IPA Submits Comment Letters Regarding FINRA Regulatory Notice 22-08 and the Ohio
Division of Securities Revised Rule 1301:6-3-09
SEC Extends Comment Period for Climate Disclosure Proposal to June 17, and Reopens
Comment Periods for Proposed Rules Regarding Private Fund Advisers and Regulation ATS for 30 days
As the 2022 midterm primary elections heat up, May is off to a busy start on the regulatory front. The IPA remains engaged in reviewing and soliciting feedback on new regulatory proposals, including the Financial Industry Regulatory Authority’s (FINRA) and the Ohio Division of Securities .
On Monday, the IPA submitted two comment letters to FINRA and the Ohio Division addressing these regulatory proposals.
Additionally, the SEC that it has extended the public comment period on its landmark 500-page climate disclosure that requires all SEC registrants – including non-traded REITs and BDCs – to provide more information on how their operations affect the climate and carbon emissions. Further, the SEC that it will reopen the comment periods on the to enhance private fund investor protection and on the proposed rulemaking to include significant Treasury markets platforms within Regulation ATS for 30 days.
IPA Submits Comment Letter to FINRA on Complex Products Notice
FINRA’s Regulatory Notice 22-08 on complex products and options puts a spotlight on the regulatory concerns that arise when investors trade such products without understanding their unique characteristics and risks. While largely focused on options and exchange-traded products, and particularly those accessible to self-directed retail investors, the notice specifically references recently emerging products that may be considered complex, including “interval funds, or tender-offer funds that provide limited liquidity to investors.” Further, the notice makes reference to non-traded REITs and other products such as direct participation programs.
- First, while the Notice might have been inspired by the trading of complex products in certain types of self-directed accounts, non-listed REITs and BDCs, interval funds, and tender-offer funds are not “traded” and are distributed through registered broker-dealers and investment advisers who have fiduciary duties and regulatory frameworks requiring them to act in their customers’ best interest.
- Second, the Securities Exchange Commission and FINRA should address under existing law any problem related to the distribution of complex products through these financial professionals. No amendment to existing sales practices standards is necessary.
- Third, any rulemaking concerning complex products would necessitate a definition of “complex,” which will be difficult, if not impossible.
- Fourth, however one might define the term “complex,” the definition should not extend to interval funds and tender-offer funds, which are registered closed-end funds that provide shareholder repurchase programs regulated by the Commission.
IPA Submits Comment Letter to Ohio Division of Securities on Revised Rule 1301:6-3-09
The IPA also submitted a comment letter to the Ohio Division of Securities (Division) yesterday regarding its proposal to incorporate, without any change or alteration, every North American Securities Administrators Association (“NASAA”) standard and statement of policy and all of the Division’s Merit Standards for Securities Offerings, into Rule 1301:6-3-09 concerning registration by qualification. Due to the IPA’s efforts, the Division’s proposal was in response to a request by the Ohio Joint Committee on Agency Rule Review (JCARR) that the Division follow JCARR-mandated rulemaking of each existing NASAA statement of policy and Division Merit Standard before application to any issuer registrant.
The IPA’s comment letter strongly urges the Division to withdraw this proposal in favor of a newly revised proposal that conforms to JCARR. We request that the Division break out, request comment, and separately evaluate each NASAA standard and statement of policy, and each Division Merit Standard, in compliance with JCARR. The comment letter provides that the proposal, as drafted, would undermine the JCARR process in at least five ways.
- The Division Proposes to Deny JCARR a Rule-by-Rule Substantive Review. The Division proposes to automatically incorporate – without any change – NASAA’s 43 statements of policy and 17 Merit Standards covering widely-disparate topics issued over a period of almost 50 years.
- The Division Proposes to Incorporate Future Standards and Statements. The Division’s proposal would automatically incorporate future standards and statements of policy. This would be most pernicious for issuers who do not regularly monitor the public statements of NASAA officials.
- The Division Proposes to Adopt Undefined “Standards.” The Division proposes to automatically incorporate NASAA “standards”, but a search of NASAA’s website produces no compendium of “standards.”
- The Division Enforces Unadopted Standards and Statements of Policy. The Division is already violating this requirement by continuing to enforce NASAA standards and statements of policy now, before it has even begun the JCARR process.
- The Division Misapplies the Statements of Policy and Merit Standards. Unstated in the proposal is the fact that the Division applies the NASAA standards and statements of policy and its own Merit Standards to registrations by coordination, in violation of the Ohio Revised Code.
The IPA also notes that the Division should similarly comply with JCARR when establishing regulatory standards and policies apart from NASAA through publication in the Ohio Securities Bulletin, issuer comment letters and other pronouncements. Given the importance of these issues to the citizens of Ohio, the potential economic impact to the state and the magnitude of these new changes, we believe a new proposal which thoughtfully evaluates the broader social and economic impacts of the individual standards and statements is appropriate and necessary.
As always, we will share additional updates on these efforts as they advance. We encourage our members to visit the IPA’s website to stay current on all our advocacy initiatives. If you have any questions, please don’t hesitate to reach out to Tony or me.
Finally, we would like to extend our gratitude to the Policy, Regulatory & Legal Affairs Committee, industry thought leaders and Tom Selman for their dedication and insight in preparing the IPA’s responses. Their active participation is essential to positive outcomes for our industry.
Thank you for your continued support
SVP, Government Affairs and General Counsel
Institute for Portfolio Alternatives