Securities and Exchange Commission (SEC)

SEC Adopts Jobs Act Amendments

 

On April 5, the Securities and Exchange Commission (“SEC“) announced that it has adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation. It also approved amendments that adjust for inflation a threshold used to determine eligibility for benefits offered to “emerging growth companies” (“EGCs“) under the Jumpstart Our Business Startups (JOBS) Act.

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. In addition to the inflation adjustments, the SEC adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 (“Securities Act“) and the Securities Exchange Act of 1934 (“Exchange Act“) by Title I of the JOBS Act. The Commission approved the new thresholds on March 31. They will become effective when they are published in the Federal Register.

The Commission provided a helpful chart that sets out the inflation-adjusted amounts for the maximum amount of offerings and investment limits, specifically: (i) the maximum aggregate amount an issuer can sell in a 12-month period; (ii) the threshold for assessing an investor’s annual income or net worth to determine investment limits; (iii) the lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than the adjusted thresholds; (iv) the maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period; and (v) the inflation-adjusted amounts for determining financial statement requirements.

Also, pursuant to sections of the Securities Act and the Exchange Act added by the JOBS Act, which define the term “emerging growth company,” every five years the Commission is directed to index the annual gross revenue amount used to determine EGC status to inflation. To carry out this statutory directive, the SEC has adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold. Press Release.

SEC Adopts T+2 Settlement Cycle for Securities Transactions

 

On March 22, 2017, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 15c6‑1(a), shortening the standard settlement cycle for most broker-dealer securities transactions by one business day, beginning on September 5, 2017. The amended rules shorten the settlement cycle from three business days (T+3) to two business days (T+2). The purpose of the amended rule is to enhance efficiency, reduce risk and ensure coordinated and expeditious transition by market participants to a shortened standard settlement cycle. Release.

SEC Staff Issues Guidance Update and Investor Bulletin on Robo-Advisers

 

On February 23, 2017, the Securities and Exchange Commission (“SEC“) published information and guidance for investors and the financial services industry on the use of robo-advisers, described by the Staff as “registered investment advisers that use computer algorithms to provide investment advisory services online with often limited human interaction.” Press Release.

The guidance update (the “Update“) was issued by the SEC’s Division of Investment Management in order to address the unique issues raised by robo-advisers. It makes a number of specific suggestions on meeting disclosure, suitability and compliance obligations under the Investment Advisers Act of 1940 (the “Advisers Act“). The Update, however, is less prescriptive than the “Report on Digital Investment Advice” issued by the Financial Industry Regulatory Authority (“FINRA“) in March 2016 (the “FINRA Report“).

The FINRA Report generally addressed the issues faced by “financial services firms” (including both broker‑dealers and investment advisers) in the use of “digital investment advice tools.” As stated by FINRA, the effective practices discussed in the FINRA Report are “specifically intended for FINRA-registered firms, but may be valuable to financial professionals generally.” Accordingly, it is suggested that the Update be read carefully in conjunction with the FINRA Report, particularly by dually registered broker-dealers and investment advisers.

The Update notes that there may be a variety of means for a robo-adviser to meet its obligations to clients under the Advisers Act and that not all of the issues addressed in the Update will be applicable to every robo-adviser.

Also on February 23, 2017, the SEC’s Office of Investor Education and Advocacy (OIEA) published an Investor Bulletin that “provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.”

The Investor Bulletin describes a number of issues investors should consider, including:

  • The level of human interaction important to the investor,
  • The information the robo-adviser uses in formulating recommendations,
  • The robo-adviser’s approach to investing,

The fees and charges involved.

SEC, NASAA Sign Info-Sharing Agreement for Crowdfunding and Other Offerings

 

On February 17, 2017, the Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA) signed an agreement to facilitate information sharing with respect to rules regarding intrastate crowdfunding and regional offerings. The information sharing agreement is intended to help state and federal securities regulators ensure that the rules regarding intrastate crowdfunding and regional offerings ” are serving their intended purpose of facilitating access to capital for small businesses.” Release.

Exemptions for Security-Based Swaps

 

On February 10, 2017, the Securities and Exchange Commission (SEC) extended to February 11, 2018 the expiration dates of certain interim final rules relating to “exemptions under [various securities laws] for those security-based swaps that prior to July 16, 2011 were security‑based swap agreements and are defined as securities under the Securities Act and the Exchange Act as of July 16, 2011 due solely to the provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” Release.

SEC Adopts Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

On April 15, 2016, the Securities and Exchange Commission adopted final rules modifying regulations “for security-based swap dealers and major security-based swap participants (security-based swap entities).”  The final rules address conduct and compliance officer issues. Release.

FinCEN Proposes Funding Portals Regulations under Bank Secrecy Act

On April 4, 2016, the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury (“FinCEN”), proposed amendments to the definitions of ‘‘broker or dealer in securities’’ and ‘‘broker-dealer’’ under the regulations implementing the Bank Secrecy Act (“BSA”). This rulemaking would amend those definitions explicitly to include “funding portals” that are involved in the offering or selling of “crowdfunded securities” pursuant to Section 4(a)(6) of the Securities Act of 1933. The consequence of those amendments would be that funding portals would be required to implement policies and procedures reasonably designed to achieve compliance with the BSA Act requirements currently applicable to brokers or dealers in securities. FinCEN stated that:  “The proposal to specifically require funding portals to comply with the Bank Secrecy Act regulations is intended to help prevent money laundering, terrorist financing, and other financial crimes.”  Written comments of this proposal must be submitted on or before June 3, 2016.

The Jumpstart Our Business Startups Act, enacted into law on April 5, 2012, established the foundation for a regulatory structure for startups and small businesses to raise funds by offering and selling securities through “crowdfunding” without having to register the securities with the Securities and Exchange Commission (“SEC”) or state securities regulators.  In order to take advantage of this exemption for offerings of crowdfunded securities, an issuer must use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.

SEC Issues Staff Report on Accredited Investor Definition

On December 18, the Securities and Exchange Commission issued a staff report (the “Report”) on the definition of “accredited investor” set forth in Rule 501(a) of Regulation D under the Securities Act of 1933. The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the Report in connection with the first review of the definition.

The Report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources, including public commenters, the SEC’s Investor Advisory Committee and its Advisory Committee on Small and Emerging Companies. The Report considers alternative approaches to defining “accredited investor,” provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors.

The primary recommendations of the Report are:

  • The Commission should revise the financial thresholds, requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors.
  • The Commission should revise the accredited investor definition to allow individuals to qualify  as accredited investors based on other measures of sophistication besides their net worth and income.

The Report suggests detailed alternate approaches to implementing these recommendations.

The Commission is inviting members of the public to provide comments on the accredited investor definition, generally, and specifically on the staff recommendations contained in the Report, although a deadline for submitting comments has not been set.