The Sec has approved FINRA’s plan to overhaul how member firms calculate the value of unlised real estate investment trusts (“REITs”) and direct-participation programs (“DPPs”). Under the new rules – specifically FINRA Rule 2310 – the firms will be required to include on customer account statements a per-share estimated value for any unlisted REIT and DPP securities that they have reason to believe is reliable.

Firms also will need to make new disclsoures about the nature of the investment, including that they are not traded on a public securities exchange and that the price that the investor receives may be less than the estimated per-shre value.

Please keep in mind that the above information is being provided for informational purposes only. Thus, it is not designed to be complete in all material respects. If you have any questions relative thereto, you should contact a qualified professional.

The Securities and Exchange Commission recently voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.

Crowdfunding describes an evolving method of raising capital that has been used outside of the securities arena to raise funds through the Internet for a variety of projects ranging from innovative product ideas to artistic endeavors like movies or music. 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.

The SEC is seeking public comment on the proposed rules for a 90-day period following their publication in the Federal Register.

Background:

Crowdfunding is a term used to describe an evolving method of raising money through the Internet. For several years, this funding method has been used to generate financial support for such things as artistic endeavors like films and music recordings, typically through small individual contributions from a large number of people.

While crowdfunding can be used to raise funds for many things, it generally has not been used as a means to offer and sell securities. That is because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and an offer or sale of securities must be registered with the SEC unless an exemption is available.

Congress created an exemption to permit securities-based crowdfunding when it passed the JOBS Act last year. Among other things, the JOBS Act was intended to help alleviate the funding gap and accompanying regulatory concerns faced by startups and small businesses in connection with raising capital in relatively low dollar amounts.

Title III of the JOBS Act established the foundation for a regulatory structure that would permit these entities to use crowdfunding, and directed the SEC to write rules implementing the exemption. It also created a new entity – a funding portal – to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers. Together these measures were intended to facilitate capital raising by small businesses while providing significant investor protections.

Proposed Rules

Consistent with the JOBS Act, the proposed rules would among other things permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.

Under the proposed rules:

• A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
• Investors, over the course of a 12-month period, would be permitted to invest up to:
  • $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
  • 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Certain companies would not be eligible to use the crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

As mandated by Title III of the JOBS Act, securities purchased in a crowdfunding transaction could not be resold for a period of one year. Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.

Disclosure by Companies

Consistent with Title III of the JOBS Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.

In its offering documents, among the things the company would be required to disclose:

• Information about officers and directors as well as owners of 20 percent or more of the company.
• A description of the company’s business and the use of proceeds from the offering.
• The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
• Certain related-party transactions.
• A description of the financial condition of the company.
• Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.

Companies would be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount.

Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.

Crowdfunding Platforms

One of the key investor protections Title III of the JOBS Act provides for crowdfunding is the requirement that crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.

The proposed rules would require these intermediaries to:

• Provide investors with educational materials.
• Take measures to reduce the risk of fraud.
• Make available information about the issuer and the offering.
• Provide communication channels to permit discussions about offerings on the platform.
• Facilitate the offer and sale of crowdfunded securities.

The proposed rules would prohibit funding portals from:

• Offering investment advice or making recommendations.
• Soliciting purchases, sales or offers to buy securities offered or displayed on its website.
• Imposing certain restrictions on compensating people for solicitations.
• Holding, possessing, or handling investor funds or securities.

The proposed rules would provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.

What’s Next?

The Commission will seek public comment on the proposed rules for 90 days. The Commission will then review the comments and determine whether to adopt the proposed rules.

The Securities and Exchange Commission recently voted to adopt rules establishing a permanent registration regime for municipal advisors as required by the Dodd-Frank Act. The rule is currently slated to become effective 60 days after publication in the Federal Register.

The Final Rule:

The Commission has adopted a final rule requiring municipal advisors to register with the SEC. In particular, the rule clarifies who is and isn’t a “municipal advisor” and offers guidance on when a person is providing “advice” for purposes of the municipal advisor definition.

The final rule exempts employees and appointed officials of municipal entities from registration, and narrows the application of the term “investment strategies” to apply only to the investment of proceeds from the sale of municipal securities rather than to all public funds.

Exemptions provided under the rule are based on the activities of the advisor rather than the type of market participant. The SEC staff believes this approach avoids giving certain market participants an inappropriate competitive advantage.

