News Archives

The Massachusetts Securities Division (the “Division”) is circulating the following proposed regulations for comments:

• Adopting a notice filing for Funding Portals (federal crowdfunding) at 950 CMR 12.206.
• Adding a reference to the North American Securities Administrators Association’s (“NASAA”) statement of policy on the use of electronic offering documents and subscription agreements at 950 CMR 13.305(A).
• Updating the list of specified securities exchanges and markets for purposes of the “exchange listing exemption,” pursuant to Section 402(a)(8) of c.110A at 950 CMR 14.402(A)(8).
• Revoking the Massachusetts Uniform Limited Offering Exemption, based on the revocation of federal Rule 505 under SEC Regulation D at 950 CMR 14.402(B)(13)(i).
• Amending the Massachusetts state crowdfunding exemption to include references to SEC Rule 147A at 950 CMR 14.402(B)(13)(o).
• Adopting a notice filing for federal crowdfunding offerings under SEC Regulation CF at 950 CMR 14.402(B)(13)(p).
• Adopting a notice filing for offerings pursuant to Tier 2 of SEC Regulation A at 950 CMR 14.402(B)(13)(q).
• Adding a reference to the NASAA multi-state form, Uniform Notice of Regulation A - Tier 2 Offering, at 950 CMR 14.412(A)(1).

Funding Portals in the Commonwealth

The Division solicits comments on a proposed regulation that requires a notice filing from any Funding Portal having a principal place of business in the Commonwealth.

The proposed regulation would require the notice filing of a copy of Form Funding Portal (FP), as filed with the SEC. The regulation also sets forth amendment and withdrawal requirements for Funding Portals.
950 CMR 12.206 (PDF)

Policy on the Use of Electronic Offering Documents and Subscription Agreements

This proposed regulation is intended to provide flexibility for issuers, while incorporating the investor protections included in the NASAA Statement of Policy on the Use of Electronic Offering Documents and Subscription Agreements.
950 CMR 13.305(A) (PDF)

Update of Exemption for Exchange-Listed Securities

The revised regulation lists the exchanges designated as covered exchanges in Section 18(b)(1) of the Securities Act and SEC Rule 146.
950 CMR 14.402(A)(8) (PDF)

Revocation of Massachusetts Uniform Limited Offering Exemption

Based on the SEC’s May 2017 repeal of Rule 505 of Regulation D, the Division proposes to remove this state exemption because it is obsolete. 950 CMR 14.402(B)(13)(i) (PDF)

Inclusion of SEC Rule 147A in the Massachusetts Crowdfunding Exemption

The proposed amendment to the Massachusetts exemption will specifically reference SEC Rule 147A. The amended regulation will accommodate modern business practices and communications technology and will provide an alternative means for smaller companies to raise capital locally.
950 CMR 14.402(B)(13)(o) (PDF)

Notice Filing for Federal Crowdfunding Offerings

The Division solicits comments on a proposed regulation that requires a short notice filing from a crowdfunding issuer that is conducting its crowdfunding offering in the Commonwealth and: (a) such issuer has its principal place of business in the Commonwealth or (b) 50% or greater of the aggregate amount of the offering has been purchased by residents of the Commonwealth.

The proposed regulation would require the filing of a notice, the materials filed with the SEC (including SEC Form C), a consent to service of process on Form U2, and Form U-2A (if applicable). The regulation also sets forth renewal and amendment requirements for federal crowdfunding offerings.
950 CMR 14.402(B)(13)(p) (PDF)

Notice Filing for Regulation A, Tier 2 Offerings

The Division solicits comments on a proposed regulation requiring a notice filing from an issuer that is conducting a Regulation A, Tier 2 offering in the Commonwealth. The notice filing under the proposed regulation will use the notice form adopted by NASAA for Tier 2 offerings, along with Form U-2A (if applicable) and a filing fee. This proposed amendment also includes designation of the NASAA model notice form as a form accepted by the Division.
950 CMR 14.402(B)(13)(q) (PDF) and 14.412(A)(1) (PDF)

A public hearing to receive comments will be held at 11:00 a.m. on January 18, 2018 at the offices of the Massachusetts Securities Division, John W. McCormack Building, One Ashburton Place - 17th Floor, Boston, MA 02108. The deadline to submit written comments is January 19, 2018.
Notice of Public Hearing and Comment Period (PDF)

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Public Comments

January 19, 2018
OTC Markets Group Inc. Comments (PDF)

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January 18, 2018
Just wondering what electronic submission system do you have in place to streamline the filings and/or pull the information from Edgar? Also is filing just required or do offerings need to be reviewed/approved? If reviewed how long does this take and what are the expected costs?
Thanks,
Sherwood

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December 26, 2017
I urge the Division to adopt notice filing rules that utilize the Uniform Notice of Federal Crowdfunding Offering Form U-CF developed by NASAA rather than requiring an issuer to duplicate efforts and file everything that is permanently, and publicly available on EDGAR and the Form U-2. As offering materials prepared for offerings under Regulation Crowdfunding are created for digital display, the proposed rules would be especially burdensome without the state having its own digital filing system on par with EDGAR.

Further, every other state that has adopted rules for notice filings for offerings under Regulation Crowdfunding has adopted the Form U-CF. Being consistent with other regimes will assist with compliance. Andrew Stephenson
VP of Product Management and Strategy
CrowdCheck, Inc.
andrewstephenson@crowdcheck.com
(o) 703-548-7263
(c) 650-906-9984
www.crowdcheck.com
@crowdcheck

Pyramid schemes are fraudulent businesses where participants are paid to recruit others to participate. Pyramid schemes are often disguised as multi-level marketing businesses or MLMs. You should be aware of the following information before investing in any MLM business.

The scheme:

Make money quickly by purchasing a starter package that promises immediate guaranteed payouts of anywhere from $700-$1,500 per month. These payouts are unrealistic and are promised only to induce the investor to buy into the scheme. Mandatory purchase of high-priced starter packages are hallmarks of this scheme and the sales pitches usually promise higher payouts if more money is paid for the starter package.

The product:

In many illegal schemes the promoter spends little time explaining the product because the product is ancillary to the overall scheme. Recent schemes have involved products related to internet services, mobile marketing platforms, app sales, cloud computing services, and voice-over-internet applications. Often unsold products purchased by the investor may not be returned to the company. Instead, promoters emphasize that the way to make money is to recruit other people to sign up and purchase the starter package.

