UK: September 9, 2016 Corporate News Update

Last Updated: 20 September 2016
Article by Mark Tice

SEC Adopts New Rules For Investment Adviser Disclosures and Private Placement Brokers and Seeks Comments on Public Company Disclosure Requirements, FINRA Proposes Changes to Gifts and Entertainment Rules and Federal Courts Uphold Constitutionality of SEC Administrative Proceedings and Investment Adviser "Compensation" Definition

This week's corporate news roundup includes an overview of new rules requiring investment advisers to disclose more information on Form ADV, as well as new rules easing the regulation of M&A and private placement brokers. The SEC also requested comments on Regulation S-K disclosure obligations, and FINRA proposed amendments to rules that restrict broker-dealer gifts, non-cash compensation and business entertainment. Federal courts also ruled on the constitutionality of the SEC's administrative judge proceedings and held that commingled investor funds may be considered investment adviser "compensation" under the Investment Advisers Act:


The SEC recently adopted amendments to rules under the Investment Advisers Act of 1940, which require registered investment advisers to disclose additional information on Form ADV and to keep additional records relating to advisory services. The amendments require investment advisers to provide more details about their separately managed account businesses, including data related to the use of borrowings and derivatives, as well as details of their branch office operations and use of social media. Investment advisers will be required to keep supporting documentation demonstrating performance calculations or rates of return, and maintain originals of all written communications relating to the performance or rates of return of managed accounts or securities recommendations. The amended rules also permit private fund adviser entities to register using a single Form ADV if they otherwise operate a single advisory business.  Investment advisers will be expected to comply with the amended rules by October 1, 2017. For more information, click here.


The SEC is seeking public comment on disclosure obligations under Subpart 400 of Regulation S-K, which require public companies to report certain information about directors, executive officers, promoters, security holders, certain corporate governance matters and management compensation, among other things. In its request for comment, the SEC noted that many business and financial disclosure requirements under Regulation S-K have not changed since they were first adopted. The requested comments are intended to inform potential changes in the type of information required to be disclosed and how such information is presented. The public comment period will remain open for 60 days after the comment request has been published in the Federal Register. Withers Bergman LLP intends to file a comment letter in response to the SEC's request. Please contact a member of the Withers Bergman corporate team if you have specific concerns that you would like us to raise in our comment letter. For more information, click here.


The SEC recently approved new FINRA rules that are intended to relax regulation of certain brokers who engage in limited private placement activities. The rules reflect a determination that firms that solely advise companies on mergers and acquisitions or on raising debt and equity capital in certain private placements, or that provide advisory services to companies that need assistance analyzing financial alternatives, do not necessarily engage in activities typically associated with traditional broker-dealers. However, such firms often are registered as broker-dealers because they receive transaction-based compensation in exchange for their services. Under the new rules, such "capital acquisition brokers" (CABs) would continue to be FINRA members, but would be subject to streamlined rules of conduct that are more suitable for CABs' more limited activities. The new rules define a CAB as any broker that engages in one or more of several activities, including, among others, advising an issuer regarding its securities offerings, advising a company regarding its purchase or sale of a business or assets, acting as a placement agent or finder in certain limited circumstances, or effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company. For more information, click here.


The U.S. Court of Appeals for the D.C. Circuit recently upheld the SEC's use of administrative law judges in administrative proceedings. Raymond J. Lucia had petitioned the court for a review of SEC-imposed sanctions on his company for Investment Advisers Act violations, arguing that the proceeding was unconstitutional because the presiding administrative law judge ("ALJ") was a constitutional "Officer" who should have been appointed by the U.S. President in accordance with the U.S. Constitution's "Appointments Clause." The SEC argued that ALJs are employees, and not Officers subject to the Appointments Clause, based in part on the fact that the SEC must affirmatively act to approve an ALJ's decision in order for it to be final. The court declined to review the decision, confirming that the use of ALJs in administrative proceedings is not subject to the Appointments Clause because ALJs have not been delegated sovereign authority. For more information, click here.


The Financial Industry Regulatory Authority (FINRA) recently proposed amendments to rules and guidance that restrict broker-dealer gifts, non-cash compensation and business entertainment. Under the proposal, FINRA Rule 3220 would be revised so the current $100 annual limit on gifts from registered broker-dealers or their associated persons to any individual, where the gift is in relation to the business of the recipient's employer, is raised to $175 per year. A new Rule 3221 would be created to prohibit broker-dealers and associated persons from accepting or making non-cash payments in connection with the sale of any security. This would be a significant expansion of existing rules on non-cash compensation that apply only to the sale of variable insurance contracts, investment company securities, direct participation programs or public offerings of securities. In addition, existing FINRA guidance permitting certain "ordinary and usual business entertainment" would be enhanced under a new Rule 3222. The new rule would require broker-dealers to adopt written policies and supervisory procedures relating to business entertainment that are tailored to its business needs. The comment period for the proposed amendments ends on September 23, 2016. For more information, click here.


The U.S. Court of Appeals for the Third Circuit recently affirmed a lower court's expansive view of what constitutes compensation to investment advisers under the Investment Advisers Act. Everett C. Miller challenged a trial court's conclusion that he had acted as an unregistered investment adviser, subject to potential jail time. After confirming that Miller satisfied other prongs of the "investment adviser" definition, the court considered whether he provided securities advice "for compensation" (a key component of the investment adviser definition). The court relied on a 1987 SEC interpretive release that defined compensation, in part, as the receipt of "any economic benefit." The court concluded that the funds temporarily held by Miller for investments that he had recommended for sale to investors was indeed compensation to Miller, because he commingled investors' funds with his own and used funds from such accounts for his personal expenses. For more information, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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