Additionally, instead of the proposed approach that would have required individuals associated with registered municipal advisory firms to register separately, the final rule requires these firms to furnish information about these individuals. The final rule also allows the SEC to censure these individuals if necessary.

Defined Terms:

The rule defines the following terms:

Advice. A person is providing “advice” to a municipal entity or an “obligated person” based on “all of the relevant facts and circumstances,” including whether the advice:

• Involves a “recommendation” to a municipal entity.
• Is particularized to the specific needs of a municipal entity.
• Relates to municipal financial products or the issuance of municipal securities.

Advice, however, does not include giving out certain general information.

An “obligated person” essentially means an entity such as a non-profit university or non-profit hospital that borrows the proceeds from a municipal securities offering and is obligated by contract or other arrangement to repay all or some portion of the amount borrowed.

Investment Strategies. A person providing advice to a municipal entity or an “obligated person” with respect to “investment strategies” only has to register if such advice relates to:

• The investment of proceeds of municipal securities.
• The investment of municipal escrow funds.
• Municipal derivatives.

Exemptions From the Municipal Advisor Definition:

To avoid confusion, the final rule clarifies exemptions from the municipal advisor definition for certain people engaging in specified activities.

The following people conducting the specified activities would not be required to register as a municipal advisor:

Public Officials and Employees. Public officials do not have to register to the extent that they are acting within the scope of their official capacity. This exemption addresses an unintended consequence of the original proposal that generated significant public comment and created the impression that public officials and municipal employees would be covered if they provide “internal” advice.

This exemption covers people serving as members of a governing body, an advisory board, a committee, or acting in a similar official capacity as an official of a municipal entity or an “obligated person.”

For instance, it covers:

• Members of a city council, whether elected or appointed, who act in their official capacity.

• Members of a board of trustees of a public or private non-profit university acting in their official capacity, where the university is an obligated person by virtue of borrowing proceeds of municipal bonds issued by a state governmental educational authority.

Similarly, this exemption covers employees of a municipal entity or an obligated person to the extent that they act within the scope of their employment.

Underwriters. Brokers, dealers, and municipal securities dealers serving as underwriters do not have to register if their advisory activities involve the structure, timing, and terms of a particular issue of municipal securities.

This exemption begins when the municipal issuer engages the underwriter on a particular transaction and would continue until the end of the underwriting period for that transaction.

The exemption does not apply to advice on investments of proceeds of municipal securities (or related municipal escrow investments in refinancings) or municipal derivatives. That is because this type of advice is outside the scope of underwriting the issuance of municipal securities and involves potential conflicts of interest.

Registered Investment Advisers. Registered investment advisers and associated persons do not have to register if they provide investment advice regarding the investment of the proceeds of municipal securities or municipal escrow investments. This exemption helps ensure the rule does not create duplicative regulation of investment advisers.

This exemption does not apply to advice on the structure, timing, and terms of issues of municipal securities or municipal derivatives. That is because advice in these areas is outside the focus of investment adviser regulation.

Registered Commodity Trading Advisor. Registered commodity trading advisors under CFTC rules and their associated persons do not have to register if the advice they provide relates to swaps. This exemption helps ensure the rule does not create duplicative regulation with existing CFTC regulation of swap advisers.

Attorneys. Attorneys do not have to register if they are providing legal advice or traditional legal services with respect to the issuance of municipal securities or municipal financial products.

This exemption does not apply to advice that is primarily financial in nature or to an attorney representing himself or herself as a “financial advisor” or “financial expert” on municipal advisory activities.

Engineers. Engineers do not have to register if they provide engineering advice such as feasibility studies and cash flow analysis and similar activities related to engineering aspects of a project.

This exemption does not apply to activities in which an engineer provides advice regarding municipal financial products or the issuance of municipal securities.

Banks. Banks do not have to register to the extent they provide advice on certain identified banking products and services (such as deposit accounts, extensions of credit, or bond indenture trustee services).

This tailored exemption does not apply to banks that:

• Engage in other municipal advisory activities such as providing advice on municipal derivatives or the issuance of municipal securities.

• Provide advice on municipal derivatives, in part because municipal derivatives were a source of significant losses by municipalities in the financial crisis.

Accountants. Accountants do not have to register if they are providing accounting services that include audit or other attest services, preparation of financial statements, or issuance of letters for underwriters.

