SEC Risk Alert and Guidance on Customer Sales of Unregistered Securities

On October 9th, the Securities and Exchange Commission (“SEC”) published a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers. The publications accompany an enforcement action against two firms for improperly selling billions of shares of penny stocks through such unregistered offerings. The Risk Alert summarizes deficiencies that were discovered by the SEC’s Office of Compliance Inspections and Examinations during a targeted sweep of 22 broker-dealers frequently involved in the sale of microcap securities. The sweep uncovered widespread deficiencies including insufficient policies and procedures to monitor and identify potential red flags in customer-initiated sales; inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration; and failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities. The Division of Trading’s FAQs remind broker-dealers of the requirements of Section 4(a)(4) of the Securities Act, which provides a registration exemption for broker-dealers when executing customers’ unregistered sales of securities if, after reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer would be violating the registration requirements of Section 5 of the Securities Act. SEC Press Release.

Accredited Investors’ Defining Moment

On October 9th, Investment News summarized the SEC Investor Advisory Committee’s vote to recommend changes to the “accredited investor” definition. Instead of relying on income and net worth to determine accredited investor status, the Committee suggested considering such things as an investor’s educational background, professional credentials, and investment experience. Defining Moment.

SEC Delays Vote on Trading Safeguards

On October 9th, Financial News reported the SEC has delayed a vote on the adoption of new rules that would require exchanges and other clearing firms to adopt new safeguards against inadvertent trading errors. Delay.

Form 10-K Case Study

On October 7th, described George Washington University School of Business’s “Initiative on Rethinking Financial Disclosure.” The initiative challenged teams of two people from the school’s graduate business programs to devise ways of improving issuer disclosure in annual reports. The winning team’s proposal will be submitted to the SEC as part of the agency’s disclosure effectiveness project. Case Study.

Draft Filing Review Program for ABS Issuers

On October 6th, the Division of Corporation Finance invited issuers of asset-backed securities to request staff review of their draft registration statements. On September 24, 2014, the SEC published revisions to the rules governing disclosure, reporting, and the offering process for asset-backed securities. ABS issuers must comply with the new rules and forms, other than asset-level disclosures, no later than November 23, 2015. The Division of Corporation Finance is inviting ABS issuers to request staff review of their registration statements in draft form, prior to filing. Corporation Finance Announcement.