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From Securities Regulation Daily, March 25, 2015

SEC adopts Regulation A+, proposes rules for broker-dealer off-exchange trading

By Mark S. Nelson, J.D. and Jacquelyn Lumb

The SEC today unanimously adopted a new framework for Regulation A offerings, known as Regulation A+, as required by the Jumpstart Our Business Startups (JOBS) Act that became law more than two years ago. The Commissioners also unanimously proposed changes to Exchange Act Rule 15b9-1.

Capital formation. The Commission’s adoption of Regulation A+ brings to a close another chapter in the agency’s efforts to finish its JOBS Act rulemakings. Existing Regulation A was seldom used because of issuers’ perception that it was unworkable as originally designed, making other types of offerings more appealing. A key premise of the JOBS Act was to reinvigorate capital formation in general. JOBS Act Title IV was especially targeted to prod issuers to use Regulation A.

The new Regulation A puts smaller offerings on two possible tracks: Tier1 deals with offerings of up to $20 million in a 12-month period (no more than $6 million by selling security holders who are an issuer’s affiliates); Tier 2 deals with offerings of up to $50 million, also in a 12-month period, but this tier limits offers by selling security-holders who are issuer affiliates to no more than $15 million.

Many issuers would be able to elect to go forward under either tier. Issuers also can submit draft offering statements to the SEC for pre-filing, nonpublic staff review, much like the pre-filing review for emerging growth companies under JOBS Act Title I. Tier 2 offerings would be subject to additional requirements, including a provision that preempts state laws regarding qualified purchasers (i.e., any person to whom securities are offered or sold under Tier 2).

Preemption provision. The preemption requirement, first floated in the Commission’s Regulation A+ proposal in December 2013 (the final rule text has yet to be published by the SEC), became one of the more controversial proposed changes to existing Regulation A. At today’s open meeting, Chair Mary Jo White said the preemption provision is intended to achieve a balance between federal and state regulations. She added that investor protections built into the final rule, and the need to give the new framework practical utility, both argue for adoption of the two-tiered structure.

NASAA’s coordinated review program. White expressed some doubts over the North American Securities Administrators Association’s (NASAA’s) coordinated review program because of its potential costs, which may deter the use of Regulation A. In her view, a calibrated preemption of state securities laws is necessary until there is a track record to judge how the coordinated review program will function in order to eliminate the need for preemption.

Commissioner Luis A. Aguilar noted that state regulators may continue to investigate and bring enforcement actions involving Regulation A+, and may continue to investigate and bring actions against broker-dealers for unlawful conduct in Regulation A+ transactions.

Commissioner Daniel M. Gallagher said it would be a significant development if NASAA managed to persuade the several hold-out states to join its program. He urged the SEC to work closely with NASAA on Tier 1 offerings and said he would be monitoring how the coordinated review program works in practice.

Commissioner Kara M. Stein noted in her remarks on Regulation A+ that she was not a fan of the preemption provision as adopted, but her objections were not strong enough to dissuade her from joining the other commissions in adopting the final rule.

NASAA issued a statement following the vote in which it expressed concern that the rule does not maintain the investor protection role of the state securities regulators and said it would evaluate its options once it has examined the final rule.

Bipartisan rule. According to Commissioner Michael S. Piwowar, Regulation A+ is a good example of bipartisan law being implemented by a bipartisan Commission. However, he said the final rule is an imperfect and consensus approach to the types of small offerings targeted by Regulation A.

Commissioner Gallagher wished that the Commission would have chosen its own, higher cap, but noted that it can reconsider today’s choice in two years. He also advocated for more daring capital formation initiatives, such as the venture exchanges he first proposed a few years ago and which were the subject of a recent Congressional hearing.

The rule amendments will become effective 60 days after publication in the Federal Register.

Amendments to Rule 15b9-1. In another development, the Commission moved ahead with a proposal to amend Exchange Act Rule 15b9-1 to clarify when a broker-dealer must join a national securities association. The proposal would narrow the existing exemption and require broker-dealers who engage in off-exchange proprietary trading to become members of a national securities association. The proposed rule could have a significant impact on some traders in the high frequency trading space. Approximately 125 broker-dealers claim an exemption to mandatory membership with a registered national securities association pursuant to Rule 15b9-1.

Chair White opened the discussion of the proposal by noting that it would close regulatory gaps. Stephen Luparello, the director of the SEC's Division of Trading and Markets, said the proposal would both align Rule 15b9-1 with its original purpose and reinforce the statutory scheme for off-exchange markets.

Potential for abuse. Commissioner Aguilar noted that FINRA’s current chair has reported that some market participants disperse their trading activity across multiple markets in an attempt to hide various forms of market abuse. The proposed amendments will help FINRA spot abusive trading activities more effectively and ensure that high frequency traders can be held responsible for any misconduct. He also noted that regulators could use the additional information they receive under the proposed amendments to fine-tune surveillance techniques to the unique issues posed by high frequency traders.

Commissioner Stein was concerned that the proposal may not adequately define hedging and hopes commenters will provide additional input on this point.

Commissioner Piwowar, while voting in support of the proposal, questioned whether it was necessary or appropriate. The proposal relates to regulatory structure rather than market structure. He said the opportunity cost of this rulemaking is the valuable time that could have been spent on issues more clearly related to market structure.

The comment period will remain open for 60 days after publication in the Federal Register.

MainStory: TopStory BrokerDealers ExchangesMarketRegulation FederalPreemption JOBSAct SecuritiesOfferings

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