On September 4, 2009, the Securities and Exchange Commission ("Commission") issued its Small Entity Compliance Guide for Regulation S-AM. As you may recall, Regulation S-AM was adopted by the Commission on August 4, 2009 to implement Section 624 of the Fair Credit Reporting Act ("FCRA"), as amended by Section 214 of the Fair and Accurate Credit Transactions Act of 2003 ("FACT Act"). That section of the FCRA, as amended by the FACT Act, required the Commission and certain other federal agencies (notably, the Office of the Comptroller of the Currency ("OCC"), the Board of Governors of the Federal Reserve System ("Board"), the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision ("OTS"), the National Credit Union Administration ("NCUA") and the Federal Trade Commission ("FTC")) to adopt rules implementing limitations on a person's use of certain information received from an affiliate to solicit a consumer for marketing purposes, unless the consumer receives notice and a reasonable opt-out opportunity pursuant to a reasonable and simple method. Regulation S-AM implements the requirements of Section 624 with respect to investment advisers and transfer agents registered with the Commission, as well as brokers, dealers and investment companies. The full release for Regulation S-AM (Release Nos. 34-60423, IC-28842; and IA-2911), is available at www.sec.gov/rules/final/2009/34-60423.pdf. The Commission's Small Entity Compliance Guide for Regulation S-AM is available at www.sec.gov/divisions/marketreg/tmcompliance/34-60423-secg.htm.

The effective date of Regulation S-AM is September 10, 2009 and compliance will be mandatory as of January 1, 2010. As of the date of this writing, however, the Investment Company Institute has requested a five month extension of this compliance date, until June 1, 2010.

Background

Section 214 of the FACT Act added Section 624 to the FCRA, giving consumers the right to restrict a person from making marketing solicitations using certain information obtained about them from the person's affiliate. That section also required the OCC, the Board, the FDIC, the OTS, the NCUA, FTC, and the Commission, in "consultation and coordination" with one another, to issue rules implementing Section 624 of FCRA. The banking agencies issued regulations on November 7, 2007 (72 FR 62910), and the FTC issued its rule on October 30, 2007 (72 FR 61424). The Commission proposed Regulation S-AM on July 8, 2004 and, as noted, enacted the Final Regulation on August 4, 2009. In general, Regulation S-AM will allow a consumer to block affiliates of a person subject to the regulation with whom the consumer does business, from soliciting the consumer based on certain "eligibility information" received from the person. The regulation prohibits the use of "eligibility information" (i.e., certain financial information, such as information regarding the consumer's transactions or experiences with the person) received from an affiliate to make marketing solicitations to the consumer unless (1) the potential marketing use has been clearly, conspicuously and concisely disclosed to the consumer, (2) the consumer has been provided a reasonable opportunity and a simple method to opt out of receiving the marketing solicitation, and (3) the consumer has not opted out. The Regulation makes clear that the notice and opt out required can be combined with other disclosures required by law, such as the initial and annual privacy notices required under Regulation S-P. A number of exceptions exist to the notice and opt out requirements, such as when an affiliate making the solicitation has a pre-existing business relationship with the consumer, or provides marketing material in response to an affirmative request by the consumer or in response to a communication initiated by the consumer. In addition, the Regulation includes an appendix with model forms that, when properly used, satisfy the Regulation's requirements for a clear, conspicuous and concise notice. Finally, examples are provided, illustrating the applicability of the regulation to certain situations.

Small Entity Compliance Guide

The Small Entity Compliance Guide succinctly summarizes the relevant aspects of Regulation S-AM, as follows:

How Does Regulation S-AM Operate – A covered person is prohibited from using eligibility information that it receives from an affiliate to make a marketing solicitation unless: (i) the potential marketing use of that information has been clearly, conspicuously and concisely disclosed to the consumer; (ii) the consumer has been provided a reasonable opportunity and a simple method to opt out of receiving the marketing solicitations; and (iii) the consumer has not opted out.

Notice and Opt Out – The notice, and the opt-out opportunity, must be provided to a consumer before an affiliate uses eligibility information to make a marketing solicitation. The notice and opt-out opportunity must be provided to the consumer either: (i) by a company with which the consumer has or had a pre-existing business relationship; (ii) as part of a joint notice from two or more members of an affiliated group of companies, provided that at least one of the affiliates providing the joint notice has or had a pre-existing business relationship with the consumer.