The sales pitch:

Make money without working hard or make money through minimal effort like making referrals or inviting others to presentations. Investment of money where you expect to make returns mainly through the efforts of others is potentially a security. Individuals must be registered to offer and sell securities and securities must themselves be registered or exempt from registration.

How money is made:

Money is made primarily when you recruit others to purchase the package, NOT from product sales. Illegal pyramid or Ponzi schemes disguised as fraudulent MLMs pay earlier investors with funds from later investors. Also, specific payouts are often guaranteed by promoters, but actual payouts fall far short of the guarantees.

Who is targeted:

MLM frauds usually involve affinity fraud and can be spread quickly through word-of-mouth. The Securities Division has investigated MLM frauds in Spanish and Portuguese communities, Brazilian communities, and Asian-American communities, but anyone is potentially vulnerable.

What you can do to protect yourself from investing in an illegal pyramid scheme disguised as an MLM business:

• Don’t invest because your friends tell you it’s a good investment — use your own judgment and make your own decision.
• Ask for financial information about the company.
• Be wary about mandatory payments for starter materials, membership fees or other payments to join the scheme.
• Be wary if money is made primarily by recruitment and not by the sale of a product.
• Ask for specific documentation about the product and product sales.
• Be wary of schemes that require minimum ongoing purchases of products.
• Make sure that any products purchased can be returned to the company if not sold.
• Ask if there are minimum sales requirements before payouts can occur.
• Be wary of promoters who urge the purchase of higher positions in the distribution network to immediately increase payouts.
• Ask for written contracts detailing payouts, cancellation terms, and long-term business plans.
• Be wary of promoters who urge quick establishment of distribution networks by adding family members, children, pets, etc.
• Be wary of any scheme that claims to provide payouts in cash.

See also:   Illegal Pyramid Schemes Disguised as Multi-level Marketing Businesses (MLMs) (PDF)

Questions:

Check with the Securities Division to determine if the individuals and firms selling the investment are properly registered with the Commonwealth of Massachusetts.

Contact:

Massachusetts Securities Division
800-269-5428 or 617-727-3548
Email: MSD@sec.state.ma.us

Massachusetts Crowdfunding Exemption – Final Regulation (PDF)

Massachusetts Crowdfunding Exemption - Q&A for Issuers (PDF)

Massachusetts Emergency Crowdfunding Regulation (PDF)

Summary and Highlights (PDF)

Solicitation of Public Comment (PDF)

Office of the Secretary of the Commonwealth Massachusetts Securities Division

Notice of Public Hearing

The Massachusetts Securities Division has adopted an emergency regulation permitting intra-state crowdfunding offerings, the "Crowdfunding Exemption," located at 950 CMR 14.402(B)(13)(o). The Crowdfunding Exemption allows Massachusetts businesses to raise up to $1,000,000 over a 12-month period in a single offering conducted entirely within the state, and is tied to the federal "intrastate offering" exemption found in Section 3(a)(11) of the Securities Act of 1933 and Securities and Exchange Commission Rule 147. Pursuant to the regulatory authority conferred by M.G.L. c. 110A § 412 and as required by M.G.L. c. 30A, the Securities Division will hold a notice and comment period ending on Tuesday, March 24, 2015 and conduct a public hearing commencing at 10:00am on Tuesday, March 24, 2015 at the Massachusetts Securities Division, John W. McCormack Building, One Ashburton Place, 17th Floor, Boston, Massachusetts, 02108, before permanently adopting the Crowdfunding Exemption under the Massachusetts Uniform Securities Act, M.G.L. c. 110A.

The emergency regulation was filed with the Secretary of State on January 15, 2015. Copies of the regulation as well as a summary and highlights may be obtained by visiting the Securities Division's website. Copies are also available from Jeremy Entwistle, Esq., at the Securities Division at the above address.

Persons desiring to be heard on this matter in person should appear for the public hearing. All written comments will be subject to posting on the Securities Division website, and the Securities Division will not edit personal identifying information from submissions.

Written comments will be accepted until 5:00pm on Tuesday, March 24, 2015.

 

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Submitted Comments

Tuesday, April 3, 2015 12:13 PM

Sir –

As you and I have discussed, I do think that having neighboring States adopt reciprocal Rule 504-based crowdfunding provisions could make crowdfunding much more useful for small businesses. This strikes me as superior to being locked into an intrastate-only approach.

I have given some thought to what reciprocal crowdfunding provisions might look like. Attached is my rough draft of a Massachusetts version and (for comparison) a Maine version.

As you know, Rule 504 allows general solicitation (a necessary attribute of crowdfunding) “in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions.”

When I compare the Maine and Massachusetts statutes, I find that Maine’s grants the Securities Administrator very broad authority to define the content of a prospectus for purposes of a registration by qualification. See § 16307 of the Maine Uniform Securities Act. There is no comparable provision in the Massachusetts statute, and § 303(b) seems to impose minimum content requirements that cannot be waived.

One possible approach to reciprocal crowdfunding in Massachusetts would be for the Division to rely on existing 950 CMR 13.303(A)(1) and simply require a cross-reference sheet and supplement as part of a registration statement. In this way, the Division could track the requirements of § 303(b) against whatever prospectus format happens to be used in the other State. The issuer could be required to add further information in the supplement if any 303(b) items are not otherwise presented in a satisfactory manner.

A second approach would be to use the Secretary’s broad authority to craft registration exemptions. The enclosed Massachusetts draft follows that route. As a condition to the exemption, it requires the issuer to follow qualification-like procedures – namely to preclear the offering document with the Division and to distribute the precleared document to offerees in Massachusetts. By imposing these requirements, I think this exemption should meet the Rule 504 conditions quoted above, and thus should allow for general solicitation under Rule 504. As you will see, the enclosed draft also borrows various conditions found in the Massachusetts crowdfunding exemption (950 CMR 14.402(o)), incorporating these by reference.

I have also prepared a Maine version. Its foundation differs from the Massachusetts version in one significant respect – the Maine draft is a straight qualification provision which capitalizes on the flexibility under § 16307 of the Maine Act. Note that the Maine version is longer than the Massachusetts one because I have chosen to draft this as a markup instead of incorporating key provisions by reference.

I hope the idea of reciprocal 504-based crowdfunding appeals to you and also to the Secretary. I would be happy to discuss this topic at your convenience.

