Legislative and Regulatory Updates

Print PDF

FINRA Issues Guidance on the Obligation of Broker Dealers to Conduct Reasonable Investigations in Regulation D Offerings

Today, FINRA issued it's Regulatory Notice 10-22 offering broker dealers guidance on their due diligence responsibilities for private placement offerings.  In this notice, FINRA reminds the broker dealer community of their obligations to conduct a reasonable investigation of the issuers and securities they recommend.  You can access the Notice HERE.

Industry Issues – Legislative

Congress Prepares a Sweeping Overhaul of Financial Regulations

By Will Heyniger, Washington Council Ernst & Young
Reprinted from the REISA Legislative and Regulatory Update.  To view all the legislative and regulatory initiatives contact www.reisa.org for membership details.

Congress and the Obama Administration have been planning an ambitious overhaul of financial regulation in response to the financial crisis, which will affect many areas of the financial services industry. The legislation could result in the creation of entirely new regulators while consolidating others, and many participants in securities markets and other businesses would face increased compliance responsibilities.

While the administration in August finished translating the several parts of its overhaul into legislative language, the chairmen of the Congressional banking committees don’t see eye-to-eye with each other (or with the administration) on some issues, and the Senate in particular faces an extremely crowded calendar this fall that may limit its ability to pass such a sweeping package of bills. Shortly before the House adjourned for the summer on July 31, House Financial Services Committee Chairman Barney Frank (D-MA) promised that Congress would send the overhaul to President Obama by the end of this year.

Broadly, the many pieces of the regulatory reform effort break down into:

  • Establishing a new systemic risk regulator and setting stiff new leverage requirements for the largest financial institutions;
  • Creating a process for “winding down” the largest financial companies in an orderly way if they fail;
  • A powerful new Consumer Financial Protection Agency (CFPA);
  • Regulation of credit default swaps and other over-the-counter derivatives;
  • Rules on executive compensation including a “Say on Pay” shareholder vote and new authority for regulators to disapprove a financial company’s incentive pay practices if they are deemed too risky;
  • Tighter regulation of credit rating agencies, such as Moody’s and Standard & Poor’s’
  • “Risk retention” requirements for companies that securitize loans, such as mortgages;
  • Mandatory SEC registration for larger hedge funds, private equity and venture capital funds;
  • and Strengthened investor protection powers for the SEC.
TALF Extended By Treasury Department

The TALF program designed to help the market for asset-backed securities will be extended until next year. TALF, which stands for Term Asset-Backed Securities Loan Facility, was designed to help the market for asset-backed securities and was due to expire at the end of the year. All asset backed securities will now be eligible under TALF for federal support until March 31, 2010, and newly issued commercial mortgage backed securities will be eligible for TALF funds until June 30, 2010. The extension of CMBS securities has been applauded by the real estate industry.

Industry Issues – Regulatory

There are many regulatory issues associated with the alternative investments. Anyone actively engaged in this practice should be familiar with the following:

NASD Notice To Members 05-18

The NASD Notice To Members 05-18 issued March 2005 addresses Section 1031 exchanges of real property into TIC interests and states that TIC interests are generally considered securities for purposes of the federal securities laws and NASD rules. The Notice to Members addresses:

  • Suitability
  • Due Diligence
  • Commission Splitting with unregistered individuals or firms;
  • Supervision; and
  • Recordkeeping.

The notice reminds members that when offering TIC interests that are securities to customers, members and their associated persons must comply with all applicable NASD rules. In addition, members relying on private offering exemptions from the registration requirements of the Securities Act of 1933 (Reg. D) must ensure that their manner of offering TIC interests complies wit hall applicable requirements, including the prohibition on general solicitation.

If you would like a copy of NTM 05-18 forwarded to you please send us an e-mail at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and indicate NTM 05-18 in the memo line.

Section 5 of the Securities Act of 1933 [15USC 77a et seq. as amended] and Securities and Exchange Commission Interpretive Release No. 6455

These rules governing unregistered securities offered and sold within the United States are covered in what is commonly referred to as Reg. D.  Perhaps the two most important requirements of Reg D are that investors are accredited (as defined in the Reg) and the prohibition against general solicitation.  A violation of either of these, and in fact, any of the other provisions of Reg D, can have serious and far reaching consequences.  The interpretive release published by the SEC assists broker-dealers, reps and investment professionals applying the provisions of Reg D.

If you would like a copy of either REG D or the SEC Interpretive Release No. 6455, send us an e-mail at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and indicate REG D in the memo line.

IRS Rev. Proc 2002- 22

This Revenue Procedure specifies the conditions under which the IRS wil lconsider a request for a ruling that an undivided fractional interest in real estate( other than a mineral property as devined in §614) is not an interest in a business entity and will, accordingly, qualify as a fractional interest in real property eligibly for tax-free exchange under §1031(a)(1).

If you would like a copy of the text of IRS Rev. Proc 2002 – 22 please send an e-mail to: This e-mail address is being protected from spambots. You need JavaScript enabled to view it and indicate IRS Rev. Proc 2002 – 22 in the memo line.

Check back here for other regulatory updates that may affect your practice in the area of TIC and DST investing.