SEC adopts amendments impacting broker-dealers, private fund advisers

The SEC on Wednesday adopted rule amendments that will require more broker-dealers to register with the Financial Industry Regulatory Authority (FINRA) and will enhance the regulation of private fund advisers.

The commission narrowed the exemption from Section 15(b)(8) of the Securities Exchange Act of 1934, which requires any broker or dealer registered with the commission to become a member of a national securities association unless the broker or dealer effects transactions in securities solely on an exchange of which it is a member. FINRA is currently the only registered national securities association.

“Some of today’s broker-dealers continue to rely on an exemption from national securities association registration that’s older than the cell phone era,” SEC Chair Gary Gensler said in a news release. “This has led to a regulatory gap whereby a number of firms that have cross-market, monthly trading volume valued in the hundreds of billions of dollars are exempt from national securities association oversight. These amendments update and narrow the circumstances in which broker-dealers do not need to register with a national securities association. National securities association membership will help enhance robust and consistent oversight, particularly with regard to cross-market and off-exchange oversight.”

The narrower exemptions apply when a broker or dealer that does not carry customer accounts and is a member of at least one exchange effects off-member-exchange securities transactions that:

• result solely from orders that are routed by a national securities exchange of which it is a member to comply with order protection regulatory requirements, or

• are solely for the purpose of executing the stock leg of a stock-option order.

Exchange Act Rule 15b9-1 provides an exemption from Section 15(b)(8) under which certain commission-registered dealers may engage in unlimited proprietary trading of securities on any national securities exchange of which they are not a member or in off-exchange market without triggering Section 15(b)(8)’s national securities association membership requirement.

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

New rules for private fund advisers

The SEC also adopted rules and amendments that require private fund advisers registered with the commission to:

• Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses;

• Obtain an annual audit for each private fund; and

• Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.

“By enhancing advisers’ transparency and integrity, we will help promote greater competition and thereby efficiency,” Gensler said in a news release. “Consistent with our mission and congressional mandate, we advance today’s rules on behalf of all investors — big or small, institutional or retail, sophisticated or not.”

The new rules require that all private fund advisers:

• Prohibit engaging in certain activities and practices that are contrary to the public interest and the protection of investors unless they provide certain disclosures to investors, and in some cases, receive investor consent; and

• Prohibit providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment unless disclosed to current and prospective investors.

Additionally, the amendments will require all registered advisers, including those that do not advise private funds, to document in writing the annual review of their compliance policies and procedures.

Also on Wednesday, the SEC reopened the comment period on its proposed rule that would redesignate and amend the current custody rule, enhancing protections of customer assets managed by registered investment advisers.

To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.