Independent Registered Municipal Advisor. People who provide advice in circumstances in which a municipal entity has an independent registered municipal advisor with respect to the same aspects of a municipal financial product or issuance of municipal securities do not have to register, provided that certain requirements are met and certain disclosures are made.

Swap Dealers. Registered swap dealers under CFTC rules do not have to register as municipal advisors if they provide advice with respect to swaps in circumstances in which a municipal entity is represented by an independent advisor. This exemption helps ensure that the rule does not create duplicative regulation with existing CFTC regulation of swap dealers and recognizes a similar exemption under CFTC rules.

This exemption does not apply to swap dealers that engage in other municipal advisory activities such as providing advice on the issuance of municipal securities or the investment of the proceeds of municipal securities or municipal escrow investments.

Please keep in mind that the above information is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If the reader has any questions concerning the contents of this post, you should contact a qualified professional.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission (the “SEC”), on July 10, 2913 by a vote of 4-1, adopted amendments to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”).1 These amendments, which were required by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), eliminate, subject to certain conditions, the prohibition on general solicitation and general advertising in Rule 506, one of the most commonly relied upon safe harbors from Securities Act registration by private fund issuers. These amendments will become effective 60 days after publication of the Adopting Release in the Federal Register.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The Securities and Exchange Commission (Commission) recently announced the adoption of a final rule (Rule 15b12-1) to permit a registered broker-dealer to engage in a retail forex business, provided that the broker-dealer complies with the Securities Exchange Act of 1934, the rules and regulations thereunder, and the rules of the self-regulatory organization(s) of which the broker-dealer is a member insofar as they are applicable to retail forex transactions. The Commission is adopting Rule 15b12-1 substantially in the form previously adopted as an interim final temporary rule and is providing that the rule will expire on July 31, 2016.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of commercial, commodity and securities laws, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks, investment advisors, precious metals or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

August, 2012:

Text of
Chairman’s statement

The Securities and Exchange Commission recently proposed rules to eliminate the prohibition against general solicitation and general advertising in certain securities offerings.

Under the proposed rules, which are mandated by the Jumpstart Our Business Startups Act, companies would be permitted to use general solicitation and general advertising to offer securities under Rule 506 of Regulation D of the Securities Act and Rule 144A of the Securities Act.

“I believe that the proposed rules fulfill Congress’s clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings,” said SEC Chairman Mary Schapiro.

The Commission will seek public comment on the proposed rules for 30 days. Shortly thereafter, the Commission will review the comments and determine whether to adopt the proposed rules.

SUMMARIZING FACT SHEET:

Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings

Background:

The Current Offering Process

Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the SEC’s exemptions from registration prohibit companies from engaging in a general solicitation or general advertising in connection with securities offerings – that is, advertising in newspapers or on the Internet among other things. Rule 506 is one of those exemptions.

JOBS Act

The JOBS Act, enacted earlier this year, directed the SEC to remove the prohibitions on general solicitation or general advertising for securities offerings relying on Rule 506. By requiring the SEC to remove these restrictions, Congress sought to make it easier for companies to inform the public that they are seeking to raise capital through the sale of securities.

In particular, Section 201(a)(1) of the JOBS Act directs the SEC to amend Rule 506 to permit general solicitation or general advertising provided that all purchasers of the securities are accredited investors. It also says that “[s]uch rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”

The new law also directs the SEC to revise Rule 144A, which governs the resale of securities primarily by larger institutional investors known as qualified institutional buyers (QIBs). Under current Rule 144A, offers of securities can only be made to QIBs. Under the new law, Rule 144A would be revised so that offers of securities could be made to investors who are not QIBs as long as the securities are sold only to persons whom the seller reasonably believes are QIBs.

The Proposed Rules

Rule 506

Under the proposed rules, companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that:

• The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.

• All purchasers of securities are accredited investors, because either:

  • They come within one of the categories of persons who are accredited investors under existing Rule 501.

  • The issuer reasonably believes that they meet one of the categories at the time of the sale of the securities.

Under Rule 501, a natural person qualifies as an accredited investor if he or she has individual net worth – or joint net worth with a spouse – that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person. Or, if he or she has income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

In determining the reasonableness of the steps that an issuer has taken to verify that a purchaser is an accredited investor, the proposing release explains that issuers are to consider the facts and circumstances of the transaction. This includes, among other things, the following factors:

• The type of 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.

• The nature of the offering, meaning:

  • The manner in which the purchaser was solicited to participate in the offering.

