Secretary Galvin Adopts New Regulations:

1) Use of Expert Network Firms,

2) Performance-Based Fees, and

3) Other Regulatory Changes.

The Massachusetts Securities Division (the "Division") is adopting new regulations. These changes include limitations on investment advisers' use of expert network firms, performance based fee restrictions, as well as other changes, as described below.

Secretary Galvin's Letter Approving
the Filing of Regulations (Dated August 4, 2011)
(PDF)

Adopting Release (PDF)

Policy Statement Regarding Regulation on Use of Matching or Expert Network Services and Investment Advisers under SEC Authority (Dated September 8, 2011) (PDF)

Public Hearing (held on June 23, 2011)

View Comments


Section I

Investment Advisers Using Matching or Expert Network Services - Dishonest or Unethical Conduct in the Securities Business
(Adopted 8/19/11, Effective 12/1/11)

The Division is adding a new section under 950 CMR 12.205(9)(c)(16) to the existing list of dishonest and unethical practices. The Division believes this addition is necessary to address the rising use of expert network firms by investment advisers to facilitate paid consultations between investment advisers and industry experts.

As alleged in In the Matter of Risk Reward Capital Management Corp., RRC Management LLC, RRC BioFund LP, and James Silverman, Docket No. E-2010-057, some investment advisers have paid expert networks and consultants to access confidential information about publicly traded companies. The rise of expert network firms, and the number of abuses which have been addressed by regulators, make it clear that additional measures are required to ensure that confidential information is not being accessed and traded upon. The Division's proposed regulations, while not altering investment advisers' existing duty not to trade on insider information, seek to provide investment advisers with greater clarity as to what is impermissible conduct when paying consultants for information.

For more information on this proposal or to submit a comment, click here.


Section IV

Update References from the NASD to FINRA
(Effective Upon Publication in the Massachusetts Register)

The Division's regulations include references to the NASD and NASD rules. In 2007, the NASD merged with the NYSE and NYSE Regulation, Inc. and became the Financial Industry Regulatory Authority, or FINRA. The proposed amendments update the regulations to reflect this change by referencing FINRA and FINRA member conduct rules.

No comments were received on this proposal. The regulation is therefore being adopted as proposed.


Section V

Update References to Forms U-4 and U-5 and to Sections of Form U-4
(Effective Upon Publication in the Massachusetts Register)

The Form U-4 has been substantively changed, and several references to items in the Massachusetts regulations are out of date. The proposed amendments herein update the regulations to reflect these changes.

References to Forms U-4i and U-5i in the regulations are corrected to reference current forms.

No comments were received on this proposal. The regulation is therefore being adopted as proposed.


Section VI

Update Fees to Match Sec. 178 of c.184 of Acts of 2002
(Effective Upon Publication in the Massachusetts Register)

Section 178 of c.184 of the Acts of 2002 raised the registration fees for broker-dealer firms and their registered representatives. The proposed amendments update the Massachusetts regulations to reflect these changes.

No comments were received on this proposal. The regulation is therefore being adopted as proposed.


Section VII

Stock Exchanges
(Effective Upon Publication in the Massachusetts Register)

The proposed amendment to 950 CMR 12.201(3) deletes language providing that Boston Stock Exchange members may elect inactive broker-dealer status. The Division believes this language is no longer applicable due to changes at the exchange.

The proposed amendments to 950 CMR 14.402(A)(8) will update references to the Boston Stock Exchange, the Philadelphia Stock Exchange, and the Pacific Exchange. The Boston Stock Exchange was purchased by NASDAQ in 2007 and no longer operates under the old name. The Philadelphia Stock Exchange was also purchased by NASDAQ and has been renamed the NASDAQ OMX PHLX. The Pacific Exchange merged with the NYSE in 2006.

The proposed new language in 950 CMR 14.402(A)(8) explicitly undesignates the proposed NASDAQ OMX BX Venture Market as an exchange that is eligible to claim the §402(a)(8) exemption. The NASDAQ OMX BX Venture Market will be a new market for the trading of penny stocks, and it will have significantly lower substantive listing standards than the old Boston Stock Exchange. The NASDAQ OMX BX Venture Market has indicated that it will not seek exemptions under state regulations that were related to its predecessor, the Boston Stock Exchange.

Amended language of 950 CMR 14.402(B)(13)(b)(2) and 14.402(B)(13)(h) replaces references to the NASD Automated Quotation System and to the NASDAQ National Market System with references to the NASDAQ Global Market.

No comments were received on this proposal. The regulation is therefore being adopted as proposed.


Section VIII

Technical Correction to Fee Charts for Securities Exemptions and Notice Filings
(Effective Upon Publication in the Massachusetts Register)

These amendments correct the graduated fee charts for securities exemption filings and notice filings for offerings under Rule 506 of SEC Regulation D.

