Momentum has been building recently for the SEC to comprehensively revise the decades-old “accredited investor” standard for natural persons under federal securities laws. In 2010, the Dodd-Frank Act directed the SEC to review the standard every four years, and in recent months, various SEC committees and staff have published reports recommending revisions (see reports from SEC Investor Advisory Committee; SEC Advisory Committee on Small and Emerging Companies; and SEC staff (pursuant to Dodd-Frank) (see previous Winston discussion here). Still, the SEC has yet to begin the formal public rulemaking process required to implement changes, and it has not indicated a timeline by which it expects to do so. Recently, however, the U.S. House of Representatives took a step toward revising the standard without the SEC, by passing a bill that would implement certain changes directly into the definition of “accredited investor” in the Securities Act of 1933 (the “33 Act”).

On February 1, 2016, the House passed bill H.R. 2187, “The Fair Investment Opportunities for Professional Experts Act,” which would expand the accredited investor standard for natural persons to include two new, separate classes of qualifying persons:

  1. brokers and investment advisers licensed or registered by the SEC, FINRA (or an equivalent self-regulatory organization), or any state securities regulatory division, and
  2. persons having demonstrable education or job experience to qualify them as “having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by FINRA (or an equivalent self-regulatory organization).”

Qualifying as an accredited investor is significant because accredited investors may participate in certain types of private investments that non-accredited investors may not, such as private equity funds, venture capital funds, and hedge funds. Currently, a natural person qualifies as an accredited investor if (generally) he or she has (i) a net worth of $1 million, or (ii) an individual income greater than $200,000 in each of the two most recent years (or $300,000 in the case of joint spousal income) and a reasonable expectation of earning the same amount in the current year. House bill H.R. 2187 would expand the standard to also include the two new, separate classes of qualifying persons described above. The bill requires approval by the Senate and the President in order to become law.

This initiative by the House of Representatives is interesting in that it appears to break from traditional protocol with respect to the SEC’s authority to define the accredited investor standard.

Currently, the term “accredited investor,” as applied to natural persons, is defined generally in the 33 Act, but it also requires persons to meet more detailed specifications set forth in SEC rules and regulations. These specifications have long been set forth in SEC Rule 501 under Regulation D. And, as described above, Congress and the SEC have been operating in a manner that seems to anticipate that the SEC would propose a rulemaking to revise Rule 501 based on some or all of the recommendations set forth in recent SEC report. The passing of House bill H.R. 2187 could alter the course of the SEC’s rulemaking plans.

In addition, House bill H.R. 2187 would change the structure of the definition. As noted above, the substantial details of the accredited investor standard for natural persons currently appear in SEC rules, which can be revised through the SEC rulemaking process. However, House bill H.R. 2187 would codify directly into the 33 Act the two existing financial tests from Rule 501, as well as the two new, separate specifications described above in this article. Thus, if H.R. 2187 becomes law, then only Congress – and not the SEC – would have the authority to revise these portions of the standard (although we note that the SEC would retain the ability to prescribe other, additional specifications via its rulemaking authority).

It is not clear whether House bill H.R. 2187 will receive sufficient approval to become law, or when the SEC might proceed with a rulemaking. Regardless, it seems clear that momentum in Washington regarding revisions to the accredited investor standard remains strong.

Feature: SEC’s Proposed Audit Trail Plan

On April 27th, the Securities and Exchange Commission (“SEC”) announced that it has unanimously voted to publish for public comment a proposed audit trail plan to create a single, all-inclusive computerized audit system to monitor the entire stock market in real time. The audit trail plan would enable regulators to better catch market manipulation and investigate stretches of extreme market disruption by letting them track 58 billion daily trading records that are submitted to stock and options exchanges as well as private-trading venues maintained by brokerage firms.

The audit trail plan, which was submitted jointly to the SEC by the self-regulatory organizations (‘SROs”) and the Financial Industry Regulatory Authority (“FINRA”), comes almost six years after the 2010 “flash crash,” when over 20,000 trades were completed at clearly inaccurate prices and almost $1 trillion in equity-market value was wiped out before prices recovered.

How Will It Work?

Once the audit trail plan is in full use, exchanges and other market participants such as broker-dealers must submit certain information about orders to a central repository at numerous times within the lifecycle of an order.Every trading firm and broker would have a unique identifier so that authorities can connect companies to particular transactions. Exchanges would be responsible for submitting data to the repository that stamps the date and time within which the orders and bids take place. The SEC, the exchanges and FINRA would have access to information in the database.

