Monthly Archives: November 2013

Regulatory Continuing Education – Staying Ahead of the Curve


As the year comes to a close, it is essential for firms to consider end-of-the-year training programs, both now and throughout 2014. The Securities Industry/Regulatory Council on Continuing Education (the “Council”) recently published their Firm Element Advisory (“FEA”) release for the fall of 2013 which helps identify specific topics of interest for training plans.  Listed below are some of the “new” topics mentioned by the Council in its FEA that your firm may want to consider covering in its training plans:

  • Alternative Mutual Funds – FINRA issued a new Investor Alert on alternative funds to inform investors considering investing in such funds to be aware of the unique characteristics and risks of these investments. Alternative mutual funds are SEC-registered funds that hold more non-traditional investments and employ more complex trading strategies than traditional mutual funds. It is important to review these complexities with sales personnel.
  • SEC Approves Amendments to MSRB Rule G-39 The SEC approved amendments to the MSRB’s telemarketing rule, MSRB Rule G-39, that expands the scope of the rule to include additional provisions that are substantially similar to FTC rules prohibiting deceptive and other abusive telemarketing acts or practices. Rule G-39 requires brokers, dealers and municipal securities dealers to, among other things, maintain do-not-call lists and limit the hours of telephone solicitations to customer residences.
  • Disclosure of Fees in Communications Concerning Retail Brokerage Accounts and Individual Retirement Accounts – FINRA issued Regulatory Notice 13-23 to provide guidance on communications with the public concerning the fees associated with retail brokerage accounts and individual retirement accounts (IRA).

The examples above are just a few highlights of the updates published by the Council to consider when planning for continuing education training. While the FEA can be a useful reference to consider when performing continuing education, it should not be the only resource your firm uses. Continuing education topics should be tailored to the needs of your individual firm. For more information, feel free to contact us at or (619) 298-2880.

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Requirements of Rule 506(d): Bad Actors


As a continuation of last week’s entry, this blog focuses on other considerations for general solicitation under Rule 506(d) of Regulation D, including the condition that the issuer takes reasonable care to verify that each person involved in the operation and distribution of the private fund is not a “bad actor.”

According to the Securities and Exchange Commission’s (“SEC’s”) final rule, a “bad actor” is defined as “the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) that have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specific laws.”

As a result of Rule 506(d), the “bad actor” disqualification rule, an offering is disqualified from relying on Rule 506(b) or 506(c) of Regulation D if the issuer, or any other person covered by Rule 506(d), are found to be “bad actors.” However, as described by the SEC in its final rule, an exception from disqualification exists for those issuers of an offering who establish that they did not know, and can demonstrate their exercise of reasonable care in that they could not have known, that there was a presence or participation of a “bad actor.” To establish “reasonable care” and rely upon this exemption, the issuer must make a “factual inquiry” into whether any disqualification exists. Evaluation of this standard will be based on the facts and circumstances surrounding the issuer’s inquiry. One potential control is for the issuer to prepare a detailed 506(d) questionnaire identifying those convictions, administrative sanctions and other violations that would lead an individual or firm to be considered a “bad actor,” requiring such persons and entities associated with the offering to attest to any disciplinary activities. The issuer should retain a copy of this completed questionnaire as evidence of a “factual inquiry” into any possible disqualifications.

Additionally, under Rule 506(e), for disqualifying events that occurred before September 23, 2013 (the effective date of the “bad actor” rule), issuers may still rely on Rule 506, but will have to comply with the disclosure provisions of Rule 506(e).  This provision requires issuers to provide a written description to purchasers about pre-existing “bad actor” events within a reasonable time before the 506 sale. You can read more about the disclosure requirements here.

For more information about Rule 506(d) as contained in last month’s Legal Tip, please click here, and/or for assistance with the development of your questionnaire, contact us at or (619) 298-2880.

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Requirements of Rule 506(c): Reasonable Steps

This September, the Securities and Exchange Commission (“SEC”) modified Regulation D and created new Rule 506(c), allowing general solicitation and advertising by issuers of private funds pursuant to certain conditions.  These conditions require, among other things, that issuers relying on Rule 506(c) take “reasonable steps” in order to verify: 1) that each investor is an “accredited investor;” and 2) that each person involved in the operation and distribution of the fund is not a “bad actor.”  In this posting, the first of these requirements will be discussed, with the latter “bad actor” condition to receive further attention in next week’s posting.

To date, the SEC has not offered an exact definition for what it considers “reasonable steps” when determining whether each investor in a Rule 506(c) offering is accredited.  Rather, the SEC stated in its final rules that whether steps taken are “reasonable” would be an “objective determination by the issuer in the context of the facts and circumstances of each purchaser and transaction.”  In the past, issuers generally relied on investor representations made in the subscription agreement without independently verifying the financial status of the investor. Now, the SEC will expect the issuer to exercise greater diligence than before in ascertaining accredited investor status if the fund uses Rule 506(c) to promote its interests.  To accomplish this, the SEC provided a non-exclusive list of methods that an issuer may follow to show that “reasonable steps” were taken to verify that the purchaser is an accredited investor. This includes:

  • the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
  • the amount and type of information that the issuer has about the purchaser; and
  • the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.

To provide some “real-world” context to these methods, the SEC gave the following examples that may be deemed sufficient for issuers targeting natural persons as potential investors:

  • When relying on income as the basis for establishing accreditation, the issuer may review IRS forms that report revenue for the previous two (2) years, and obtain a written confirmation from the purchaser representing that he or she expects to reach the same income level in the current year.
  • When relying on net worth, the issuer may review financial statements, brokerage statements, etc. from third parties in order to verify assets; a consumer report from at least one consumer reporting agency; and a written confirmation from the purchaser that all liabilities to make a net worth determination have been disclosed (information cannot be older than (3) three months).
  • The issuer obtains a written confirmation from a broker-dealer, a registered investment adviser, a licensed attorney or a CPA that such person has taken reasonable steps in the prior (3) three months to verify that the purchaser is an accredited investor.

When relying on Rule 506(c), issuers should take all necessary steps, non-exclusive to the steps above, to verify that the purchaser is indeed an accredited investor.  Failure to do so may result in the loss of the Regulation D exemption and, potentially, the loss of the Securities Act Section 4(2) private placement exemption as well.  For further information on this topic, or to read more about general solicitation and advertising under Rule 506(c), go here, or contact us at or (619) 298-2880.

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