  • The terms of the offering, such as a minimum investment amount.

The SEC’s proposing release notes that proposing specific verification methods that an issuer must use “would be impractical and potentially ineffective in light of the numerous ways in which a purchaser can qualify as an accredited investor … We are also concerned that a prescriptive rule that specifies required verification methods could be overly burdensome in some cases, by requiring issuers to follow the same steps, regardless of their particular circumstances, and ineffective in others, by requiring steps that, in the particular circumstances, would not actually verify accredited investor status.”

The proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that companies conducting 506 offerings without the use of general solicitation and general advertising would not be subject to the new verification rule.

Rule 144A

Under the proposed rules, securities sold pursuant to Rule 144A could be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe is a QIB.

Form D

The proposed rules would amend Form D, which issuers must file with the SEC when they sell securities under Regulation D. The revised form would add a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation and general advertising.

Please keep in mind that the above information is being provided for educational purposes only. Thus, it is not designed to be complete in all material respects. It should not be relied upon as providing legal or investment advice. If you have any questions concerning its contents, you should contact a qualified professional.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market

In an attempt to keep investors apprised on changes in the regulatory environment, we have provided a copy a a recent release issued by the Securities and Exchange Commission. Please keep in mind that this post is being provided for education purposes only and is not designed to be complete in all material respects. To view a complete copy of the release, please follow the below highlighted link. Thus, if you have any questions relating to its contents, you should contact a qualified professional

The Securities and Exchange Commission has approved two proposals submitted by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) that are designed to address extraordinary volatility in individual securities and the broader U.S. stock market.

One initiative establishes a “limit up-limit down” mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band. When implemented, this new mechanism will replace the existing single-stock circuit breakers that the Commission approved on a pilot basis after the market events of May 6, 2010.

The second initiative updates existing market-wide circuit breakers that when triggered, halt trading in all exchange-listed securities throughout the U.S. markets. The existing market-wide circuit breakers were adopted in October 1988 and have been triggered only once, in 1997. The changes lower the percentage-decline threshold for triggering a market-wide trading halt and shorten the amount of time that trading is halted.

The exchanges and FINRA will implement these changes by February 4, 2013. On Thursday, the Commission approved both proposals for a one-year pilot period, during which the exchanges, FINRA, and the Commission will assess their operation and consider whether any modifications are appropriate.

“Limit Up-Limit Down” Plan for Individual Securities

The “limit up-limit down” mechanism, established jointly by the exchanges and FINRA, prevents trades in individual listed equity securities from occurring outside of a specified price band, which would be set at a percentage level above and below the average price of the security over the immediately preceding five-minute period. For more liquid securities – those in the S&P 500 Index, Russell 1000 Index, and certain exchange-traded products – the level will be 5 percent, and for other listed securities the level will be 10 percent. The percentages will be doubled during the opening and closing periods and broader price bands will apply to securities priced $3 per share or less.

To accommodate more fundamental price moves, there would be a five-minute trading pause, similar to the pause triggered by the current circuit breakers, if trading is unable to occur within the price band for more than 15 seconds.

Under the new plan all trading centers, including exchanges, automated trading venues, and broker-dealers executing trades internally, must establish policies and procedures to prevent trades from occurring outside the applicable price bands, honor any trading pause, and otherwise comply with the procedures set forth in the plan.

Updated Market-Wide Circuit Breakers

The revised market-wide circuit breaker rules update the existing rules by:

• Reducing the market decline percentage thresholds needed to trigger a circuit breaker to 7, 13, and 20 percent from the prior day’s closing price, rather than declines of 10, 20, or 30 percent.
• Shortening the duration of trading halts that do not close the market for the day to 15 minutes, from 30, 60, or 120 minutes.
• Simplifying the structure of the circuit breakers so that there are only two relevant trigger time periods, those that occur before 3:25 p.m. and those that occur on or after 3:25 p.m. The two periods replace the current six-period structure.
• Using the broader S&P 500 Index, rather than the Dow Jones Industrial Average, as the pricing reference to measure a market decline.
• Requiring the trigger thresholds to be recalculated daily rather than quarterly.

The market-wide circuit breakers were not triggered during the severe market disruption of May 6, 2010, which led the exchanges and FINRA, in consultation with SEC staff, to assess whether the circuit breakers needed to be updated in light of today’s market structure. In addition, the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues recommended in February 2011 that the SEC and CFTC review the current operation of the market-wide circuit breakers, and consider appropriate modifications.