SEC Comments

SEC Chair Mary Jo White lauded the ultimate goal of the audit trail database, saying at an open SEC meeting on April 27th that, “[w]hile FINRA and the exchanges currently maintain their own separate audit trail systems, and have worked diligently to improve them, these systems do not provide ready access to all of the data points necessary for effective oversight … [t]he consolidated audit trail is critical to achieving this objective, and it will generate enormous benefits for the SEC’s mission.”

In her remarks at the same SEC meeting, Commissioner Kara Stein criticized how the audit trail plan will actually work. She pointed out the fact that, during the first few years of the system’s use, regulators would accept that up to 5% of all orders could be erroneously reported. Commissioner Stein commented that while she is glad that the SROs have finally proposed a plan for the audit trail database, which when effective “is critical to ensuring the integrity of our markets” and “will help us to fully understand the trading that is occurring in our markets within a matter of days, instead of months,” the proposed plan may not be sufficiently accurate as it permits the clocks that create trade timestamps at the exchanges and broker-dealers reporting trading data to be out of sync by up to 50 milliseconds. As a result, she added, the timestamp on orders “will not be reliable.” Commissioner Stein questioned why the audit trail database would allow a wider “out of sync” range than is currently allowed by some exchanges pursuant to their own rules. For example, she noted, Nasdaq currently requires all exchanges trading Nasdaq securities to synchronize their trade matching and quotation systems to within 100 microseconds, a standard that is 500 times more stringent. SEC officials countered that error rates will fall as brokers become more familiar with the data they have to report.

SEC Chair Mary Jo White agreed with Commissioner Stein’s assessment of the timestamp problem, adding that “[t]here is concern about whether 50 milliseconds is the optimal standard or whether the offset should be more precisely calibrated, as the precision of synchronization may affect the accuracy of the sequencing of events recorded in the consolidated audit trail.” However, she warned that more accuracy may mean more cost, and concluded that “[t]his element of the proposal is also a significant cost driver that must be carefully considered.”

What Comes Next?

Public comments on the proposal should be received by the SEC within 60 days of its publication in the Federal Register, which publication has not yet occurred. SEC Commissioner Michael Piwowar, referencing the flood of stock market data, urged market participants to weigh in on the cost and benefits of each part of the proposal, as well as the proposal as a whole.

The SEC must take final action to approve the proposal within six months. If the plan is approved in a second vote, exchanges would have to begin reporting data to the audit trail within one year, large brokers would have to comply within two years, and smaller firms would have three years to report their activity. FINRA and the exchanges will determine which company builds the audit trail. According to the SEC, it will be at least three years before the system is fully operational. Its estimated cost to build will be $4 billion, and $2.1 billion annually to maintain.

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


Comptroller Gives Statement on Incentive-Based Compensation Rule and Net Stable Funding Rule

On April 26th, Comptroller of the Currency Thomas J. Curry spoke at a board meeting of the Federal Deposit Insurance Corporation (“FDIC”) regarding his vote approving the proposed Incentive-Compensation Rule, implementing Section 956 of the Dodd-Frank Consumer Protection and Wall Street Reform Act of 2010. Comptroller Curry also signed the rule on behalf of the Office of the Comptroller of the Currency (“OCC”). At the same meeting, Comptroller Curry also spoke at the FDIC board meeting regarding his vote approving the proposed Net Stable Funding Rule, and he signed this rule on the OCC’s behalf as well.


FDIC Adopts Final Rule Amending How Small Banks are Evaluated for Deposit Insurance

On April 26th, the FDIC approved a final rule that amends the way in which small banks are evaluated for deposit insurance. The final rule, which affects banks with less than $10 billion in assets that have been FDIC insured for at least five years, updates the data and revises the methodology that the FDIC uses to determine risk-based assessments for these institutions to better reflect risks and to help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts. The final rule follows an initial proposed rule on small bank assessments issued in June 2015 and a revised proposed rule issued in January. It adopts the revised notice of proposed rulemaking as proposed and reflects comments received during both comment periods, including the calculation of asset growth. The FDIC has also revised the online assessment calculatorthat allows institutions to estimate their assessment rates to reflect the final rule. FDIC Press ReleaseFDIC Chairman Gruenberg Statement.

Federal Reserve

Federal Reserve Issues FOMC Statement and Renders Decisions to Implement Monetary Policy Stance

On April 27th, the Federal Reserve issued a Federal Open Market Committee (“FOMC”) statement on labor market conditions and made decisions to implement the monetary policy stance announced in its statement.