-- Greg

Reciprocal Crowdfunding Exemption - MA (PDF)

Reciprocal Seed_Capital_Registration_Rule_Ch_524 - ME (PDF)

Gregory S. Fryer
Verrill Dana LLP

 

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Wednesday, March 25, 2015 12:28 PM

Reciprocal Crowdfunding Exemption - MA (PDF)

 

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Tuesday, March 24, 2015 4:14 PM

Comments from Ahmad Abdul-Qadir )

 

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Tuesday, March 24, 2015 5:03 PM

Comments from Gerard P. O'Connor (PDF)

 

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Tuesday, March 24, 2015 2:24 PM

Below is a very comprehensive submission to SEC dealing with education.
I’m on CFPA educational committee. If interested, I could send you CFPA comments about education.
Please feel free to contact me at any time.

Best regards,
Sasha
Alexander “Sasha” Gimpelson
Office: 617-996-6969 Cell: 617-309-0789
email: gimpelsona@twc.com

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February 3, 2014

Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Submitted via email: rule-comments@sec.gov

Re: Comments on Proposed Rule: JOBS Title III - Crowdfunding: #141-146

“The great aim of education is not knowledge but action” - Herbert Spencer.

Dear Ms. Murphy:

Thank you for the opportunity to provide comments to the Securities and Exchange Commission (the “Commission”) on its proposed amendments.

The Advisory Council was formed to address a very important need for investor education pursuant to the Jobs Act. Education is critical both for accredited and non-accredited investors for their long term success, as well as that of the Jobs Act. The advisory council consists of a group of prominent practitioners, educators and industry experts with representatives from CFPA, CFIRA & NLCFA.

The SEC has recognized this need and issued basic guidelines for equity investor education; section 4A(a)(3) of the Jobs Act states that intermediaries will be required to “provide… disclosures related to risks and other investor education materials.” However, scope and specific requirements for other materials are left vague. This is where we see a great opportunity, and would like to present the following objectives to this advisory council:

1. Act as advisory board to develop standards for a complete, systematic online investor education program that prepares investors to participate in the crowdfunding marketplace while mitigating potential risk of fraud
2. Create a BOK (body of knowledge) to meet and elaborate upon FINRA and SEC recommendations/requirements for investor education
3. Submit BOK to SEC to meet 90-day comment deadline.

We appreciate this opportunity to comment in advance of the proposed rulemaking for the JOBS Act. Should you have any questions or require any additional information about the Advisory Council or the contents of this letter, please feel free to contact me at 617-879-4710

Alexander Gimpelson
----------------------------------------------------------------------------
Request for Comment
Informal surveys of platforms catering to accredited investors indicate that only a fraction of signed-up investors actually invest. The experienced investors who have already been active remain active, while the majority of novice accredited investors are staying on the sidelines. We could expect similar behavior from non-accredited investors.

It is believed that one of the major reasons is simply a lack of knowledge required to be successful in investing in privately held companies. If the majority of potential investors are remaining on the sidelines, JOBS act is not likely to deliver the promise of job creation. Therefore, the objective of education should not be only making investors aware of potential risks associated with crowdfunding or simply repetition of SEC regulations, but also preparing novice investors to be comfortable in making investment decisions.

“The great aim of education is not knowledge but action” - Herbert Spencer.

141. Is the scope of information proposed to be required in an intermediary’s educational materials appropriate? Why or why not? Is there other information that we should require an intermediary to provide as part of the educational materials? If so, what information and why?

The National Financial Capability Study presents new survey findings that underscore the need to ensure all Americans have access to the education, resources and tools they need to manage their money with confidence

The requirements are dealing mainly with risks and regulations of the JOBS Act. They fail to prepare potential investors to be successful, informed and confident crowdfunding investors.
Education should cover principles of investing, fundamentals of crowdfunding, and basics of evaluating investment opportunities of privately held companies. It should guide learners through the process of making investment decisions and prepare them to be successful, informed crowdfunding investors.

143. Should we prescribe the text or content of educational materials for intermediaries to use? Why or why not? Should we provide models that intermediaries could use? Why or why not?

It is not critical what specific educational method or content is used, provided the course covers the requisite topics and meets basic pedagogical standards. It is up to the intermediary to select the appropriate method. The SEC’s responsibility is to assure that a learner has understood and is capable of applying the acquired knowledge.

The great majority of non-accredited investors have no experience in investing in early stage companies, nor evaluating the opportunities, nor conducting due diligence. Failure to learn or lack of ability to apply the knowledge will result in an unsatisfactory experience, loss of money and in the long run will damage crowdfunding.

We believe that there is only one way to assure that investors are ready to invest. When consequences of actions are significant, standardized tests are widely used. There should be a certification exam available for students once they complete the core materials.

In terms of administration, we recommend multiple choice questions which usually requires less time for test takers to answer, are easy to score and grade, provide greater coverage of material, allow for a wide range of difficulty, and can easily diagnose a test taker's difficulty with certain concepts. True/false tests that require a test taker to choose all answers that are appropriate are fair, efficient and provide feedback to the test taker. Feedback will greatly speed up the process of eradicating deficiencies.

We believe that it would be advisable for the Commission to create a standardized set of basic investor education requirements. The attached Body of Knowledge may be useful for the Commission to guide the development of the test and educational materials.

Developed by experts in crowdfunding and financial literacy, the attached Body of Knowledge curriculum explains crowdfunding in clear, straightforward language—including its properties as an alternative investment and its potential benefits and risks to investors. It offers a methodology investors can use to evaluate the suitability and legitimacy of crowdfunding opportunities.

144. Should we specifically prohibit certain types of electronic media from being used to communicate educational material? If so, which ones and why?

We believe that is wise not to put a limit or specify the type of electronic media allowed. While it is clear that it should not be a requirement, we recommend education for novice investors to be easy, flexible and convenient. For example, an eLearning format of education which delivers the highest comprehension level according to multiple studies may be useful. It will also allow short and subject-specific lectures, accessible any time anywhere at the learners pace on any device.
e-Learning encompasses technology-enhanced learning (TEL), computer-based training (CBT), computer-assisted instruction (CAI), internet-based training (IBT), web-based training (WBT), online education, virtual education, virtual learning environments (VLE) which are also called learning platforms, m-learning, digital educational collaboration, distributed learning, computer-mediated communication, cyber-learning, and multi-modal instruction. All of these formats should be permissible.