Additional Measures

In addition to the single-stock circuit breaker pilot program, the SEC has undertaken other initiatives in the wake of May 6, including:

• Approving new exchange and FINRA rules clarifying how and when erroneous trades would be broken.
• Approving new exchange and FINRA rules to strengthen the minimum quoting standards for market makers and effectively prohibit “stub quotes” in the U.S. equity markets.
• Adopting a rule requiring broker-dealers to have risk controls in place before providing their customers with access to the market. ?
• Adopting a rule establishing a large trader reporting system to enhance the Commission’s ability to identify large market participants and collect information on their trading activity. ?

The SEC staff also is considering what additional measures may be needed, including establishing a consolidated audit trail system to better track orders and trades in securities across the national market system. (Press Rel. 2012-107)

The Securities and Exchange Commission recently announced a rule proposal to help protect investors from identity theft by ensuring that broker-dealers, mutual funds, and other SEC-regulated entities create programs to detect and respond appropriately to red flags.

The SEC issued the proposal jointly with the Commodity Futures Trading Commission (CFTC). Section 1088 of the Dodd-Frank Act transferred authority over certain parts of the Fair Credit Reporting Act from the Federal Trade Commission (FTC) to the SEC and CFTC for entities they regulate. The proposed rules are substantially similar to rules adopted in 2007 by the FTC and other federal financial regulatory agencies that were previously required to adopt such rules.

The rule proposal would require SEC-regulated entities to adopt a written identity theft program that would include reasonable policies and procedures to:

• Identify relevant red flags.
• Detect the occurrence of red flags.
• Respond appropriately to the detected red flags.
• Periodically update the program.

The proposed rule would include guidelines and examples of red flags to help firms administer their programs.

As a post script to this article, query whether a violation of these rules by any of the covered entities would create a cause of action against the firm for violating the rules, which led to client damages.

Effective October 7, 2011, new consolidated FINRA rules governing your broker/dealer’s and your account executive’s know-your-customer and suitability obligations become effective for the consolidated FINRA rulebook. The new rules are based in part on and replace provisions in the NASD and NYSE rules.

These rules are of critical importance for broker/dealers and customers alike. They form critical standards by which the firm’s can reasonably monitor the activity that is taking place in your account and they provide guidance to you, the customer, to understand your role verses that of your account executive. In order for the protections of these rules to surround the activity in your account, you must, at the start of your relationship with the broker/dealer and your account executive, provide complete information as discussed below. Importantly, if your circumstances change, it is critical that these changes be communicated to your account executive and firm so that they can fulfill their regulatory obligations to you.

If you comply with your disclosure obligations and the firm or account executive fails to recommend suitable investments or strategies to you, then you would have a claim against them for, among other things, breach of contract, negligence, breach of fiduciary duties, fraud and as it relates to the firm, negligent supervision.

In order to understand how these rules relate to your particular situation, it is important to understand the type of account relationship that you have with the firm. There are three basic types, non-discretionary, discretionary or hybrid. These account are more fully discussed on my website.

Another reason that this information is important is that if you file an arbitration claim, which is based upon investments or strategies not being suitable for you, your expert witness will, in large part, base his testimony and opinions upon the information that you have disclosed to the firm and/or associated person. Your financial condition, prior investment experience and other relevant matters set the standard by which to compare the complained of activity in your account.

Discussion of the New Rules

The know-your-customer and suitability obligations are critical to ensuring investor protection and promoting fair dealing with customers and ethical sales practices. As part of the process of developing the consolidated FINRA rulebook, FINRA proposed and the SEC approved FINRA Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability). The new rules retain the core features of these important obligations and at the same time strengthen, streamline and clarify them. The new rules are discussed separately below.

Know Your Customer

In general, new FINRA Rule 2090 (Know Your Customer) is modeled after former NYSE Rule 405(1) and requires firms to use “reasonable diligence, in regard to the opening and maintenance of every account, to know the “essential facts” concerning every customer. The rule explains that “essential facts” are “those required to (a) effectively service the customer’s account, (b) act in accordance with any special handling instructions for the account, (c) understand the authority of each person acting on behalf of the customer, and (d) comply with applicable laws, regulations, and rules. The know-your-customer obligation arises at the beginning of the customer-broker relationship and does not depend on whether the broker has made a recommendation. Unlike former NYSE Rule 405, the new rule does not specifically address orders, supervision or account opening-areas that are explicitly covered by other rules.