Treasury Department Developments


FinCEN Director Is Leaving the Agency

On April 26th, the Financial Crimes Enforcement Network (“FinCEN”) announced that Director Jennifer Shasky Calvery will be leaving her position at the end of May. Ms. Calvery has served as FinCEN’s director since September 2012. FinCEN Press Release.

Securities and Exchange Commission

Requests for Comment

SEC Seeks Public Comment on Proposed Plan to Build a Consolidated Audit Trail

On April 27th, the SEC announced that it has voted to publish for public comment a proposed national market system (“NMS”) plan to create a single, all-inclusive database that would permit regulators to more readily find market manipulation and investigate the causes of extreme spells of market disruption. The plan for the database, known as the consolidated audit trail (“CAT”), was submitted jointly by the self-regulatory organizations (‘SROs”) as required by Rule 613 of Regulation NMS. Public comments on the proposal should be received by the SEC within 60 days of its publication in the Federal Register. See Chair White Statement,Commissioner Piwowar Statement and Commissioner Stein Statement. See also The Wall Street Journal.

SEC Seeks Comments on ICE Trade Vault’s Application for Registration as a Security-Based Swap Data Repository

On April 22nd, the SEC requested comments concerning ICE Trade Vault’s Form SDR seeking registration as a security-based swap data repository (“SDR”) under Section 13(n) of the Securities Exchange Act of 1934 for security-based swap transactions in the credit derivatives asset class, including whether ICE Trade Vault has satisfied the requirements for registration as an SDR. ICE Trade Vault is a swap data repository that is currently regulated and provisionally registered by the Commodity Futures Trading Commission (“CFTC”). Comments should be submitted on or before May 31, 2016. SEC Release No. 34-77699.

Speeches and Statements

  • Recommendations Are Vital to SEC Market Structure Proposals, Says White

In opening remarks at the Equity Market Structure Advisory Committee Meeting on April 26th, SEC Chair Mary Jo White discussed how important it is to receive recommendations from the Committee and Subcommittees on the SEC’s proposals for improving equity market structure. At the same meeting, SEC Commissioner Michael S. Piwowar spoke about four of the Subcommittees’ recommendations. Commissioner Stein Remarks.


SEC Publishes Information for Form ABS-EE Filings

On April 28th, the SEC published Compliance and Disclosure Interpretations (“C&DIs”) related to the filing of asset-level disclosures on Form for Submission of Electronic Exhibits for Asset-Backed Securities (“Form ABS-EE”).

Other Developments

SEC Advisory Committee Holding Meeting on Small and Emerging Markets

On April 29th, the SEC announced that its Advisory Committee on Small and Emerging Markets will be holding a public meeting on May 18, 2016 starting at 9:30am EST at the SEC’s headquarters in Washington, D.C. The agenda for the meeting includes matters relating to rules and regulations affecting small and emerging companies under the federal securities laws. Written statements should be received by the SEC on or before May 16, 2016. SEC Release No. 33-10074.

SEC Adopts Revisions to EDGAR Filer Manual

On April 27th, the SEC adopted revisions to the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) Filer Manual and related rules to reflect updates to the EDGAR system. The revisions and related rules will become effective upon publication in the Federal Register. SEC Release No. 33-10071.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Municipal Securities Rulemaking Board

MSRB Will Offer Municipal Market Trading Data to Academics Through Wharton Research Service

On April 25th, the Municipal Securities Rulemaking Board (“MSRB”) announced that it will be making trading data on the $3.7 trillion U.S. municipal bond market readily available to academic institutions through Wharton Research Data Services (“WRDS”), a research platform that provides financial and economic data to over 400 institutions worldwide. The addition of MSRB trade data to WRDS will enable researchers to easily access and evaluate the over 40,000 trades executed daily in the municipal bond market. Researchers will also be able to study statistical trends and patterns in the data to inform public policy and municipal finance. MSRB Press Release.

Financial Industry Regulatory Authority

FINRA Issues First Cross-Market Report Cards on Spoofing and Layering

On April 28th, FINRA made available to member firms its first monthly cross-market equities supervision report cards, which are intended to help firms identify and stop spoofing and layering activity. FINRA Press Release.

FINRA Announces Effective Date of Exemption from Trade Reporting Obligation for Certain Transactions on ATSs

FINRA issued a regulatory notice on April 27th announcing that new FINRA Rule 6732, Exemption from Trade Reporting Obligation for Certain Transactions on an Alternative Trading System, becomes effective on July 18, 2016. Rule 6732 provides FINRA staff with the authority to grant a member alternative trading system (“ATS”) an exemption from the TRACE trade reporting obligations of Rule 6730 (“Transaction Reporting”) for transactions occurring on an ATS that meet specified conditions. FINRA Regulatory Notice 16-15.

