SEC Open Meeting on Regulation A + and Rule 15b9-1
Securities and Exchange Commission
Open Meeting
Wednesday, March 25, 2015
Key Topics & Takeaways
- Rule 15b9-1: The SEC unanimously voted in favor of proposing amendments to Rule 15b-9-1 which would require broker-dealers that trade in off-exchange venues to become members of a national securities association.
- Regulation A+: The SEC unanimously voted in favor of final rules that update an existing exemption under Regulation A, allowing companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure, and reporting requirements
SEC Commissioners
- Mary Jo White, Chair, Securities and Exchange Commission
- Luis A Aguilar, Commissioner, Securities and Exchange Commission.
- Daniel M. Gallagher, Commissioner, Securities and Exchange Commission.
- Kara M. Stein, Commissioner, Securities and Exchange Commission.
- Michael S. Piwowar, Commissioner, Securities and Exchange Commission.
Opening Statements – Chair White
Rule 15b9-1
Securities and Exchange Commission (SEC) Chair Mary Jo White stated that the first recommendation from the Division of Trading and Markets reflects a simple but powerful principle of the federal securities laws, the protection of investors and that market stability requires trading to be overseen by both the Commission and strong self-regulatory organizations. White noted that Rule 15b9‑1 of the Exchange Act currently permits certain broker-dealers to engage in significant off-exchange proprietary trading without becoming members of the Financial Industry Regulatory Authority (FINRA), and that the proposal put forth would look to close that regulatory gap.
White provided that the Rule was implemented at a time when the equity market structure was dominated by floor-based exchanges that could readily regulate all of their members’ trading activity. White noted that today’s markets are now dominated by computer algorithms and that active cross-market proprietary trading firms have emerged as significant market participants. Accordingly, White provided that the proposed amendments would strengthen regulatory oversight over active proprietary trading firms by ensuring that all broker-dealers active in the off-exchange market compete on the same level playing field and are subject to the same comprehensive set of self-regulatory organizations (SROs). White lastly noted that the proposal would provide a limited hedging exemption for floor-based dealers who continue to transact predominantly on the floor.
Regulation A+
White noted the recommendation from the Division of Corporation Finance to adopt final rules implementing Title IV of the Jumpstart Our Business Startups (JOBS) Act is designed to help enhance the ability of small companies to access capital. White stated that existing Regulation A is rarely used by issuers and added that a 2012 Government Accountability Office (GAO) Report cited overlapping requirements of federal and state law over such offerings as one factor. Accordingly, White provided that the Commission’s goal is to make Regulation A+ an effective, workable path to raising capital that also provides strong investor protections.
White addressed the issue of preemption, stating that in light of the significant investor protections included in the rules and the need for a workable exemption, the rules would preempt state registration and qualification laws for certain offerings of up to $50 million, in what the Commission termed Tier 2 offerings. She noted that the establishment of the North American Securities Administrators Association’s (NASAA) coordinated review program was a positive development, however she voiced a number of concerns concerning costs of state securities law registration and qualification requirements. White emphasized that states retain their full anti-fraud powers and may require that issuers using Regulation A+ file their offering documents with the states.
Staff Presentation
SEC staff began with the discussion of its recommendation to amend Rule 15b9-1 in order to realign it with its original purpose, i.e. to apply to members who primarily transact on the trading floor of an exchange. SEC staff provided that broker-dealers are currently exempted from membership in a national securities association if they are a member of a national securities exchange, carry no customer accounts, and have annual gross income of no more than $1,000 that is derived from securities transactions effected other than on a national securities exchange of which they are a member. SEC staff stated that the proposed amendments would, among other things, eliminate the current exemption and replace it with a more narrow one that would accommodate off-exchange transactions by a floor-based dealer that are solely for the purpose of hedging the risks of its floor-based activities.
SEC staff explained that its recommendation to adopt final rules to amend Regulation A, create two tiers of offerings:
- Tier 1 for offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
- Tier 2 for offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
Staff explained that both tiers would be subject to certain basic requirements while Tier 2 offerings would be subject to additional disclosure and ongoing reporting requirements.