145. Should we require intermediaries to submit the educational materials to us or FINRA (or other applicable national securities association) for review? Why or why not? If we should require submission of materials, should we require submission before or after use, when they are first used, when the intermediary changes them or at some other point(s) in time? Please explain.

FINRA Educational Foundation is the most appropriate organization to review educational materials. The review of the materials should be before use and also when the intermediary changes the materials. If not, the investors will start investing without knowing that the educational materials studied were missing important points that they should know.

146. Should we require intermediaries to provide educational material at additional or different specified points in time, rather than only when the investor begins to open an account or make an investment commitment? Why or why not? If so, why would that be preferable to requiring updates on an as-needed basis? For example, should educational material be provided on a quarterly, semi-annual, or annual basis? Should this material be provided again to investors who have not logged onto or accessed an intermediary’s platform for a specified period of time? Why or why not? If so, what should that period of time be?

Intermediaries should provide educational materials when the investor begins to open an account or make an investment commitment. It is important that the investor is ready for investing when they do. The investor should take the test again if they are inactive more than one year. One year is enough for people to forget all the important materials that they learned.

Abridged Novice Investor Body Of Knowledge -

I. Introduction

· Course Objectives
· What Is the Jobs Act and What Does It Do for Me?
· Promise of Crowdfunding
· Types of Crowdfunding

II. Crowdfunding Investing in Privately Held Companies

i. How it works
ii. Investment Options in Privately Held Companies
iii. Choosing Investments
iv. Risk & Fraud
v. Due Diligence

III. Taking Action: Making an crowdfunding Investment

i. The Process
ii. Options/Vehicle

IV. Post-Investment Actions & Opportunities

iii. Working with Your New Venture
iv. Investor Rights & Obligations
v. Investor Protection
vi. Portfolio Management
vii. State & Federal Regulations

Supplemental Materials
Key Investment Concepts: Available on FINRA Investment Education Foundation website
Common Types of Investments: Available on FINRA Investment Education Foundation website
Managing Investment Risk: Available on FINRA Investment Education Foundation website
Investing Basics: Investor.gov
Investor Protection: Available on NASAA website
State Regulations: Available on NASAA website
Reading Financial Statements: SEC Beginners' Guide to Financial Statements
Financial & Investment Dictionary: NASDAQ Glossary of Stock Market Terms
Investor Tools: TBD
How Professional Investors Evaluate Opportunities: TBD
Portfolio Management: TBD

 

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Monday, March 23, 2015 11:18 PM

March 24, 2015


The Honorable William F. Galvin
Secretary of the Commonwealth
Massachusetts Securities Division
McCormack Building
One Ashburton Place, 17th Floor
Boston, MA 02108
Re: Comments on Emergency Crowdfunding Regulations Dated January 15, 2015

Dear Secretary Galvin:

With the energy pulsing around crowdfunded securities, Massachusetts again finds itself at a turning point in history where it has chosen to lead the advancement of technology and commerce, staking early claims in future prosperity. The January 15, 2015, emergency release of the Massachusetts Crowdfunding Exemption demonstrates that the Commonwealth believes that the benefits outweigh the small and distributed amounts of risk. The exemption will help Massachusetts concentrate innovation, attract even more talent, and create jobs, all in our small—but powerful and dynamic—state. This excitement is why I chose to move from France after a successful career in construction to invest in Massachusetts. Thank you.

My aim is to eventually build a crowdfunding platform after proving that real estate crowdfunding can work in Massachusetts as the manager of an issuer myself. While other platforms and issuers are hiding behind the perceived safety of federal Regulation D offerings and the related JOBS Act provisions, the true power of crowdfunding for everyone is being ignored.

The comments that follow address these opportunities and some lingering uncertainties from my perspective as an entrepreneur of a small start-up grappling with the complex areas of securities and business law. The first round of regulations offers hope for young businesses like mine who are facing an otherwise dense and complex regulatory environment with high costs of compliance.

Crowdfunded securities might appear at first glance as simply Internet offerings of everyday “Direct Participation Programs,” but casting them as such ignores their power and significance. The difference is that this movement is democratizing capital and empowering new enterprises—an idea greater than simply generating new businesses—run by people who would otherwise be locked out of the traditional capital-raising techniques.

The old ways of overseeing security sales and salespeople and conducting merit review will need to evolve to keep pace. The technology has advanced beyond merely helping to bring buyers and sellers together in traditional deals, an issue the markets have never had a problem with. Crowdfunding can enhance the social function of investing, infusing projects with cultural “return” while employing technologies that can now, among other things:

Enhance transactional security and tracking, including escrow and other safekeeping services;
Verify participants’ identification, bad-actor records, and ability to pay;
Communicate good and bad reputations of issuers and investors;
Disseminate knowledge about misunderstood risks and uncover otherwise unknown risk;
Compare investment outcomes over time; and
Rapidly find and create market demand for efficient and profitable deal structures.
These enhancements combined bring better value and safety to the investors the Securities Division is statutorily compelled to protect. With each element of a crowdfunding exemption that restricts issuers’ and platforms’ ability to speak openly and directly about what they are doing with flexibility and good-faith sensibility, these benefits become harder and harder to provide.

My specific answers follow the quoted solicited questions below, but more generally, with the proper exemptions in place, crowdfunding platforms can assist the Securities Division and other regulators in overseeing risk and protecting investors. The regulations should allow them to develop tools to monitor the sites’ offerings and the reputations of investors and issuers without imposing unnecessary liability and burdens.

While somewhat beyond the scope of this specific regulation, the states’ exemptions should further enhance technology’s ability to discover wrongdoing, risks, and rewards. They should allow people to widely disseminate investment documentation without these acts being viewed as impermissible offerings of securities. The more visible a project is and the more people are allowed to talk openly about it, the more likely problems will be uncovered before capital vanishes.

As the Crowdfunding Exemption exists today, tethered to the SEC’s almost unworkable intrastate offering exemption, issuers and platforms can barely post an investment-related sentence without living in fear of impairing their businesses. I would encourage the Securities Division to expand the final regulation to work with more federal and state regulatory regimes. I would also encourage the Division and other regulators to advance the definition of an “offering” in a crowdfunding context to arise at the point that a dollar amount for an investment can be entered into a system, accompanied by the possibility of clicking to commit the funds. It is at that point that all risks should be visible and the offer actually made. Allowing people all over the country to see and read offering documents will bring transparency, safety, competitive financing terms, and better-structured deals overall.

