December 2020

Dear SDDco Clients and Colleagues: Our SDDco Perspective includes industry news, guidance, regulatory rule updates, deadlines, and other timely matters impacting brokers, advisers, fintech firms, taxpayers, investors, and their service professionals. The SDDco Perspective is made available on our website monthly at http://sddco.com/resources-newsletter.

IN THIS ISSUE:

• Stop The Presses! No, Really, Stop Them. FINRA Wants To Review That Document.
• The IRS affirms tax treatment PPP loan program and the expense deductibility of related expenses
• SEC Amends Exempt Offering Framework
• Compliance Rule Deficiencies Identified by The SEC
• When It Comes to Regulatory Compliance, Ignorance is Not Bliss

Stop The Presses! No, Really, Stop Them. FINRA Wants To Review That Document.

Gary Fox
Director, Business Development

FINRA has submitted to the SEC proposed amendments to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) that would require members to file retail communications concerning private placement offerings. The filing occurred on October 28, 2020.

FINRA proposes to amend both rules to now include “any retail communication (as defined under Rule 2210)” to the list of documents that must be filed with Advertising Regulation. This would be in addition to the current filing requirement. Please note, these new requirements would not affect private placements that are otherwise exempt from filing under Rules 5122 and 5123.

If your firm sells private placements to retail investors, you may need to incorporate the potential additional review time into your processes. Advertising Regulation may take up four (4) weeks to respond to a filing, and if additional changes are necessary to a document after their review, a second submission may be required. FINRA does offer a path for expedited processing, though for an additional cost as well. Overall, firms who sell private placements to natural persons in general should review their previous communications and target audience in order to determine how this amendment will impact them. We would be happy to assist in this review.

Why the change?

FINRA conducted research into Private Placements, reviewing enforcement action statistics, reviews from Advertising Regulation (AdReg), and other information related to Private Placements. They found significant, recurring problems with Private Placement communications. According to the Staff:

“In 2018, AdReg conducted a spot check of the private placement retail communications provided to Corp Fin in connection with filings under Rules 5122 and 5123 during the second and third quarters of 2018. The review revealed significant and pervasive violations of Rule 2210; overall, 806 of the 1,062 retail communications reviewed (76%) did not comply with Rule 2210. Between January 1, 2017, and March 31, 2020, AdReg reviewed 1,726 new member and voluntary filings of private placement retail communications. Of these filings, 41% required revisions to comply with applicable standards, and 4% were so noncompliant with the rules that FINRA issued “do not use” (DNU) review letters. In comparison, during this same period, only 8% of overall AdReg filings reviewed required revisions, and only 0.1% received a DNU letter.”

Rule 5122 applies to private placements of unregistered securities issued by a member or a control entity. The rule requires a member to file the PPM, term sheet or other offering document with the FINRA Corporate Financing Department at or prior to the first time the document is provided to any prospective investor. Many member private offerings are exempt from the rule’s requirements, including among others, offerings sold only to institutional accounts, as defined in FINRA Rule 4512(c), qualified purchasers, as defined in the Investment Company Act of 1940, and qualified institutional buyers, as defined in Rule 144A under the Securities Act of 1933 (“Securities Act”).

Rule 5123 requires members to file with FINRA any PPM, term sheet or other offering document, including any material amended versions thereof, used in connection with a private placement of securities within 15 calendar days of the date of first sale. Rule 5123 exempts private placements that are filed under other FINRA Corporate Financing Rules, as well as most of the same categories of private placements that are exempt from filing under Rule 5122. As a result of these exemptions, both rules apply predominately to private placements sold to retail investors.

The SEC is accepting commentary on the proposed amendments until November 27, 2020.