Commissioner Statements
Commissioner Aguilar
Rule 15b9-1
Commissioner Aguilar stated that the proposed rule amendments are an important first step to improving market oversight. Aguilar stated that today’s market is much different than what it was in 1965 when Rule 15b9-1’s predecessor was adopted, namely that electronic trading has greatly reduced trading on the floors of exchanges and that high-frequency traders (HFT) are now responsible for over 50 percent of the trading that takes place on Alternative Trading Systems (ATS).
Aguilar indicated his concern that a HFT firm’s identity when a trade is executed off-exchange, it is usually not reported to FINRA and therefore frustrates FINRA’s surveillance efforts. Aguilar noted that the current proposal provides that HFTs can be held responsible for potential misconduct, will ensure that the intent of Regulation ATS is not frustrated, and that the Commission will be provided with a more complete and detailed picture of HFTs and their cross-market trading activity.
Regulation A+
Commissioner Aguilar voiced approval for the rules, however, he noted that he would have liked aspects to have been stronger – such as additional disclosures on equity compensation received by insiders in the year prior to an offering. Aguilar noted that after considering several factors including the creation of the new coordinated review program, the Commission had determined not to preempt blue sky review for offerees in Tier 1 offerings and that the Commission will increase the ceiling on Tier 1 offerings from $5 million to $20 million. For Tier 2 offering, Aguilar highlighted Regulation A+ rules address the concern that preempting state blue sky review will deprive state regulators of the benefit of a preview of certain riskier offering before such offerings are sold to the public in their states. Thus, first-time Regulation A+ issuers must publicly file their offering statements with the Commission at least 21 days before qualification.
Commissioner Gallagher
Rule 15b9-1
Commissioner Gallagher, while supporting the amendments to Rule 15b9-1, expressed several reservations. Namely, Gallagher stated that he is not convinced that all proprietary dealers avail themselves of the proposal and that he is wary of this type of one-size-fits-all regulation. Gallagher stated that FINRA should not be treated as the SEC’s deputy and that the proposal will increase costs and burdens on firms, particularly at a time when the market is losing firms on a regular basis due to regulatory costs. Accordingly, Gallagher stated that the benefits of the proposal must outweigh costs.
Gallagher stated that the Commission should now move forward with actual market structure initiatives, such as those related to Regulation NMS and SRO status. Lastly, Gallagher stated that the broker-dealer regulatory paradigm is incredibly comprehensive, if not suffocating, and that the notion that this oversight regime pales in comparison to the Adviser’s Act fiduciary duty regime is “preposterous.”
Regulation A+
Commissioner Gallagher voiced support and indicated that he was pleased to see some useful features in the rule, such as a streamlined path for Exchange Act registration of Regulation A securities, and real efforts to scale the Tier 2 periodic reporting regime for smaller-sized issuers, including semiannual reporting. Gallagher expressed disappointment over the following points in the final rules:
- He noted Congress gave the Commission the authority to raise the cap and that $50 million was a baseline number.
- That the rule introduces a needless transactional friction by failing to deem Regulation A’s semiannual reporting to be “reasonably current” for purposes of Rules 15c2-11, 144, and 144A.
- That the Commission should have allowed reporting issuers to use Regulation A
- The Commission should have provided a clean 12(g) exemption, without the age-out provision included in the final rule.
Gallagher added that he believes the amendments in Regulation A+ don’t go far enough to help issuers that are trying to raise under $5 million.
Commissioner Stein
Rule 15b9-1
Commissioner Stein stated that the proposal addresses the lack of oversight for certain broker-dealers by essentially requiring broker-dealers who conduct transactions away from exchanges to become members of FINRA. Stein noted that, in particular, the proposal will require broker-dealers engaged in proprietary trading to become members of FINRA, become subject to FINRA’s oversight, and provide trade reports to FINRA. Stein noted that the exemption was never intended accommodate firms that employ automatic trading strategies, who now account for an increasingly large source of order volume. Stein, however, expressed her concern that the hedging exemption of the proposal is not adequately defined in the proposal.
