RIA Compliance Blog

Fewer Firms Make Switch to State Oversight Than Expected

April 18, 2012 | Steve Parker

As a result of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), mid-sized firms of less than $100 million in assets under management should make the switch from Securities and Exchange Commission (SEC) oversight to state regulatory oversight. Most advisers know that under the newly adopted SEC rules, mid-sized advisers that were SEC registered prior to Dodd-Frank must remain SEC registered through the first quarter of 2012, and then complete their switch to state regulation by June 28, 2012. Firms wishing to switch should have already completed the state registration process to become effective in the state or states in which the adviser is registering.

It was estimated by this time that 3,200 firms would have made the switch to state regulation. However, spokesman John Nester for the SEC announced that as of April 5, a little more than 1,900 firms claimed that they were no longer eligible for SEC registration and needed to make the switch.
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Florida Law Increases Penalties for Selling Unregistered Securities

April 16, 2012 | Steve Parker

The Florida Legislature has recently passed a law which imposes harsher penalties for those who sell unregistered securities. The bill, HB 777, was signed into law by Governor Rick Scott on April 6, 2012. The bill will take effect July 1, 2012. As a result, the lowest permissible sentence for violations is increased.

The bill provides that all those who do not register securities offerings with the state’s Office of Financial Regulation may be charged with a third-degree felony at a higher level than previously allowed. A third-degree felony in the state of Florida carries up to a five year prison sentence. Broker-dealers, appointed persons, and issuers of securities who do not register with the Office of Financial Regulation are also subject to the same penalty.
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Update: Georgia Adopts Proposed Rule Amendments

April 13, 2012 | Steve Parker

In a previous blog, Georgia Securities Commissioner Proposes Rule Amendments, we discussed the proposed amendments to rules previously promulgated under the Georgia Uniform Securities Act of 2008. The amendments were recently adopted and became effective on March 29, 2012.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

JOBS Act: General Solicitation Provision to be a Boom for Hedge Funds

April 13, 2012 | Steve Parker

One of the most significant provisions of the Jumpstart Our Business Startups (JOBS) Act is its elimination of the general solicitation ban currently contained in Rule 502 for Rule 506 offerings sold only to “accredited investors.” As a result, hedge funds will be able to advertise to investors through the internet, mass mailings, and other media. Previously hedge funds have been banned from soliciting or advertising their private offerings to the general public. This prohibition has created confusion among hedge fund managers because of uncertainty about the meaning of “general solicitation.”

The JOBS Act requires the Securities and Exchange Commission (SEC) to eliminate the ban on general solicitation and advertising as long as all purchasers are either “accredited investors” or “qualified institutional investors.” An “accredited investor” includes an individual whose net worth is at least $1 million, excluding the value of his/her primary residence or who meets certain income criteria. We have previously discussed the definition of “accredited investor” in Financial Advisers Should Note More Restrictive Accredited Investor Definition. A “qualified institutional investor” includes companies that manage a minimum at $100 million in assets. Under the JOBS Act, the SEC must adopt rules to eliminate the ban on advertising for an offering by a private issuer within 90 days.
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SEC Has Additional Rulemaking Deadlines with Passage of JOBS Act

April 12, 2012 | Steve Parker

With the passage of the Jumpstart Our Business Startups Act (JOBS Act), the Securities and Exchange Commission (SEC) will be required to create a number of new rules, in addition to the rules already required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The first deadline that the SEC faces under the JOBS Act is adopting rules eliminating the ban on general solicitation of certain private offerings. It will have 90 days to revise Rule 506 of Regulation D to allow those securities to be sold using general solicitation or advertising when all of the purchasers of the securities are “accredited investors.”

