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November 2011 Archives

B-D Corner: More Disclosures and Filings Required For Private Placements

Last month, FINRA proposed Rule 5123 which, if adopted by the SEC, would have a huge impact on broker-dealers  that offer or sell any security conducted in reliance on an exemption from registration under the Securities Act (i.e., a private placement), or participate in the preparation of a PPM, term sheet or other disclosure document for a private placement.Proposed FINRA Rule 5123 would require broker-dealers and their representatives to provide a PPM or term sheet to each investor prior to the sale of a private placement. Such disclosure would be required to describe the anticipated use of the offering’s proceeds, the amount and type of the offering’s expenses, and the amount and type of compensation to be provided to sponsors, finders and consultants in connection with the private placement.  Proposed Rule 5123 would also require “notice” filings of broker-dealers’ private placement activities. Specifically, the proposed Rule would require broker-dealers to file with FINRA the PPM, term sheet or other disclosure document (including exhibits) with FINRA no later than 15 calendar days after the date of first sale, and to timely file any material amendments to such document.Notably, proposed Rule 5123 would exempt several types of private placements from the requirements noted above. Some of the Rule’s exemptions include private placements sold only to one or more of the following purchasers:
  • Institutional accounts;
  • Qualified purchasers;
  • Qualified institutional buyers; and
  • Investment companies.
As offerings sold exclusively to qualified purchasers are exempt, so-called 3(c)(7) funds would not have to comply with proposed Rule’s requirements.For additional information proposed FINRA Rule 5123, please contact Brent M. Cunningham, Associate Attorney by email at [email protected] or by phone at (619) 298-2880.

Seeking To Provide Services to Public Retirement Funds in California May Make You a Lobbyist

In September of 2010, the Californialegislature passed AB 1743 to supervise “External Managers” and require “Placement Agents” to register as lobbyists.  Generally speaking, “External Managers” are defined as a person or entity who is retained or seeking to be retained by a state public retirement system in California to manage a portfolio of assets for compensation, and a “Placement Agent” is an individual or entity hired or retained by an external manager who acts as a finder, solicitor or marketer to a public retirement system or pension fund in California. Placement agents, therefore, promote external management services to California state pension funds.The following are two important exclusions from the definitions of “Placement Agent” under AB 1743:
  • One-Third Rule – personnel of external managers who spend one-third or more of his or her time managing securities; and
  • Competitive Bidding Process Rule – personnel of an external manager whereby the external manager is: (1) registered as an investment adviser or broker dealer with the SEC; (2) has been elected through a competitive bidding process; and (3) whose contract specifies the manager’s fiduciary standard of care.
It is important to specify that AB 1743 only applies to lobbying state retirement funds, such as the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS).  However, local lobbying ordinances may still govern the solicitation of local pension funds. Accordingly, if you are marketing your services to local retirement funds you should be mindful of any applicable registration, reporting or other requirements.For additional information placement agents and lobbyist registration, please contact Brent Cunningham, Associate Attorney by email at [email protected] or by phone at (619) 298-2880.

NASAA Provides Guidance on Top IA Deficiencies in State Examinations

The North American Securities Administrators Association (“NASAA”) recently released a set of examination findings which identify the common compliance deficiencies for state registered investment advisers.The press release listed the top deficiencies revealed in a series of coordinated state examinations of 825 investment advisers.  To illustrate their findings, NASAA has produced a presentation that includes a number of slides that provide detailed information on common deficiencies as well as a series of recommended best practices to minimize the risk of regulatory violations.The report reveals that NASAA uncovered 3,543 deficiencies as compared to 1,887 deficiencies identified in a 2009 review of 458 investment advisers.  The top five categories with the greatest number of deficiencies involved registration, books and records, unethical business practices, supervision, and advertising. In fact, the examination findings revealed that a whopping 59.9% of state-registered investments were deficient in some aspect of their registration obligations.In addition to registration, NASAA cited the following problem areas:
  • Form ADV Disclosure: Top deficiencies were inconsistencies between the information contained on Form ADV Parts 1 and 2
  • Failure to maintain and safeguard client records
  • Missing client agreements, altered documentation and signing blank documents
  • Lax supervision, especially over remote offices
  • Advertising misstatements involving websites, client correspondence, business cards and the misuse of “Registered Investment Adviser” and “RIA”
State securities regulators, such as the California Department of Corporations, will likely use this information to focus their exams on areas that have proven to need improvement.  Accordingly, investment advisers should rigorously review their compliance policies and procedures to increase the likelihood that they are in full compliance with the areas identified in the NASAA examination report.For additional information please contact Brent Cunningham, Associate Attorney by email at [email protected] or by phone at (619) 298-2880.
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