Regulation A+
Commissioner Stein voiced support for the proposed rules while noting that she would have liked to see the Commission take a different approach to preemption. Stein highlighted that, over the years, Regulation A has been used lightly, possibly as a result of the ease of making a private offering under Regulation D. Additionally, Stein questioned whether the changes to Regulation A will work in practice but offered optimism towards the language in the rules requiring the staff to undertake a study of Regulation A+ and submit a report to the Commission no later than five years following the adoption of the final rules.
Commissioner Piwowar
Rule 15b9-1
Commissioner Piwowar stated that with any rulemaking, there is a serious threshold question that must be met: whether the proposal is necessary and appropriate. While voting in favor, Piwowar stated that he is not entirely convinced that the proposal clears this hurdle. Piwowar expressed concern that the proposal would modify the regulatory structure to account for the evolution of the markets since Rule 15b9-1 was originally adopted.
Piwowar questioned if changes in market activity translate to a need for rulemaking, especially in light of the anticipated informational enhancements, such as the Consolidated Audit Trail (CAT). Piwowar expressed his concern that the hedging exemption may impose too many conditions. Additionally, Piwowar expressed concern that the proposal was effectively requiring membership in FINRA, as there is currently only one national securities association. Piwowar expressed concern that the proposal could result in further entrenchment of FINRA as the sole national securities association, and that this could create its own regulatory risks and distorted incentives.
Lastly, Piwowar stated that the proposal is about regulatory structure and not market structure, and that the Commission must be mindful of the opportunity cost of this rulemaking, as it is the valuable time that we could have spent on issues that are more clearly related to, and impactful on, market structure.
Regulation A+
Commissioner Piwowar voiced support for the final rules but stated they were not his preferred approach. Piwowar highlighted that during the proposal stage he raised the issue as to whether the Commission might consider a new regulatory model in which an issuer could seek qualification of a Regulation A offering from either the Commission of a state securities regulator. He concluded by saying he hoped the Commission will soon consider further expansion of Rule 504 under Regulation D as well as potential exemptive relief under the intrastate exemption to allow for regional crowdfunding conducted pursuant to state securities laws.
For more information on this meeting and to view an archived webcast, please click here.
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Securities and Exchange Commission
Open Meeting
Wednesday, March 25, 2015
Key Topics & Takeaways
- Rule 15b9-1: The SEC unanimously voted in favor of proposing amendments to Rule 15b-9-1 which would require broker-dealers that trade in off-exchange venues to become members of a national securities association.
- Regulation A+: The SEC unanimously voted in favor of final rules that update an existing exemption under Regulation A, allowing companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure, and reporting requirements
SEC Commissioners
- Mary Jo White, Chair, Securities and Exchange Commission
- Luis A Aguilar, Commissioner, Securities and Exchange Commission.
- Daniel M. Gallagher, Commissioner, Securities and Exchange Commission.
- Kara M. Stein, Commissioner, Securities and Exchange Commission.
- Michael S. Piwowar, Commissioner, Securities and Exchange Commission.
Opening Statements – Chair White
Rule 15b9-1
Securities and Exchange Commission (SEC) Chair Mary Jo White stated that the first recommendation from the Division of Trading and Markets reflects a simple but powerful principle of the federal securities laws, the protection of investors and that market stability requires trading to be overseen by both the Commission and strong self-regulatory organizations. White noted that Rule 15b9‑1 of the Exchange Act currently permits certain broker-dealers to engage in significant off-exchange proprietary trading without becoming members of the Financial Industry Regulatory Authority (FINRA), and that the proposal put forth would look to close that regulatory gap.
White provided that the Rule was implemented at a time when the equity market structure was dominated by floor-based exchanges that could readily regulate all of their members’ trading activity. White noted that today’s markets are now dominated by computer algorithms and that active cross-market proprietary trading firms have emerged as significant market participants. Accordingly, White provided that the proposed amendments would strengthen regulatory oversight over active proprietary trading firms by ensuring that all broker-dealers active in the off-exchange market compete on the same level playing field and are subject to the same comprehensive set of self-regulatory organizations (SROs). White lastly noted that the proposal would provide a limited hedging exemption for floor-based dealers who continue to transact predominantly on the floor.