With that said, I hope my specific comments below are helpful and interesting. Thank you for your staff’s dedication and attention to this important issue.

Very truly yours,

Laurent Bouzelmat

_________________________________________

1) Relationship to the Federal Intrastate Offering Exemption. The Crowdfunding Exemption is tied to the federal intra-state offering exemption under section 3(a)(11) of the Securities Act of 1933 and SEC Rule 147. That exemption is available for a security which is part of an issue offered and sold only to persons resident within a single state where the issuer of such security has been formed and is doing business in that state.

It is anticipated that most crowdfunding issuers will wish to offer securities via the Internet. Does the federal requirement that offers and sales be made only to persons resident within a single state limit the usefulness of the Exemption? Should the Securities Division consider adopting alternative or additional regulations that would work with other federal rules that permit offerings not strictly limited to a single state (for example, Rule 504 of SEC Regulation D or SEC Regulation A)?

Tying the Crowdfunding Exemption to § 3(a)(11) of the Securities Act of 1933 and SEC Rule 147 is essentially a decision by the Commonwealth to make the Securities Division a sole regulator. Not only does this decision limit the resources available to detect issuer wrongdoing and investment opportunities, the exclusion limits the Commonwealth’s ability to attract outside enterprises and investors. It places the Securities Division in the primary role of protecting other states’ investors, even if those states have expressly chosen not to regulate those activities, and opens up good-faith issuers to excessive liability by creating violations under Massachusetts law for what would otherwise only be violations of federal law, or that of other states. The Commonwealth should focus its exemption and regulatory efforts on the policies that matter most to the state.

More important than opening up investment to investors from multiple states is grappling with the effect of the current definition of an “offering,” which in the past has been troublesome for issuers, investors, and regulators alike. With today’s technology, little is gained from keeping prospectuses and others disclosures from the public at large. Withholding information can actually do more harm than good. If documents are pre-reviewed by regulators and securities are offered only online, with ample safeguards in place to filter unauthorized investors, then the definition of an “offering” and the prohibitions that come with it should be limited to the time at which an investor can enter a dollar amount to be invested along with some action to commit the funds. Massachusetts should lead the way on this issue and let its citizens peer into what is taking place elsewhere.

2) Alternatives to Single-State Offering Exemption. Should the Securities Division consider adopting rules to facilitate offerings made in more than one state? If so, would regulatory cooperation and coordination among the states be desirable with respect to such offerings?

It is difficult to imagine a scenario in which an issuer or investor in the crowdfunding sphere would ask for limitations on what documents can be disseminated, where an issuer’s operations can be, and how much can be raised, either overall or per investor. They believe that technology has fundamentally changed society’s ability to uncover fraud and to build efficient and fair markets that previously required substantial regulatory intervention. The answers to both of these questions are thus resoundingly going to be: “Of course there should be coordinated flexibility!”

The ideal from these people’s perspectives is to open up the investments widely to bring transparency and competition, placing trust in the SEC and other states’ regulators. Massachusetts investors should be trusted with knowing what issuers in other states are doing by viewing investment prospectuses and with investing in other states’ issuers.

Even with the Securities Division’s continued role as one of the most active state securities regulators—intervening in areas that other states would leave to the market—the agency should at a minimum permit investors outside of Massachusetts to invest in Massachusetts enterprises without limitation. Such a move would be good for the Commonwealth and would require few additional resources to monitor the issuers’ in-state activities.

From the opposite perspective of outside issuers selling securities to Massachusetts residents, the states, including Massachusetts, have already created a system of review to allow offerings to proceed within a particular region, but its successes are not altogether clear. This geographic coordination could even belie the policies that the states seek to advance. The problem is that two adjacent states could have diametrically opposed securities policies and varying review capabilities.

In reality, the level of regulation imposed by individual states more or less falls into one of three categories: (1) merit review filing with disclosures to ensure basic quality of investment to investors (as in Massachusetts), (2) disclosure filing to ensure that all material information is disclosed, but not displacing the market’s assessment and valuation of the underlying deal structure (more in line with federal policy), and (3) no review at all.

While disclosure review is probably the best balance between investor protection and market choice, if the Securities Division is reluctant to abandon its merit review standard, the Commonwealth could at least work with the NASAA to develop a system by which states classify their goals into one of these (or similar) categories and then give full faith and credit to any other state’s regulatory review at that level. The securities could then be offered in all states that meet that standard of review or a lesser standard.

Under this system, a merit review by the Massachusetts Securities Division would allow an offering to proceed in any state, after perhaps a simple and inexpensive notice filing. An offering filed with the SEC, such as one proceeding under Regulation A, could be offered in all states not requiring merit review. The only adverse consequences of this system would be either the increase of filings within merit-review states (increased regulatory burden) or else issuers’ avoidance of merit review states altogether (decreased economic activity in stricter states).

3) Limitation on Forms of Security: Equity or Debt. The Exemption is limited to equity or debt securities. Should the Securities Division consider making the Exemption available for other forms of securities? If so, what other types of securities should be specified in the Crowdfunding Regulation? Will permitting the offer and sale of other forms of securities require issuers to provide special disclosures to investors in order to accurately disclose the characteristics of the investment?

The crowdfunding exemption should be open to all securities that aid directly in the creation and fostering of new enterprises (not just creating new businesses). If crowdfunding is about more than simply maximizing returns, seeking instead to advance societal and personal goals using democratized capital, then equity and debt are arbitrary categories. The limitation appears to be an expression that investments outside of equity and debt contain unknowable risks that do not warrant exclusion from more rigorous registration requirements, which may or may not be true.

With the corporate form declining in popularity, as more flexible limited liability companies rise, very clear and understandable disclosures about how returns are calculated and where in the priority line they are paid back become the most important elements for investors, not the category of security. For example, in many crowdfunded companies, preferred return has been the emerging paramount return structure, which falls somewhere between debt (in its calculation and priority above other equity interest holders) and equity (in its priority below creditors and unamortized payback).

The line at which certain securities—primarily derivatives—depart from the core policies of crowdfunding begins where they enter the realm of zero-sum speculation and insurance, which typically do little to bolster and protect an underlying enterprise.

