SEC Announces Priorities for 2016; Protecting the Retail Investor From Retirement Advisors

The Securities and Exchange Commission (SEC) announced their priorities for 2016 and examining retirement plan advisors remains a focal point. In June of 2015, the SEC, through their Office of Compliance Inspections and Examinations (OCIE), launched the Retirement-Targeted Industry Reviews and Examinations initiative (ReTIRE). Since that time, OCIE has conducted over 160 examinations of retirement advisors and brokers, with over 115 on the advisors. The purpose, generally, is to protect retail investors and their retirement accounts.

With a priority on protecting retail investors, OCIE is examining SEC registered advisors to ensure they are taking adequate steps to follow their fiduciary obligation towards their client’s best interests. This often means the advisor’s fee is scrutinized, with practices such as reverse churning being the target. Reverse churning, in sum, is a practice of advisors putting investors into accounts that pay a fixed fee to the advisor, but usually fail to perform in a manner to justify that fee. For 2016, the review is expanding and will now include the practice, disclosures, and sales strategies for exchange traded funds (ETF). Two other new priorities include examining the sale of variable annuities and undisclosed public pension advisor gifts and entertainment.

The effort by OCIE is not to be confused with the Department of Labor (DOL) examination on retirement advisors, which is running concurrently. The DOL examinations under the Employee Retirement Income Security Act, however, is similarly focused on protecting the retail investor. Comments by those at the SEC and DOL suggest that the focus on protecting the retail investor through these investigations are likely to continue for some time.

© 2016 Vandenack Williams LLC
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Can My Company Legally Offer and Sell Securities Without Registering?

A Video FAQ with Mark A. Williams.

A company can legally offer and sell securities without registration depending on whether or not they fall within an exemption. So if you are going to offer an investment in your company, you really have to look at how much are you offering, where do the people live, where does your company do business, and with that information you can usually determine whether an exemption is available.

You also have to look at not just the SEC, but state law. If you don’t have to register with SEC, you may still have to register in one or more states. Every state has different types of exemptions so you have to look very carefully. Making an offering of securities is a very complicated process and you need to make sure to seek wise counsel when doing so.

© 2014 Parsonage Vandenack Williams LLC

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What Are the Exemptions From Securities Laws?

Securities laws require that every time you offer security or ownership in your business, that you have to register that security with the state and/or federal government. So an exemption is something that says you don’t have to go through that process. So, if you own a business and you need to raise funds from investors, finding an exemption can save you a lot of money because registration is very expensive. The exemptions vary depending on the state and whether or not exemption is needed from the SEC as well. You need to look at who are your investors and what type of investment are you offering them and then you can find an exemption that will apply to your situation.

© 2014 Parsonage Vandenack Williams LLC

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How Are Securities Used as Collateral?

Securities (stocks, bonds, ownership interest in an LLC or partnership) can be given to a bank and you can borrow off them just like you could a car or a house. It’s usually a little more complicated than that if it is a publicly traded security. So if you are buying IBM or Apple or one of those companies on the stock exchange, then that’s usually pretty easy. You have a clear right to sell it and it is usually very easy to determine the value of that stock and a bank will usually loan you a percentage of what that value is. If it is a small business, if it’s a business that you own with a group of partners, it is a little more complicated because there’s usually contractual rights with your partners about whether you can sell it and whether you can even get a loan on it.

So, can you get a loan on securities? Absolutley, but you really have to look at what’s the security, what is it worth and what happens if the bank does really have to take it back.

© 2014 Parsonage Vandenack Williams LLC

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New SEC Rules Allow General Solicitations

On September 23, 2013, the JOBS Act goes into effect allowing businesses to advertise investment opportunities that can exceed $1 million to the public without having to go through the expense of securities registration. In order to make general solicitations, the businesses will have to limit investment to only accredited investors (typically high-income/high-net-worth individuals) and the business will be required to document verification of accredited investor status. These provisions modify Rule 506 of Regulation D, an often used exemption for private investment.

The ability to generally advertise and solicit investment provides valuable flexibility and reduced cost for those seeking to raise capital; however, be aware that this type of solicitation still requires substantial disclosures and compliance with all other Regulation D requirements under Rule 506.

© 2013 Parsonage Vandenack Williams LLC

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