Regulation A+
White noted the recommendation from the Division of Corporation Finance to adopt final rules implementing Title IV of the Jumpstart Our Business Startups (JOBS) Act is designed to help enhance the ability of small companies to access capital. White stated that existing Regulation A is rarely used by issuers and added that a 2012 Government Accountability Office (GAO) Report cited overlapping requirements of federal and state law over such offerings as one factor. Accordingly, White provided that the Commission’s goal is to make Regulation A+ an effective, workable path to raising capital that also provides strong investor protections.
White addressed the issue of preemption, stating that in light of the significant investor protections included in the rules and the need for a workable exemption, the rules would preempt state registration and qualification laws for certain offerings of up to $50 million, in what the Commission termed Tier 2 offerings. She noted that the establishment of the North American Securities Administrators Association’s (NASAA) coordinated review program was a positive development, however she voiced a number of concerns concerning costs of state securities law registration and qualification requirements. White emphasized that states retain their full anti-fraud powers and may require that issuers using Regulation A+ file their offering documents with the states.
Staff Presentation
SEC staff began with the discussion of its recommendation to amend Rule 15b9-1 in order to realign it with its original purpose, i.e. to apply to members who primarily transact on the trading floor of an exchange. SEC staff provided that broker-dealers are currently exempted from membership in a national securities association if they are a member of a national securities exchange, carry no customer accounts, and have annual gross income of no more than $1,000 that is derived from securities transactions effected other than on a national securities exchange of which they are a member. SEC staff stated that the proposed amendments would, among other things, eliminate the current exemption and replace it with a more narrow one that would accommodate off-exchange transactions by a floor-based dealer that are solely for the purpose of hedging the risks of its floor-based activities.
SEC staff explained that its recommendation to adopt final rules to amend Regulation A, create two tiers of offerings:
- Tier 1 for offerings of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
- Tier 2 for offerings of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
Staff explained that both tiers would be subject to certain basic requirements while Tier 2 offerings would be subject to additional disclosure and ongoing reporting requirements.
Commissioner Statements
Commissioner Aguilar
Rule 15b9-1
Commissioner Aguilar stated that the proposed rule amendments are an important first step to improving market oversight. Aguilar stated that today’s market is much different than what it was in 1965 when Rule 15b9-1’s predecessor was adopted, namely that electronic trading has greatly reduced trading on the floors of exchanges and that high-frequency traders (HFT) are now responsible for over 50 percent of the trading that takes place on Alternative Trading Systems (ATS).
Aguilar indicated his concern that a HFT firm’s identity when a trade is executed off-exchange, it is usually not reported to FINRA and therefore frustrates FINRA’s surveillance efforts. Aguilar noted that the current proposal provides that HFTs can be held responsible for potential misconduct, will ensure that the intent of Regulation ATS is not frustrated, and that the Commission will be provided with a more complete and detailed picture of HFTs and their cross-market trading activity.
Regulation A+
Commissioner Aguilar voiced approval for the rules, however, he noted that he would have liked aspects to have been stronger – such as additional disclosures on equity compensation received by insiders in the year prior to an offering. Aguilar noted that after considering several factors including the creation of the new coordinated review program, the Commission had determined not to preempt blue sky review for offerees in Tier 1 offerings and that the Commission will increase the ceiling on Tier 1 offerings from $5 million to $20 million. For Tier 2 offering, Aguilar highlighted Regulation A+ rules address the concern that preempting state blue sky review will deprive state regulators of the benefit of a preview of certain riskier offering before such offerings are sold to the public in their states. Thus, first-time Regulation A+ issuers must publicly file their offering statements with the Commission at least 21 days before qualification.
Commissioner Gallagher
Rule 15b9-1
Commissioner Gallagher, while supporting the amendments to Rule 15b9-1, expressed several reservations. Namely, Gallagher stated that he is not convinced that all proprietary dealers avail themselves of the proposal and that he is wary of this type of one-size-fits-all regulation. Gallagher stated that FINRA should not be treated as the SEC’s deputy and that the proposal will increase costs and burdens on firms, particularly at a time when the market is losing firms on a regular basis due to regulatory costs. Accordingly, Gallagher stated that the benefits of the proposal must outweigh costs.