4) Offering Amount Limit. The Crowdfunding Exemption permits an issuer to offer and sell up to $1,000,000 of securities in a 12-month period. (See Sec. 4 of the Exemption.) This limit increases to $2,000,000 if the issuer has audited GAAP financial statements. The Securities Division requests comments on these offering size limits. If the offering limits were raised, would the Exemption, which applies only limited requirements to crowdfunding offerings, provide adequate protections for investors and local markets?

The Securities Division also seeks comments on the requirement for issuers to obtain audited statements in order to raise between $1,000,000 and $2,000,000. The Division solicits information about the costs and/or potential benefits of requiring that audited financial statements be included in a securities offering document.

In making the Crowdfunding Exemption available to issuers relying on other federal exemptions, the most important change should allow Regulation A issuers to raise up to $5 million under the same financial reporting terms as required by the SEC.

The requirement of audited financial statements might not provide the level of protection sought. Businesses with little financial history are not going to be more transparent and safe with the stamp of perfection from an accountant. The scale of capital between $1 million and $2 million, while doubled, might not be so extreme for an audit to pass a cost-benefit analysis.

5) Investment Limitations. Under Sec. 5 of the Crowdfunding Exemption, most investors may invest up to the greater of $2,000 or 5% of income or net worth. The percentage investment limit is higher for investors with higher incomes or net worths. The limitation included in the Exemption substantially resembles the limit included in the SEC’s proposed regulations for the federal crowdfunding exemption. Is this investment limit an effective way to control the risk of an investor over-investing in a crowdfunding offering? Should the limit be higher or lower?

The Exemption will be lost if the issuer sells securities to any investor in excess of the investment limitations. Should the issuer be permitted to meet this standard based on a good faith reasonable belief about the purchaser’s income and/or net worth? If the issuer can meet the requirement based on good faith reasonable belief, should the issuer be required to take reasonable steps to verify the income and/or net worth of purchasers?

Unlike the SEC’s proposed crowdfunding rule, the Crowdfunding Exemption does not attempt to limit the amount an investor may invest in crowdfunding offerings as a category. Should the Securities Division consider adding a limit that would apply to investors’ investments in crowdfunding offerings as a category?

The generous limits proposed here lose luster when issuers and crowdfunding platforms are held to strict compliance. The ability to verify incomes and net worths of investors in large numbers is complicated. People without scanners could be prevented from investing, and people with very basic tools could create documents to lie about their situations. The Securities Division should not prioritize spending resources on protecting investors who lie repeatedly. Other tools exist to deal with related issuer wrongdoing as well.

At a very minimum, the regulation should expressly state that no verification of income or net worth is required for any investment up to $2,000. Any investor starts there by virtue of being at least 18 years of age. Other common documents and tools could expand upon this simplicity. For example, an accredited investor with a certification letter from an accountant or attorney should be allowed to invest up to $20,000 without additional documentation, as the minimum income that such a person would have to have is $200,000 per year. Limited liability companies and partnerships should be allowed to invest at least $2,000 per member (minus any individual contributions), and corporations should be judged on their own income (perhaps with a representation that the corporation is not investing to subvert the individual limitations).

While a basic representation that an individual has adequate resources to invest more than $2,000 might be too simplistic, several representations, perhaps with actual dollar values and references to documentation from which those figures are drawn, should be adequate for many investors. For example, pull down boxes could show a list of income-demonstrating documents (ranging from tax filings to paystubs) and a period for which that income is earned (weekly, biweekly, monthly, etc.); a corresponding text box could ask for the exact amount of income for that period. The system could then annualize the income figure to determine the amount that the investor can commit. If the income is for a prior year, an additional representation could be required that the investor’s current income is not lower than that amount.

If the Securities Division decides not to abandon the strict compliance standard, or chooses a hybrid, it should promulgate clear and workable rules about what kinds of documentation are acceptable evidence and allow for good-faith compliance. These standards could perhaps intensify for higher investment amounts where the costs of compliance will drop (as fewer investors’ financial situations will require greater scrutiny).

No overall investment limit should be placed on crowdfunding as a category. Such a limit is wholly unworkable from the perspective of issuers and of platforms. The best approach would be to require suggested guidelines about excessive investments. For example, an investor representing that she makes $85,000 per year could have a customized suggestion presented to her that she should not invest more than 15% ($12,750) of her income in all crowdfunded securities. Investors should be trusted to know how much is too much.

Net worth limits are largely meaningless except for very wealthy clients. For example, student loan obligations can exceed six figures for many people, even if their actual monthly payments are lower than people with far lower principal amounts.

As one final point on the topic of per-issuer limitations, crowdfunding platforms—particularly those engaged in more of an investment-banking-type model—would benefit from a clear signal that their participation in more than one offering would not invoke these limits.

6) Excluded Types of Issuers. Under sec. 6, the Exemption is not available to: blank check/blind pool offerings; investment companies; hedge funds or similar investment vehicles; '34 Act reporting companies; companies engage in oil, mining, or other extractive industries. The Securities Division solicits comments on these limitations.

As stated above, crowdfunding is about creating new enterprises. If an issuer cannot demonstrate a direct connection to fostering new enterprises, then the crowdfunding exemption should not be available as a work around existing registration laws.

7) Minimum Offering Amount requirement. Sec. 8 of the Crowdfunding Exemption requires the issuer to establish a minimum offering amount that is needed to accomplish the business plan. The minimum offering amount shall be not less than 30% of the maximum offering amount. The Securities Division requests comments on all aspects of this requirement, including the 30% standard for a minimum offering amount.

This limitation is a reasonable as a risk trade off in states that would otherwise conduct more intense reviews of new securities. Crowdfunding should be available to enterprises that can be visualized. If a project could operate on less than 70% of the amount sought, then the amount sought could simply be reduced. This limit requires issuers to consider very seriously the capital necessary to launch their businesses. The final Crowdfunding Exemption should give clear guidance on how a “testing the waters” campaign can be used to ensure that enough interest exists to risk getting to this threshold.

8) Escrow of Funds until Minimum Offering Amount is Reached. Pursuant to Sec. 9 of the Crowdfunding Exemption, funds raised in a crowdfunding offering must be placed in an escrow account at an insured bank until the minimum offering amount is reached. The Securities Division requests comments on the practicability of this escrow requirement. Should the Securities Division consider any alternatives to requiring that escrowed funds be held in an insured bank account?

