Asset Management

FINRA Issues Proposed Rule Set for Limited Corporate Financing Brokers

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FINRA issued for comment a Proposed Rule Set for Limited Corporate Financing Brokers (LCFBs).  The proposed rule set would provide a lighter regulatory regime for LCFBs, defined as any broker that solely engages in one or more of the following activities:

    • advising an issuer, including a private fund, concerning its securities offerings or other capital raising activities;
    • advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
    • advising a company regarding its selection of an investment banker;
    • assisting in the preparation of offering materials on behalf of an issuer;
    • providing fairness opinions; and
    • qualifying, identifying or soliciting potential institutional investors.

The rule set would not apply to firms that carry or maintain customer accounts, handle customers’ funds or securities, accept customers’ trading orders or engage in proprietary trading or market-making.  The proposed rule set also is limited in that, among other things, it would not eliminate all exam requirements for principals and representatives that are associated with an LCFB and would not eliminate the net capital requirements. The comment period expires on April 28.  Regulatory Notice.

No-Action Letter Provides Relief to M&A Brokers

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On January 31, in a significant no-action letter (Letter), the Staff of the Division of Trading and Markets provided assurances that it would not recommend enforcement action to the Commission under Section 15(a) of the Securities Exchange Act of 1934 if an “M&A Broker” (as defined in the Letter) were to engage in enumerated activities in connection with the purchase or sale of a privately-held company without registering as a broker-dealer pursuant to Section 15(b) of the Exchange Act.

The Letter is the culmination of years of effort (both political and regulatory) and provides significant relief to a broad range of activities heretofore restricted to registered broker-dealers.  Letter.

No-Action Letter Provides Guidance Regarding “Knowledgeable Employees” of Private Fund Advisers

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On February 6, the staff of the SEC’s Division of Investment Management issued a no-action letter with respect to Rule 3c-5 of the Investment Company Act of 1940 (the Company Act) that represents a substantial improvement over the existing guidance regarding the definition of “knowledgeable employees” thereunder, i.e., persons who are not required to be “qualified purchasers” under Section 3(c)(7) of the Company Act, or to be counted for purposes of the 100 beneficial owner limit under Section 3(c)(1) of the Company Act.  Response.

FTC Announces Revised Thresholds for Clayton Act Antitrust Reviews for 2014

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On January 17, the Federal Trade Commission revised the thresholds that determine whether companies are required to notify federal antitrust authorities about a transaction under Section 7A of the Clayton Act, the Hart-Scott-Rodino (HSR) Antitrust Improvements Act.  The FTC is required to revise various thresholds set forth in the HSR Act annually, based on the change in gross national product.  For instance, for 2014, the size of transaction threshold for reporting proposed mergers and acquisitions subject to enforcement under Section 7A of the Clayton Act will increase from $70.9 million to $75.9 million. A full listing of current thresholds can be found on the FTC’s website, which will be updated once the revised thresholds are published in the Federal Register.

The revised thresholds under Section 7A will apply to all transactions that close on or after the effective date of the notice, which is 30 days after its publication in the Federal Register.  Full Listing of Current Thresholds.

SEC Issues Interpretive Guidance on New Municipal Advisors Registration Rule

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On January 10, the SEC announced that its Office of Municipal Securities has issued interpretive guidance to address questions from market participants regarding the implementation of new final SEC rules requiring municipal advisors to register with the SEC.

State and local governments frequently use paid advisors to help them decide how and when to issue municipal securities and how to invest proceeds from the sales.  The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required these advisors to register with the SEC like other market intermediaries.  The SEC’s final rule was adopted in September 2013 and becomes effective on January 13, 2014.  Among the issues addressed in the guidance are:  (i) the advice standard, including the general information exclusion and the treatment of business promotional materials used by underwriters; (ii) the exemption for independent municipal advisors; (iii) the exclusion for registered investment advisers; (iv) the underwriter exclusion, including engagements as underwriters; and (v) the effective date of the final rules and the compliance period for using the final registration forms.  Interpretative Guidance.

SEC Announces Examination Priorities for 2014

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On January 9, the SEC announced its examination priorities for 2014, which cover a wide range of issues at financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds and transfer agents.

The market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, technology controls, issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations, and retirement investments and rollovers.  Program Priorities.

New Compliance and Disclosure Interpretations

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On December 4, the Division of Corporation Finance of the SEC issued new Compliance and Disclosure Interpretations regarding, among other things, Rules 506(d) and (e) of Regulation D under the Securities Act of 1933.  These rules prohibit issuers from conducting private placements that rely on Rule 506 if felons and other “bad actors” participate in the offering.

Section 260 of the Interpretations addresses questions arising under “Rule 506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering.”  Interpretations.

Guidance on the Exemption for Advisers to Venture Capital Funds

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The Division of Investment Management of the SEC recently issued Guidance on the Exemption for Advisers to Venture Capital Funds under five different scenarios.  The Guidance generally provides that the fund structures or actions described will not jeopardize the ability of advisers to rely upon the venture capital fund adviser exemption.  Guidance Update.

SEC Proposes Rules on Crowdfunding

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On October 24, the Securities and Exchange Commission voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.  Title III of the JOBS Act created an exemption under the securities laws so that this type of funding method can be easily used to offer and sell securities as well.  The JOBS Act also established the foundation for a regulatory structure for this funding method.  Press Release.

PCAOB Adopts Standards for Broker-Dealer Audits and for Auditing Supplemental Information

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On October 10, the Public Company Accounting Oversight Board adopted two attestation standards pertaining to audits of brokers and dealers intended to help protect customer funds by enhancing the quality of compliance information provided to the Securities and Exchange Commission and used in its regulatory oversight of broker-dealers.  News Release.