in which the adviser conducts business as well as information about the adviser’s twenty-five (instead of five) largest offices as calculated by the number of personnel in each office.
  • Item 1.I would be expanded to request all of the adviser’s websites and any social media platform on which the adviser has a presence, which the SEC staff may use to determine the consistency of information provided via the various social media platforms.
  • Item 1.J would be expanded to disclose whether the adviser’s chief compliance officer is employed by someone other than the adviser or a related person. The SEC designed this disclosure to allow them to better monitor risks of advisers outsourcing chief compliance officers.

UMBRELLA REGISTRATION

The SEC proposals also clarify the process for umbrella registrations, that was outlined by the SEC in 2012 in a no-action letter. Such umbrella registrations can be useful to private equity fund adviser groups.

Umbrella registration allows one adviser called the “filing adviser” to file a single Form ADV on behalf of itself and certain other advisers known as “relying advisers”. Based in part on that earlier guidance, the SEC proposals include certain conditions that must be met in order to qualify for umbrella registration, including: (1) the relying adviser being controlled by or under common control with the filing adviser; (2) each relying adviser remaining subject to the filing adviser’s supervision and control; (3) all advisers under the umbrella registration advise only private funds and clients in SMAs that are “qualified clients”; (4) the requirement for the filing adviser’s principal place of business to be located within the United States and (5) all advisers operating under a single code of ethics and compliance program that is administered by the same chief compliance officer.

BOOKS AND RECORDS

Registered advisers have certain obligations to maintain books and records under Rule 2042 of the Advisers Act. The Rule currently requires advisers to maintain documentation supporting performance claims in communications distributed to ten or more persons. The proposals would require advisers to maintain records supporting performance claims in any communication that the adviser circulates or distributes, regardless of the number of recipients. Additionally, while the current Rule requires advisers to maintain copies of written communications sent or received by the advisers, the SEC proposals creates a new category of documents relating to the performance or rate of return of any or all managed accounts or securities recommendations that would need to be maintained in the adviser’s books and records.

COMMENT PERIOD

The SEC will be accepting public comment on its proposals to amend Form ADV until August 11, 2015.

The SEC has announced an open meeting to consider clawback of executive compensation under Section 954 of the Dodd-Frank Act to be held on July 1, 2015.  According to the notice of the meeting, the SEC will consider whether to propose amendments under Section 10D of the Exchange Act, as added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to require the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for the recovery of incentive-based compensation.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

On June 24 the CFPB published its proposed rule for extending the effective date for implementation of the Know Before You Owe Rule to October 3, 2015.  The public has until July 7 to submit comments.

See the Stinson Leonard Street original alert published on June 19, 2015.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has published 11 Compliance and Disclosure Interpretations related to Regulation A+ — numbered 182.01 through 182.11 under Securities Act Rules.  Highlights are:

  • Twitter is allowed for testing the waters!  Conditions include that the communication contains an active hyperlink to the required statements that otherwise satisfy Rule 255 and, where possible, the communication prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.  The “where possible” language is a nice touch, since the “prominently conveys” language seems to be required, but ignored in practice, in other staff guidance on social media.
  • An issuer is considered to have its “principal place of business” in the United States or Canada if its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the U.S. or Canada, even if the business primarily involves managing operations that are located outside the U.S. or Canada.
  • Companies that have suspended their previous public reporting obligations under Section 15(d) of the Exchange Act in accordance with applicable rules are eligible to use Regulation A+.
  • Voluntary filers are eligible to use Regulation A+.
  • Private wholly-owned subsidiaries of Exchange Act reporting companies are eligible to use Regulation A+.
  • Regulation A+ may be used for M&A transactions, other than acquisition shelf transactions.
  • A recently created entity may provide a balance sheet as of its inception date as long as the inception date is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity reached its first annual balance sheet date.
  • State securities law registration and qualification requirements are not preempted with respect to resales of securities purchased in a Tier 2 offering (the staff had to say no once).

Filed Regulation A+ transactions continue to be somewhat mysterious when compared to my expectations.  See some examples from today, here and here, and my blog of yesterday.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Perhaps the first Regulation A+ offering document has appeared on EDGAR.  According to the documents it is a Tier 2 offering for up to $50,000,000.  The offering circular states the offering commenced on June 19, 2015.  The issuer seeks to acquire one to ten  parcels of real estate in the United States, and to develop and construct on each parcel a luxurious senior housing community consisting of independent living, assisted living and/or memory care for approximately 60 to 240 residents.

Like the first conflict minerals filings, I surmise the initial Regulation A+ filings will attract public scrutiny. Pick your precedents carefully.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

The SEC Office of Compliance Inspections and Examinations, or OCIE, has launched a multi-year Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative.  OCIE is focusing on retirement-based savings in recognition of the complex and evolving set of factors that retail investors face when making such investment decisions. OCIE, through the National Examination Program (NEP), will conduct examinations of SEC-registered investment advisers and broker-dealers (collectively, registrants) under the ReTIRE Initiative that will focus on certain higher-risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.

The staff intends to use data analytics, information from prior examinations, and examiner driven due diligence to identify registrants to examine under this Initiative. As part of the examinations or the selection of examination candidates, the staff may focus on the activities of investment advisory representatives and/or broker-dealer registered representatives (collectively, representatives). The risk-based examinations conducted under the ReTIRE Initiative will focus on the services offered by the registrants to investors with retirement accounts in the following areas:

  • Reasonable basis for recommendations
  • Conflicts of interest
  • Supervision and compliance controls
  • Marketing and disclosure

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has provided guidance on the definition of “spouse” and “marriage” in the wake of United States v Windsor.  That case held Section 3 of the Defense of Marriage Act was unconstitutional.

As a result  the SEC will read the terms “spouse” and “marriage,” where they appear in the federal securities statutes administered by the Commission, the rules and regulations promulgated thereunder, releases, orders, and any guidance issued by the staff or the Commission, to include, respectively:

  • an individual married to a person of the same sex if the couple is lawfully married under state law, regardless of the individual’s domicile, and
  • such a marriage between individuals of the same sex.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Outgoing SEC Commissioner Daniel M. Gallagher explained his dissenting votes in two SEC enforcement actions against Chief Compliance Officers.  Mr. Gallagher explained that in both instances, the Commission’s order states that the CCO was responsible for the implementation of the firms’ policies and procedures.  This, he says, illustrates a Commission trend toward strict liability for CCOs under Rule 206(4)-7.

Mr. Gallagher discussed the consequences of the SEC’s policies, including:

  • Actions like these are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that, under Rule 206(4)-7, is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties and responsibilities to avoid liability when the government plays Monday morning quarterback.
  • The Commission needs to be especially cognizant of the messages it sends to the compliance community, and in particular to CCOs of investment advisers. To put it bluntly, for the vast majority of advisers, CCOs are all we have. They are not only the first line of defense, they are the only line of defense.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Residential mortgage originators struggling to meet the August 1, 2015 implementation date for the new Truth-in-Lending RESPA Integrated Disclosure Rule received a reprieve yesterday.

CFPB Director Richard Cordray issued the following statement on the Know Before You Owe mortgage disclosure rule:

“The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015. We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks. We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time.”

The public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Rule G-44 of the Municipal Securities Rulemaking Board, or MSRB, became effective on April 23, 2015. That Rule establishes the supervisory and compliance obligations of municipal advisors.

The MSRB has provided an educational document designed to support municipal advisors’ development of effective policies and procedures for supervision and compliance, particularly for municipal advisors that are newly subject to regulatory oversight. You can find the publication here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.