Technology is in place to accomplish these escrow arrangements, which are not unreasonable. Perhaps other solutions could be workable as well, but the escrow market appears to have jumped on this opportunity.

9) Bad Actor Disqualification. The disqualification language in Sec. 10 of the Exemption is modeled on the bad actor disqualification under Rule 506 of SEC Regulation D. The Securities Division requests comments on this provision.

These requirements are not unreasonable as long as there is a procedure in place for consideration of an exception that is fair, and disclosed, to investors.

10) Required Disclosures. Under Sec. 11 of the Crowdfunding Exemption, issuers are required to provide certain disclosures. The regulation also reminds issuers of their obligation to provide full and fair disclosure of all material facts relating to the offering.

Would it be appropriate for the Exemption to spell out more details about required disclosures? Would such disclosure requirements provide useful guidance to issuers? Should the Securities Division consider requiring the use of a disclosure form? Are the specified items of disclosure sufficient to protect investors’ interests in crowdfunding transactions?

Examples of disclosures would be useful. A form for the Crowdfunding Exemption itself might not provide greater clarity and could even hamper full disclosure. If the exemption is expanded to work alongside Regulation A at the federal level, the NASAA Form U–7 could become a de facto crowdfunding form.

Also, the Massachusetts Crowdfunding Exemption could benefit from guidance on how the statements of policy of the North American Securities Administrators Association will affect the Securities Division’s merit review under the Massachusetts Crowdfunding Exemption. See 950 CMR 13.305.

11) Specific Required Risk Disclosures. Section 12 of the Exemption requires that specific risks of crowdfunded securities be disclosed, particularly the risks that that there will probably be no ready market for the securities and that the securities will be illiquid. The Securities Division requests comments regarding these disclosures.

These disclosures are reasonable, but if copied and used over and over may be overlooked. Part of the problem is that Direct Participation Programs are viewed as inherently risky because of the lack of liquidity from an often-impermissible sale, even if there is greater cash liquidity flowing from the business. Knowing that your investment is going to be locked up is important, but the underlying investments should be evaluated on their own merits. The securities regulators should avoid the corresponding message that investments that can be readily bought and sold on an open market are inherently less risky.

12) Annual Reporting by the Issuer. Sec. 14 of the Exemption requires that issuers provide a report to the Securities Division after 12 months, or when the offering has been completed or terminated. The Securities Division requests comments on this requirement.

This requirement is not unreasonable.

13) Ongoing Company Reporting. The Crowdfunding Exemption does not mandate that issuers provide ongoing reports to investors about the business and financial condition of the company. Should the Exemption require such reports? If the Exemption does not require such reports, will there be any way for investors to receive ongoing information about the issuer?

The Securities Division should permit the market and its technologies to guide reporting topics and frequency to investors. Issuers are not going to want to keep people in the dark and thus risk unnecessary lawsuits. They should be compelled to justify properly any lack of communication. Communication should be openly available online, through social media, email, and other media.

14) Sellers of Crowdfunding Securities. Unlike the proposed SEC rules for crowdfunding, the Crowdfunding Regulation does not require the use of a crowdfunding portal to offer and sell crowdfunded securities. Only broker-dealers may receive compensation for offering and selling securities. At this time, it is anticipated that issuers would sell their own crowdfunding offerings or that they would be sold through licensed broker-dealers.

The Securities Division seeks information about how it is anticipated that these offerings will be sold. Should the Crowdfunding Exemption require or permit the use of a crowdfunding portal to offer and sell the securities? If so, what would be the characteristics of such a portal? What kinds of regulation and registration should apply to such a portal?

Because crowdfunding is largely automated and funds are protected in escrow, little is gained from requiring a broker-dealer to be involved in a crowdfunded issuance, even though in many instances it appears that they will need to be under current broker-dealer law. They can be expensive and necessarily slow down the issuance process. Unfortunately, the amount of money that statutorily defined Crowdfunding Portals will be able to make might not be enough to justify the liability costs and the responsibilities placed on them by Congress. The SEC should work with FINRA and the states to rethink a new model outside the current regulatory regimes, which look like alien landscapes when trying to apply crowdfunded securities to them.

For example, a viable software-as-a-service model could emerge for individual issuers to use. States could also build their own platform and compensation guidelines as well if a proper intrastate carve-out of the broker-dealer regulations becomes workable in the eyes of the SEC and FINRA. Overall, having platforms involved at least in some small capacity with issuances will greatly help issuers and reduce risk to investors, but the current regulatory structures are too onerous and expensive to justify the level of involvement they would be capable of providing.

15) Investor Feedback – The “Wisdom of the Crowd.” The Crowdfunding Exemption currently does not require that there be an Internet-based forum for potential investors to comment on and discuss these offerings. Should such a forum be required under the Exemption?

Most platforms and issuers are concerned about dissemination of proper disclosures and about not misleading investors in online discussions. The regulators should open up a clear space for communication without liability and then permit the market to decide its extents. Make it clear that leaving up a statement by a third-party will not result in liability of the issuer if left public and without comment by the issuer. Otherwise, what will likely happen is a sterile Q&A section with responses from the issuer with references to page numbers of the offering statements. This lifeless effort benefits no one. Issuers may additionally be afraid that a new issue will come to life in these discussions that will require additional filings and disclosures. The regulations should allow them to disseminate this information quickly and easily, without fear of retribution for all but the most egregious of intentional fraud.

 

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Monday, March 23, 2015 4:07 PM

Comments from J. Scott Colesanti, LL.M. (PDF)

 

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Monday, March 23, 2015 3:47 PM

Comments from Gregory S. Fryer (PDF)

 

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Wednesday, March 18, 2015 10:31 AM

Comments from Gerald Niesar

 

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Monday, March 09, 2015 6:06 PM

Comments from William Michael Cunningham (PDF)

 

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Monday, March 09, 2015 12:41 PM

Thank you for the opportunity to submit public comment on this matter. My name is Tim Rowe, and I'm the Founder and CEO of Cambridge Innovation Center. We operate what we believe to be the largest shared space for startup companies in the world. I was active in the public debate regarding the crowdfunding exemption embedded in the Job Act, testified twice before Congress on the issue, and was honored to be present at the Rose Garden when President Obama signed the bill into law. I also serve as a Venture Partner with New Atlantic Ventures, a mid-sized venture fund with headquarters in Massachusetts and Virginia, and I serve on the Board of the New England Venture Capital Association, and was the Founding President of the Kendall Square Association, the association of the (principally innovation oriented) organizations located around MIT. I am an MBA and not a lawyer. I speak to these issues from a public policy perspective. My perspective is developed from my public and private roles in connection with innovation and startups.