No comments were received on this proposal. The regulation is therefore being adopted as proposed.


Section IX

Rules Relating to Performance Based Fees
(Added May 19, 2011)
(Effective Upon Publication in the Massachusetts Register)

The Division proposes to add a new section under 950 CMR 12.205(9)(c)(17) to the existing list of dishonest and unethical practices. The rule would prohibit the collection of performance based fees, except those fees collected in compliance with the restrictions and conditions outlined in Rule 205-3 under the Investment Advisers Act of 1940.

Rule 205-3 provides an exception to the general prohibition on performance based fees unless the client is “qualified,” generally by either having $750,000.00 under the management of the adviser, a net worth of $1.5 million, or is a qualified purchaser as defined in section 2(a)(51)(A) of the Investment Company Act of 1940.

No comments were received on this proposal. The regulation is therefore being adopted as proposed.


Public Hearing

A public hearing on these proposed changes will be held at 10:00 a.m. on June 23, 2011 at One Ashburton Place, 17th Floor, Boston, MA 02108. The deadline for submission of comments regarding these proposed changes is Friday, June 24, 2011.

Interested parties will be afforded an opportunity to orally present data, views and arguments relative to the proposed action. Written presentations may be made at the hearing or submitted at any time prior to the close of business Friday, June 24, 2011 to the Securities Division, One Ashburton Place, Room 1701, Boston, Massachusetts 02108. Copies of the proposed amendments are available on the Division's website at http://www.sec.state.ma.us/sct/sctidx.htm or by calling 617-727-3548 or 800-269-5428 (Massachusetts only).


Outstanding Regulatory Proposals
Section II, Section III

Section II

Change in Exclusion/Exemption Requirements for Hedge Funds and other "Private Funds"

On July 21, 2010, Congress passed the most sweeping financial legislation enacted since the 1930s: the Dodd-Frank Consumer Protection and Regulatory Reform Act. The proposed amendments to the Massachusetts regulations referenced in this section are necessary to promote consistency between state and new federal requirements concerning investment adviser regulation, including regulation of "private funds."

In part to address the elimination of the exemption for advisers with fewer than fifteen clients, the Securities and Exchange Commission ("SEC") has proposed to exempt: 1) advisers solely to private funds with less than $150 million in assets under management, and 2) venture capital funds regardless of the amount of assets under management. The SEC has proposed to define a "private fund" as a fund that would be Investment Company under the Investment Company Act of 1940, but for section 3(c)(1) or 3(c)(7) of the Act. This new category of "exempt reporting" advisers must submit reports to the SEC and are subject to other regulatory requirements.

Exempt reporting advisers at the federal level will still be required to either register with the individual states in which they do business, or claim an available exclusion or exemption. The North American Securities Administrators Association ("NASAA") has proposed a private funds model rule consistent with the new Dodd-Frank requirements.

12.205(1)(a)(6) - Definition of Institutional Buyer

The proposed amendment to 12.205(1)(a)(6) will phase out existing subsection (b), which defined institutional buyer as including "an investing entity whose only investors are accredited investors as defined in Rule 501(a) under the Securities Act of 1933 (17 CFR 230.501(a)) each of whom has invested a minimum of $50,000." Following the date of implementation, investment advisers will no longer be able to rely on this exemption for new beneficial owners or additional funds for existing investors. However, advisers can continue to rely upon the exemption for business that existed prior to the implementation date.

12.205(2)(c) Exemption for Exempt Reporting Advisers

The Division proposes to remove the institutional buyer exemption located in 12.205(b), and adopt an exemption in order to ensure proper regulation of investment entities whose regulatory oversight has come within the ambit of state responsibility. In its place, the Division proposes to adopt a regulation consistent with the Dodd-Frank requirements.

The proposed addition to 12.205(2) creates a registration exemption for "exempt reporting advisers." The proposal would exempt advisers to 3(c)(7) and venture capital funds from Massachusetts registration requirements, subject to certain limitations. These exempt advisers will file the same report and amendment thereto that an exempt reporting adviser is required to file with the SEC.

For more information on this proposal or to submit a comment, click here.


Section III

Investment Adviser Discretion and Custody Requirements

The Division proposes to modify the minimum financial requirements for investment advisers found at 950 CMR 12.205(5). The proposal would remove the option of maintaining a segregated account instead of a bond, raise the bonding requirement for discretion to $50,000.00, and remove the bonding requirement for custody. In addition, advisers with custody would be required to comply with Advisers Act Rule 206(4)-2, the SEC's safekeeping requirements.

For more information on this proposal or to submit a comment, click here.