Uniform fiduciary duty standard for broker-dealers
Illustration by Divine Harvester

As we blogged about last August, Section 913 of the Dodd-Frank Act directed the SEC to study the need for establishing a new, uniform, federal fiduciary standard of care for brokers and investment advisers providing personalized investment advice. Recall that, traditionally, broker-dealers and investment advisors are subject to different duties of care: a suitability standard for broker-dealers and a more stringent, fiduciary duty for investment advisors. 

Despite the express mandate given to it by Section 913 of the Dodd-Frank Act, the SEC has made slow progress in determining whether to adopt a uniform fiduciary standard rule. In January 2011, the SEC issued its Section 913 Report, recommending “the consideration of rulemakings” that would establish a uniform fiduciary standard for both broker-dealers and investment advisers. In the wake of issuing its Section 913 Report, in March 2013 the SEC opened its doors comments, requesting data and other information relating to the costs and benefits of implementing a uniform fiduciary standard. While the comment period ended in July of 2013, the SEC has apparently not yet completed its anticipated cost-benefit analysis. Based on the SEC’s regulatory agenda for the 2014 fiscal year, it does not seem to be in much of a rush: in the agenda, the SEC listed the “Personalized Investment Advice Standard of Conduct” as a “long-term action” and as its 40th priority out of 43 items. That said, in a speech at the SEC Speaks Conference in Washington on February 21, 2014, SEC Chair Mary Jo White said she
Continue Reading Uniform Fiduciary Standard for Broker-Dealers: An Update

With newer methods to communicate and interact with the so-called social network popping up on almost a daily basis, securities regulators have been giving more and more attention to social media and how companies and certain regulated professionals are employing it. As we discussed in a previous blog, the SEC has signed off on public companies utilizing social media for disclosure purposes, provided that, among other things, companies disclose to investors the types of social media outlets they will employ for such purposes. The SEC has issued guidance on the use of social media by public companies for Regulation FD and other disclosure purposes, which can be found in this SEC Press Release and in the SEC’s report on its investigation of the Facebook postings made by Netflix’s CEO.

Now it appears that social media is gaining the attention of FINRA as well, the primary self-regulatory organization for registered broker-dealers. As reported in a recent article on CNN, FINRA wants state privacy laws to provide exemptions for registered broker-dealer firms that would permit such firms to access Facebook and other social media accounts of their associated persons (i.e., stockbrokers). Because of the prominence and proliferation of Facebook and the personal or sensitive nature of the information contained on an individual’s Facebook page and other social media accounts, state legislatures have proactively enacted legislation that prevent or restrict companies from monitoring employees through social media. According to the National Conference on State Legislatures, six states enacted legislation in 2012 that prohibits employers from requesting or requiring an employee, student or applicant to disclose a user name or password for a personal social media account.

FINRA is concerned, however, that prohibiting access to employee social media accounts may affect a registered broker-dealer’s ability to fully comply with its mandated supervisory duties under federal laws and regulations. For example, registered broker-dealers are required to maintain copies of all “business communications” as discussed in guidance issued by FINRA in Regulatory Notice 11-39. Under Rule 17a-4(b)(4) of the Exchange Act, “business communication” includes “[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public.” Thus, if a stockbroker is using social media to
Continue Reading Social media and brokers: FINRA wants broker-dealers to be “friends” with their employees

Bowing to industry pressure, FINRA has adopted vastly scaled back private placement requirements under FINRA Rule 5123.  Originally proposed in October 2011, the proposed rule was highly controversial because it significantly infringed on the capital raising process.  In particular, the originally proposed rules would require each offering to have an offering document, which must include

When someone refers to a company as being “publicly traded” we normally understand that to mean that it has sold shares to the public through an initial public offering (or “IPO”) and is listed on a national securities exchange (like the NYSE or Nasdaq) and makes periodic filings with the SEC. However, some smaller companies that are not listed on a national exchange and that have never filed any documents with the SEC are coming to find out that they may in fact be “publicly traded” and may not even realize it. Moreover, being classified as “publicly traded,” under certain circumstances, can impose requirements on the company to provide notice for certain corporate events and pay associated fees.

Rule 10b-17 and FINRA Rule 6490

Section 10(b) of the 1934 Securities and Exchange Act (the “Exchange Act”) is one of the anti-fraud provisions of the Exchange Act and imposes liability on persons engaged in the use of “manipulative or deceptive devices or contrivances”  in connection with the purchase or sale of a security. Pursuant to its rule making authority, the SEC has enacted a number of rules (the most well-known of which is Rule 10b-5) which regulate these manipulative and deceptive devices and contrivances in order to protect investors.

Less well-known among these rules is Rule 10b-17 which relates to untimely announcements of record dates. Specifically, Rule 10b-17 states that failure by an issuer of a class of securities publicly traded to give 10-days’ prior notice to FINRA of the establishment of record dates relating to dividends, distributions, stock splits, or rights or other subscription offerings, constitutes a “manipulative or deceptive device or contrivance” for Section 10(b) purposes.

FINRA Rule 6490 (effective as of September 27, 2010) codified the Rule 10b-17 notification requirements and requires issuers subject to the rule to pay the applicable fees in connection with their submission of the required notice. Most notably, notifications which are late can trigger a late fee of up to $5,000.

Our company is privately-held so why should we care?

At first glance, the rules above seem to only apply to companies who have securities which are publicly traded. In fact, the rule
Continue Reading Your company may be ‘publicly traded’ without your knowledge – and there may be a price to pay

Earlier this month, FINRA proposed new Rule 5123 to regulate private offerings.  Proposed Rule 5123 is a second attempt by FINRA this year to expand the regulatory process  on private offerings.  In January, FINRA had proposed a much more comprehensive set of changes, including proposed regulations affecting private placements not involving a FINRA member firm. 

Recently, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a proposed amendment to Rule 5122 to further regulate nonpublic offerings. The proposed amendment would cause significant changes in the nonpublic offering process including the following:

  • Disclosure Requirements – All offerings must have an offering document. The offering document would be required to disclose (i) the intended use of the offering proceeds, (ii) amount and type of compensation to be paid to participating broker-dealers or associated persons thereof, and (iii) if applicable, the nature of any affiliation between the issuer and any participating broker.
  • Filing Requirements – the offering document (and any amendment) would be required to be filed with FINRA. FINRA would review the filed offering document for compliance with Rule 5122.
  • Use of Proceeds – a maximum of 15% of the proceeds may be used to pay for offering costs, discounts, commissions, and any other compensation to participating broker-dealers. At least 85% of the proceeds must be used for the business purposes required to be disclosed in the offering document.
    Continue Reading FINRA Proposes New Regulation on Nonpublic Offerings