The JOBS Act also created a new crowdfunding exemption to registration. The SEC will have 270 days to adopt the rules and regulations effectuating this exemption, as the SEC determines to be necessary or appropriate for the protection of investors. The Financial Industry Regulatory Authority may also adopt rules regulating “funding portals” for issuers.
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Colorado Refuses to Issue No-Action Letter to Financial Instructor

April 11, 2012 | Steve Parker

The Colorado Securities Division recently declined to issue a no-action letter in connection with a company that intends to educate and train people in stock market trading. Mark Espy, owner of MarkEspyMentorin.com, sent a letter to the Colorado Division of Securities on January 17, 2012 asking for either a no-action letter or the Staff’s clarification that he and his company do not need to be licensed as an investment adviser in Colorado. Espy plans to tutor people on how to use various tools in order to trade in the stock market. The course will be taught through webinars, and students will pay a fee to enroll.

According to Espy, the instruction provided in the course will include curriculum designed to teach various techniques and procedures to measure an equity’s viability for trading or investing, portfolio management, the importance of diversification, explanations of indicators, trading strategies, and building a trading plan, among other topics. Espy has also been approved to teach an adult education class on the stock market at a local community college.
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Rhode Island Issues Proposed Private Fund Exemption

April 10, 2012 | Steve Parker

Like numerous other states, Rhode Island has issued a proposed private fund exemption. We have previously discussed various other states that have created the same type of rule in Multiple States Create Private Fund Adviser Exemption, Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, and California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule.

Under the proposed rule, in order for a private fund adviser to be exempt from registration, the private fund adviser has to satisfy a number of conditions: (1) neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of SEC Regulation A, (2) pursuant to SEC Rule 204-4, the private fund adviser files with the state each report and amendment that an exempt reporting adviser is required to file with the Securities and Exchange Commission, and (3) the private fund adviser pays a $300 fee.
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President Signs JOBS Act Into Law

April 9, 2012 | Steve Parker

The President signed the Jumpstart Our Business Startups Act (JOBS Act) on April 5 during a Rose Garden signing ceremony. He called the bill a “game changer” that would remove barriers that prevent small businesses from growing and hiring. He stated that this bill was so important that he “called on Congress to remove a number of barriers that were preventing aspiring entrepreneurs from getting funding.” We have previously discussed the JOBS Act in JOBS Act Passes Both Chambers and Will be Sent to President and House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The purpose of the JOBS Act is to provide mechanisms for small businesses to raise capital more easily and efficiently, which proponents say would promote the creation of more jobs. The President stated “because of this bill, start-ups and small business will now have access to a big pool of potential investors – namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
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JOBS Act Passes Both Chambers and Will be Sent to President

April 2, 2012 | Steve Parker

The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was “an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support.” President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
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Multiple States Create Private Fund Adviser Exemption

March 28, 2012 | Steve Parker

Three more states have taken action either to adopt a private fund exemption or to create an interim exemption until final rules are proposed. As previously discussed in California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule and Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, California and Virginia have already started the process of creating a private fund adviser exemption. The states which have adopted exemption provisions most recently are Maine, Massachusetts and Wisconsin.

Maine issued an interim order exempting private fund advisers from registration, which became effective on February 16, 2012. It will remain effective until a private fund adviser rule is proposed. According to the exemption, in order to be exempt:

The investment adviser must advise one or more “qualified private funds” which are defined in SEC Rule 203(m)-1;
The adviser must maintain a place of business in Maine;
The adviser cannot hold himself/herself out to the public as an investment adviser;
Neither the adviser nor their advisory affiliates may be subject to “bad boy” disqualification provisions which are defined in Rule 262 of SEC Regulation A; and
Under Rule 204-4 of the Investment Advisers Act of 1940, the adviser must file with the Maine Office of Securities the SEC-filed reports and amendments required for exempt reporting advisers.

If a private fund adviser advises at least one 3(c)(1) fund, defined in the Investment Company Act of 1940, that is not a venture capital fund, the fund must satisfy the same additional requirements of the Virginia Proposed Rule that we have previously discussed. (A 3(c)(1) fund is a fund with less than 100 beneficial owners and which does not presently propose to make a public offering of its securities.)
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