Suitability

New FINRA Rule 2111 generally is modeled after former NASD Rule 2310 (Suitability) and requires that a firm or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. The rule further explains that a “customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status,investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation. The new rule continues to use a broker’s recommendation as the triggering event for application of the rule and continues to apply a flexible “facts and circumstances” approach to determining what communications constitute such a recommendation. The new rule also applies to recommended investment strategies, clarifies the types of information that brokers must attempt to obtain and analyze, and discusses the three main suitability obligations. Finally, the new rule modifies the institutional-investor exemption in a number of important ways.

Recommendations

The determination of the existence of a recommendation has always been based on the facts and circumstances of the particular case. That remains true under the new rule. FINRA reiterates, however, that several guiding principles are relevant to determining whether a particular communication could be viewed as a recommendation for purposes of the suitability rule.

For instance, a communication’s content, context and presentation are important aspects of the inquiry. The determination of whether a “recommendation” has been made, moreover, is an objective rather than subjective inquiry. An important factor in this regard is whether-given its content, context and manner of presentation-a particular communication from a firm or associated person to a customer reasonably would be viewed as a suggestion that the customer take action or refrain from taking action regarding a security or investment strategy. In addition, the more individually tailored the communication is to a particular customer or customers about a specific security or investment strategy, the more likely the communication will be viewed as a recommendation. Furthermore, a series of actions that may not constitute recommendations when viewed individually may amount to a recommendation when considered in the aggregate. It also makes no difference whether the communication was initiated by a person or a computer software program. These guiding principles, together with numerous litigated decisions and the facts and circumstances of any particular case, inform the determination of whether the communication is a recommendation for purposes of FINRA’s suitability rule.

Strategies

The new rule explicitly applies to recommended investment strategies involving a security or securities. The rule emphasizes that the term “strategy” should be interpreted broadly. The rule is triggered when a firm or associated person recommends a security or strategy regardless of whether the recommendation results in a transaction. Among other things, the term “strategy” would capture a broker’s explicit recommendation to hold a security or securities. The rule recognizes that customers may rely on firms’ and associated persons’ investment expertise and knowledge, and it is thus appropriate to hold firms and associated persons responsible for the recommendations that they make to customers, regardless of whether those recommendations result in transactions or generate transaction-based compensation. FINRA, however, exempted from the new rule’s coverage certain categories of educational material-which the strategy language otherwise would cover-as long as such material does not include (standing alone or in combination with other communications) a recommendation of a particular security or securities.FINRA believes that it is important to encourage firms and associated persons to freely provide educational material and services to customers.

Customer’s Investment Profile

The new rule includes an expanded list of explicit types of information that firms and associated persons must attempt to gather and analyze as part of a suitability analysis. The new rule essentially adds age, investment experience, time horizon, liquidity needs and risk tolerance to the existing list (other holdings, financial situation and needs, tax status and investment objectives). Recognizing that not every factor regarding a “customer’s investment profile” will be relevant to every recommendation, the rule provides flexibility concerning the type of information that firms must seek to obtain and analyze. However, because the listed factors generally are relevant (and often crucial) to a suitability analysis, the rule requires firms and associated persons to document with specificity their reasonable basis for believing that a factor is not relevant in order to be relieved of the obligation to seek to obtain information about that factor.

Main Suitability Obligations

The new suitability rule lists in one place the three main suitability obligations: reasonable basis, customer-specific and quantitative suitability. Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors. In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy. A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy. Customer-specific suitability requires that a broker have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer’s investment profile. As noted above, the new rule requires a broker to attempt to obtain and analyze a broad array of customer-specific factors. Quantitative suitability requires a broker who has actual or de facto control over a customer account to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. Factors such as turnover rate, cost-equity ratio and use of in-and out trading in a customer’s account may provide a basis for finding that the activity at issue was excessive.

The new rule makes clear that a broker must have a firm understanding of both the product and the customer. It also makes clear that the lack of such an understanding itself violates the suitability rule. If the broker follows the protocol set out in these rules, the protection afford to customer’s should increase and in cases that it does not, provide additional guidance in customer’s attempting to recover their investment losses.

A complete copy of the new rules are attachment with comments and footnotes can be located on the main FINRA website.

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