Gallagher stated that the Commission should now move forward with actual market structure initiatives, such as those related to Regulation NMS and SRO status. Lastly, Gallagher stated that the broker-dealer regulatory paradigm is incredibly comprehensive, if not suffocating, and that the notion that this oversight regime pales in comparison to the Adviser’s Act fiduciary duty regime is “preposterous.”
Regulation A+
Commissioner Gallagher voiced support and indicated that he was pleased to see some useful features in the rule, such as a streamlined path for Exchange Act registration of Regulation A securities, and real efforts to scale the Tier 2 periodic reporting regime for smaller-sized issuers, including semiannual reporting. Gallagher expressed disappointment over the following points in the final rules:
- He noted Congress gave the Commission the authority to raise the cap and that $50 million was a baseline number.
- That the rule introduces a needless transactional friction by failing to deem Regulation A’s semiannual reporting to be “reasonably current” for purposes of Rules 15c2-11, 144, and 144A.
- That the Commission should have allowed reporting issuers to use Regulation A
- The Commission should have provided a clean 12(g) exemption, without the age-out provision included in the final rule.
Gallagher added that he believes the amendments in Regulation A+ don’t go far enough to help issuers that are trying to raise under $5 million.
Commissioner Stein
Rule 15b9-1
Commissioner Stein stated that the proposal addresses the lack of oversight for certain broker-dealers by essentially requiring broker-dealers who conduct transactions away from exchanges to become members of FINRA. Stein noted that, in particular, the proposal will require broker-dealers engaged in proprietary trading to become members of FINRA, become subject to FINRA’s oversight, and provide trade reports to FINRA. Stein noted that the exemption was never intended accommodate firms that employ automatic trading strategies, who now account for an increasingly large source of order volume. Stein, however, expressed her concern that the hedging exemption of the proposal is not adequately defined in the proposal.
Regulation A+
Commissioner Stein voiced support for the proposed rules while noting that she would have liked to see the Commission take a different approach to preemption. Stein highlighted that, over the years, Regulation A has been used lightly, possibly as a result of the ease of making a private offering under Regulation D. Additionally, Stein questioned whether the changes to Regulation A will work in practice but offered optimism towards the language in the rules requiring the staff to undertake a study of Regulation A+ and submit a report to the Commission no later than five years following the adoption of the final rules.
Commissioner Piwowar
Rule 15b9-1
Commissioner Piwowar stated that with any rulemaking, there is a serious threshold question that must be met: whether the proposal is necessary and appropriate. While voting in favor, Piwowar stated that he is not entirely convinced that the proposal clears this hurdle. Piwowar expressed concern that the proposal would modify the regulatory structure to account for the evolution of the markets since Rule 15b9-1 was originally adopted.
Piwowar questioned if changes in market activity translate to a need for rulemaking, especially in light of the anticipated informational enhancements, such as the Consolidated Audit Trail (CAT). Piwowar expressed his concern that the hedging exemption may impose too many conditions. Additionally, Piwowar expressed concern that the proposal was effectively requiring membership in FINRA, as there is currently only one national securities association. Piwowar expressed concern that the proposal could result in further entrenchment of FINRA as the sole national securities association, and that this could create its own regulatory risks and distorted incentives.
Lastly, Piwowar stated that the proposal is about regulatory structure and not market structure, and that the Commission must be mindful of the opportunity cost of this rulemaking, as it is the valuable time that we could have spent on issues that are more clearly related to, and impactful on, market structure.
Regulation A+
Commissioner Piwowar voiced support for the final rules but stated they were not his preferred approach. Piwowar highlighted that during the proposal stage he raised the issue as to whether the Commission might consider a new regulatory model in which an issuer could seek qualification of a Regulation A offering from either the Commission of a state securities regulator. He concluded by saying he hoped the Commission will soon consider further expansion of Rule 504 under Regulation D as well as potential exemptive relief under the intrastate exemption to allow for regional crowdfunding conducted pursuant to state securities laws.
For more information on this meeting and to view an archived webcast, please click here.