SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders
On March 25, 2015, the SEC proposed rule amendments to require high-frequency and off-exchange traders to become members of FINRA. The amendments would increase regulatory oversight over these traders.
Over the years many active cross-market proprietary trading firms have emerged, many of which engage in high-frequency trading. These firms generally rely on the broad proprietary trading exemption in rule 15b9-1 to forgo membership with, and therefore regulatory oversight by, FINRA. The rule change is specifically designed to require these high-frequency traders to become members of FINRA and submit to its review and oversight.
The proposed rule change amends Rule 15b9-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to narrow a current exemption from FINRA membership if the broker is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 derived from sources other than the exchange to which they are a member. Currently, income
The New FINRA Broker Background Check Rule
On December 30, 2014, the SEC approved FINRA Rule 3110(e), which requires FINRA member firms to verify the information provided by or contained in a broker’s Form U-4 within 30 days of filing the form with FINRA. The Rule becomes effective on July 31, 2015. The Rule is intended to help verify background information on a broker, including publicly available information through the FINRA Broker-Check system and to prevent high-risk, recidivist brokers from moving from firm to firm and continuing questionable or outright improper conduct.
Background
One of FINRA’s 2015 Regulatory and Examination Priorities is addressing concerns about high-risk brokers and improving background checks and due diligence by member firms on prospective hires. The new Rule is part of FINRA’s initiative in this regard. FINRA is taking additional steps in this area as well, including a one-time background and financial check of all registered representatives, which checks will be completed by August 2015.
The SEC release discussing and approving the
SEC Sanctions BITCOIN Exchange Operator-A Case Study In Basic Registration And Exemption Requirements
ABA Journal’s 10th Annual Blawg 100
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On December 8, 2014, the SEC settled charges against a creative, but ill informed, entrepreneur for acting as an unlicensed broker-dealer and for violations of Section 5 of the Securities Act of 1933, as amended. Ethan Burnside and his company, BTC Trading Corp., operated two online enterprises, BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange, that traded securities using virtual currencies, bitcoin or litecoin. Neither of these exchanges were registered as broker-dealers or stock exchanges. In addition, Burnside and his company conducted separate transactions in which he offered investors the opportunity to use virtual currencies to buy or sell shares in the LTC-Global exchange itself and a separate litecoin mining venture he owned and operated. These offerings were not registered with the SEC as required under the federal securities laws.
According to the SEC release on the matter, “the exchanges provided account holders the ability to use bitcoin or litecoin to buy,
Exemption to Broker-Dealer Registration Requirements for Officers, Directors and Key Employees
The topic of using unlicensed persons to assist in fundraising activities is discussed almost daily in the small and microcap community. For many years the SEC has maintained a staunch view that any and all activities that could fall within the broker-dealer registration requirements set forth in Section 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require registration. See also the SEC Guide to Broker-Dealer Registration on the SEC website.
In my blog on February 18th, 2014 I talked about the new no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act. In this blog, I am focusing on the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.
Exchange Act Rule 3a4-1 – Persons Associated with an Issuer that are not Required to be Licensed as
SEC Issues Guidance Regarding The Exemption From Broker-Dealer Registration In Title II Of The JOBS Act
Background
Title II of the JOBS Act, requires the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in offerings under Rule 506, provided that all purchasers of the securities are accredited investors and such accredited status is reasonably verified by the Issuer.
In addition, Title II creates a limited exemption to the broker dealer registration requirements for certain intermediaries that facilitate these Rule 506 offerings. In particular, new Section 4(b) to the Securities Act of 1933, has added a new exemption to the broker dealer registration requirements for:
(A) a person that maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, permits general solicitations, general advertisements, or similar related activities by issuers of such securities, whether online, in person, or through any other means
(B) that person or any person associated with that person co-invests in such securities; or
(C) that person or any
Crowdfunding Requirements For Issuers
On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act, creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended.
The new crowdfunding exemption allows Issuers to raise up to $1 million in a twelve month period, as long as no individual investment exceeds certain threshold amounts. The threshold amount sold to any single investor, cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of such investor, if their annual income or next worth is less and $100,000; and (b) 10% of the annual income or net worth of such investor, not to exceed a maximum $100,000, if their annual income or net worth is more than $100,000.