Scope and Duration of Opt Out – The scope of the opt out depends upon the content of the opt-out notice. A consumer may be given the opportunity to choose from a menu of alternatives when electing to prohibit marketing solicitations, such as electing to prohibit marketing solicitations from certain types of affiliates or to prohibit certain types of delivery methods. One of the alternatives, however, must allow the consumer to prohibit all marketing solicitations from all affiliates that are covered by a notice. In addition, the opt out must be effective for at least five years and the consumer must be allowed to opt out at any time. A covered person can, however, choose to set an opt-out period that does not expire unless revoked by the consumer.

Contents of Opt-Out Notice; Consolidated and Equivalent Notices – The notice and opt-out opportunity must be clear, conspicuous and concise. It must identify the affiliate providing the notice, or, if it is a joint notice, the company or group of companies providing the notice. If two or more consumers jointly obtain a product or service, a single opt-out notice may be provided to the joint consumers. In addition, the notice and opt out required under Regulation S-AM may be consolidated or coordinated with other notices and opt-out opportunities required by law, such as a privacy notice required by Regulation S-P.

Reasonable Opportunity to Opt Out – Regulation S-AM requires that consumers be given a reasonable opportunity to opt out. Examples of reasonable opportunities to opt out include: (i) by mail; (ii) by electronic means, such as posting at an internet web site or through e-mail where the consumer has agreed to receive disclosure by e-mail; (iii) at the time of an electronic transaction, such as a transaction conducted on an internet web site as a necessary part of proceeding with the transaction; (iv) at the time of an in-person transaction, in writing, as a necessary part of proceeding with the transaction; or (v) by including the notice and opt out as part of a privacy notice required by Regulation S-P.

Reasonable and Simple Method of Opting Out – In addition to being given a reasonable opportunity to opt out, consumers must also be given a reasonable and simple method of opting out. Examples of reasonable and simple methods of opting out include: (i) designating a check-off box in a prominent position on an opt-out form, (ii) including a reply form and self-addressed envelope together with the opt-out notice, (iii) providing an electronic means to opt out, such as a form that can be e-mailed or processed at an Internet website (if the consumer agrees to electronic delivery of information); (iv) providing a toll-free telephone number that consumers can call to opt out; or (v) allowing consumers to exercise all of his or her opt-out rights, as described in a consolidated notice by a single method, such as by calling a single toll-free telephone number.

A covered person may require each consumer to opt out through a specific means as long as that means is reasonable and simple for the consumer.

Delivery of Opt Out Notices – The opt-out notice must be provided so that each consumer can reasonably be expected to receive actual notice. Examples of delivery methods that a consumer may reasonably be expected to receive actual notice include: (i) hand delivery of a printed copy of the notice to the consumer; (ii) mail delivery of a printed copy of the notice to the last known mailing address of the consumer; (iii) e-mail delivery of the notice if the consumer has agreed to receive electronic disclosures by e-mail from the affiliate providing the notice; or (iv) posting the notice on the internet web site where the consumer obtains a product or service electronically, and requiring the consumer to acknowledge receipt of the notice.

Renewal of Opt-Out Elections – After expiration of an opt-out period, a covered person cannot make marketing solicitations to a consumer who has previously opted out unless the consumer has been given a renewal notice and a reasonable opportunity to renew the opt out and the consumer does not renew the opt out. Each renewal must be effective for at least five years and must be provided either: (i) by the affiliate that provided the previous opt-out notice, or its successor; or (ii) as part of a joint notice from two or more members of an affiliated group of companies, or their successors that jointly provided the previous opt-out notice. In addition, the renewal notice must: (i) identify the company or companies providing the renewal notice; (ii) identify the affiliate or types of affiliates whose use of eligibility information is covered by the notice; (iii) include a general description of the types of eligibility information that may be used to make marketing solicitations; (iv) indicate that the consumer has previously opted out; (v) indicate that the previous opt out is about to expire; (vi) indicate that the consumer may elect to renew the previous opt out; (vii) indicate, if applicable, that the consumer's opt out would apply for a specified period of time (e.g., five years) and that the consumer will be allowed to renew the opt out once that period of time expires; and (viii) provide a reasonable and simple method for opting out.

The renewal notice may be provided within a reasonable time before the expiration of the opt-out period or any time after the expiration of the opt-out period, provided marketing solicitations are not sent during the intervening time period. The renewal notice may be provided as part of an annual privacy notice required by Regulation S-P. However, the opt-out period may not be shortened by sending a renewal notice before the expiration of the opt-out period, even if the consumer does not renew the opt out.

Model Forms – Model forms have been included in an appendix to Regulation S-AM. Covered persons may choose to use or not use the model forms, or modify the forms, provided the requirements of Regulation S-AM are met. However, covered persons that modify the forms or use different forms to satisfy their affiliate marketing notice obligations should ensure that their notices are clear, conspicuous, and concise.