You can review the FINRA filing with the SEC here

The IRS Affirms Tax Treatment PPP Loan Program and the Expense Deductibility of Related Expenses

Robert Fortino
Managing Partner

The IRS issued Rev. Rul. 2020-27 which discusses the tax treatment of expenses paid by a taxpayer that relate to PPP loan proceeds under section 1106(a) of the CARES Act.  This section of the CARES Act defines eligible expenses for the purposes of the PPP loan.  The IRS re-affirmed two previous announcements related to the PPP loan program. The two re-affirmations are:

1. The eligible expenses used to secure the PPP loan proceeds are not deductible in computing the taxpayer’s taxable income.
2. The disallowance of the deduction of these eligible expenses is to be reflected in the taxable year the expenses were paid or incurred, if the taxpayer reasonably expects to receive forgiveness for the PPP loan, even if the taxpayer has not submitted that application for forgiveness.

The disallowance of what would normally be deductible expenses, effectively makes the PPP loan proceeds taxable. The IRS did not address what a taxpayer should do if they disallow the expenses, but are subsequently denied forgiveness in the following tax year.

SEC Amends Exempt Offering Framework

Ross Marlin
Associate Director

In an effort to expand access to capital markets for issuers and investors, on November 2, 2020 the SEC announced that it had approved amendments to certain of its rules relating to exempt private offerings.

Among other things, the amendments:

• establish a new framework for analyzing the integration of multiple offerings, and allow a registrant to avoid integration if it fits within one of four new safe harbors;
• increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits;
• set clear and consistent rules governing certain offering communications, including permitting certain ‘test-the-waters’ and ‘demo day’ activities; and
• harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.

SEC Harmonizes and Improves Exempt Offering Framework

Compliance Rule Deficiencies Identified by The SEC

Michelle Abramowitz
Marketing Manager

The SEC’s Office of Compliance Inspections and Examinations (OCIE) published a Risk Alert on November 19, 2020, identifying deficiencies with advisers’ compliance programs that they observed from recent adviser exams. The Risk Alert summarized six main areas where advisers were not complying with Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940 (“Advisers Act”); These categories included:

• Inadequate compliance resources;
• Insufficient authority of CCOs;
• Annual review deficiencies;
• Implementing actions required by written policies and procedures;
• Maintaining accurate and complete information in policies and procedures; and
• Maintaining or establishing reasonably designed written policies and procedures.

In response to these observations, the OCIE recommended advisers to,” review their written policies and procedures, including implementation of those policies and procedures, to ensure that they are tailored to the advisers’ business and adequately reviewed and implemented.”

Learn more about how SDDco can help strengthen your firm’s Investment Adviser compliance program.

Think Advisor - SEC: Compliance Officers Need More Authority

SEC Risk Alert - November 19, 2020

We will support your firm’s ongoing compliance with the Investment Advisers Act and associated state requirements including:

• Administering your IARD profile and all ADV amendments
• Maintaining and updating your Compliance Manual
• Reviewing all marketing and performance materials
• Developing Solicitors Agreements and Disclosure Statements
• Conducting Annual Reviews
• Guiding you during regulatory exams
• Drafting responses to regulators

When It Comes to Regulatory Compliance, Ignorance is Not Bliss

Casey Muller
Director of Legal & Internal Compliance

Here’s a hypothetical – you’re a broker-dealer CCO. In your supervisory position, you discover a red flag, e.g. an electronic communication that could potentially be some form of misconduct. If you fail to investigate the red flag, should you be culpable for failure of proper supervision even if such inquiry or investigation wouldn’t have uncovered the misconduct? An Appeals Court decision may have answered that question in a way that runs contradictory to precedent.

ThinkAdvisor - Appeals Court Disregards FINRA Rule in CCO Case

US Court of Appeals - North v SEC

SDDco SERVICE OF THE MONTH:

Accounting and Bookkeeping

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• Assisting the calculation of commissions/management fees
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• Preparation of billing and invoicing
• Preparation or review of bank reconciliations
• Maintenance of accounting books and general ledger
• Preparation of financial statements with trial balance
• Interface with outsourced payroll processing firms

SDDco Group makes this general information available for educational purposes only, the contents of which were not originated from SDDco. SDDco is not affiliated with any of the publishing persons or entities of the articles herein. The information provided should not be construed as legal advice. This email may constitute an advertisement under U.S. law.

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