FINRA Announces Implementation Date for Publication of ATS Block-Size Trade Data and Makes Available New Data on OTC Equity Trading

FINRA issued a regulatory notice on April 22nd announcing that, under new amendments to FINRA Rule 6110, beginning on October 3, 2016, FINRA will expand its alternative trading systems (“ATS”) transparency initiative to publish monthly information on block-size trading statistics occurring on ATSs. And on April 25th, FINRA announced that expanded data on over-the-counter (“OTC”) trading in equity securities is now live. With this enhancement, which extends FINRA’s trading-volume transparency to all of the OTC market, FINRA has supplemented the data that it currently makes available on trading by ATSs with new data on all other equities volume executed OTC by FINRA members. The additional data covers around 20 percent of all trading volume in National Market System equities. FINRA Regulatory Notice 16-14.

Fixed Income Clearing Corporation

FICC Proposes Rule Amendments Related to Its Service for GCF Repo Transactions

On April 21st, the SEC requested comments on a proposed rule change filed by the Fixed Income Clearing Corporation (“FICC”) related to the GCF Repo® Service, an intra-clearing bank service for Dealers engaged in GCF Repo Transactions with other Dealers clearing at the same clearing bank. Among other things, the proposal would amend the Government Securities Division (“GSD”) Rulebook to permanently adopt the pilot program for the GCF Repo® Service, add clarifying rule changes regarding the “net-of-net” settlement process, and make other technical changes to the GSD rules. Comments should be submitted on or before May 18, 2016. SEC Release. No. 34-77675.

Judicial Developments

Statute of Repose for Private Actions Under 34 Act Section 14(a) Was Not Extended by Sarbanes-Oxley Act

A class action suit brought against Transocean Ltd. after the Deepwater Horizon oil rig explosion alleged false statements and omissions in the company’s proxy statement in violation of Section 14(a) of the Securities & Exchange Act of 1934. The district court dismissed the suit as time-barred under a three-year statute of repose borrowed from Sections 9(f) and 18(a) under the 1934 Act. Section 14(a) contains only an implied private right of action, and in Ceres Partners v. GEL Associates, the Second Circuit had applied the express time-bars for 9(f) and 18(a) to Section 14(a) as well. The Second Circuit affirmed on April 29th, holding that while the Sarbanes-Oxley Act extended the statutes of repose for Sections 9(f) and 18(a) to five years, that extension did not apply to Section 14(a), and the borrowed three-year statute of repose continues to apply to Section 14(a) private actions.DeKalb.

Merger Agreement Indemnification Calculation Seemingly Requiring Overpayment Found Ambiguous

A merger agreement by which Mercury Systems purchased KOR Electronics required that KOR securityholders indemnify Mercury for certain taxes. Although certain merger-related expenses were required to be taken as deductions, the provision required the securityholders to indemnify Mercury for the taxes as calculated without those deductions. The district court found the provision unambiguous and required the indemnity obligation to be paid in full. On April 26th, the Appellate Court vacated and remanded for further proceedings, concluding that the indemnification provision was ambiguous. Mercury.

Industry News

SEC Is Becoming Less Aggressive in Asking Questions About Foreign Earnings

On April 27th, the Wall Street Journal reported that the SEC is becoming less aggressive in asking companies to validate their disclosures about indefinitely reinvested foreign earnings. The number of comment letters to companies from the SEC has radically fallen. Sources say that the SEC could be sending out fewer letters because companies have been learning what the agency expects in terms of disclosures. In addition, SEC Chairman Mary Jo White has referred to this issue in numerous prominent speeches, which has made companies and their auditors mindful of what regulators expect. The Wall Street Journal.

SEC Reverses Order That Granted Steven Rattner’s Reinstatement.

On April 26th, the Wall Street Journal reported on the SEC’s reversal of its earlier decision that would have allowed former Wall Street deal maker Steven Rattner to return to the securities industry after serving a regulatory ban for over five years. Rattner was barred from the industry in 2010 as part of a settlement over his alleged role in a pay-to-play arrangement involving New York State’s leading pension fund. The SEC’s reprieve, which was approved by its lower-level staff, allegedly came apart after two of its commissioners later questioned the deal and objected to not being notified about it. The Wall Street Journal.