I believe an effective crowdfunding exemption creates more opportunity for job creation in Massachusetts and in other states. Evidence shows that crowdfund investors have distinctly different goals than traditional investors of risk capital. Traditional investors (e.g. venture capital funds) invest to achieve high economic returns. In contrast, crowdfund investors often invest with a goal of helping a friend, associate, neighbor, etc. get off the ground with a new business, or to help a business do something they believe is important or valuable to society, and thus they have limited expectation of or need for classical returns. Given that the total size of their investment is small relative to their income, they are in a position to lose their investment entirely, and are typically prepared to do so in order to achieve their goal. Given these differences, crowdfunding potential represents a radically new and important source of funding that could make possible investments that were never possible before, when investments principally required the likelihood of classic economic returns.

So, my overall comment is: thank you for your work seeking to write rules to make this valuable new source of investment a reality in Massachusetts.

I have done my best to address the specific questions you have posed below:

1) Relationship to the Federal Intrastate Offering Exemption. The Crowdfunding Exemption is
tied to the federal intra-state offering exemption under section 3(a)(11) of the Securities Act of
1933 and SEC Rule 147. That exemption is available for a security which is part of an issue
offered and sold only to persons resident within a single state where the issuer of such security
has been formed and is doing business in that state.

It is anticipated that most crowdfunding issuers will wish to offer securities via the Internet.
Does the federal requirement that offers and sales be made only to persons resident within a
single state limit the usefulness of the Exemption? Should the Securities Division consider
adopting alternative or additional regulations that would work with other federal rules that permit
offerings not strictly limited to a single state (for example, Rule 504 of SEC Regulation D or
SEC Regulation A)?

--> Yes it is important to be able to raise funds from multiple states. All of the efforts I have seen in this area focus on raising funds over the Internet, which is inherently multi-state. It should be noted that investors may also be overseas.

2) Alternatives to Single-State Offering Exemption. Should the Securities Division consider
adopting rules to facilitate offerings made in more than one state? If so, would regulatory
cooperation and coordination among the states be desirable with respect to such offerings?

--> The whole purpose with crowdfunding is to eliminate red tape with respect to very small investments. So I would encourage the States to find models that basically eliminate the need for the party raising funds to consider state-level issues. Perhaps the states could agree on a common format for these raises, and a single filing (if any) for all states. Evidence from existing crowd-fund sites in the US (such as kickstarter, prosper) and overseas (where crowdfunding is not restricted in many countries today) is that there is de minimus fraud. The Economist wrote some time back that the likely reason for this is the level of transparency that the Internet provides. The federal rules require the use of a trusted intermediary (crowdfund portal) to manage this process, effectively for the purpose of providing this transparency. This is a solid approach.

3) Limitation on Forms of Security: Equity or Debt. The Exemption is limited to equity or debt
securities. Should the Securities Division consider making the Exemption available for other
forms of securities? If so, what other types of securities should be specified in the Crowdfunding
Regulation? Will permitting the offer and sale of other forms of securities require issuers to
provide special disclosures to investors in order to accurately disclose the characteristics of the
investment?

--> I have not considered this question enough to provide an informed answer. I would only say: do what you can to make this simple, and eliminate complexity/red tape. If we create a system that requires expert legal advice to administer, it will defeat the purpose. Create a system that can be done automatically, entirely over the web (no meetings with lawyers required, no special documents to be drafted in a custom way).

4) Offering Amount Limit. The Crowdfunding Exemption permits an issuer to offer and sell up
to $1,000,000 of securities in a 12-month period. (See Sec. 4 of the Exemption.) This limit
increases to $2,000,000 if the issuer has audited GAAP financial statements. The Securities
Division requests comments on these offering size limits. If the offering limits were raised,
would the Exemption, which applies only limited requirements to crowdfunding offerings,
provide adequate protections for investors and local markets?

The Securities Division also seeks comments on the requirement for issuers to obtain audited
statements in order to raise between $1,000,000 and $2,000,000. The Division solicits
information about the costs and/or potential benefits of requiring that audited financial
statements be included in a securities offering document.

--> Those of us who helped create the federal exemption took the view that these were fine limits to begin with. Lets start small, and see how it goes. If it goes well, sure, lets expand the limits.

5) Investment Limitations. Under Sec. 5 of the Crowdfunding Exemption, most investors may
invest up to the greater of $2,000 or 5% of income or net worth. The percentage investment limit
is higher for investors with higher incomes or net worths. The limitation included in the
Exemption substantially resembles the limit included in the SEC’s proposed regulations for the
federal crowdfunding exemption. Is this investment limit an effective way to control the risk of
an investor over-investing in a crowdfunding offering? Should the limit be higher or lower?

The Exemption will be lost if the issuer sells securities to any investor in excess of the
investment limitations. Should the issuer be permitted to meet this standard based on a good
faith reasonable belief about the purchaser’s income and/or net worth? If the issuer can meet the
requirement based on good faith reasonable belief, should the issuer be required to take
reasonable steps to verify the income and/or net worth of purchasers?

Unlike the SEC’s proposed crowdfunding rule, the Crowdfunding Exemption does not attempt to
limit the amount an investor may invest in crowdfunding offerings as a category. Should the
Securities Division consider adding a limit that would apply to investors’ investments in
crowdfunding offerings as a category?

--> My advice is "keep it simple". The danger is creating legislation that creates legal exposure or liabilities for offerers because of the way the regs are written. The federal regs received a lot of scrutiny. The easiest thing to do would be simply to mimic them. Either way, keep it simple. The goal of the category limitation was to protect the proverbial "grandparent" from being hoodwinked by unscrupulous individuals, limiting their total exposure. It should be noted that we don't currently limit how much one can bet at a casino (arguably less safe for the investor, and less socially beneficial). So there is certainly an argument that says no limit is needed.

6) Excluded Types of Issuers. Under sec. 6, the Exemption is not available to: blank
check/blind pool offerings; investment companies; hedge funds or similar investment vehicles;
'34 Act reporting companies; companies engage in oil, mining, or other extractive industries.
The Securities Division solicits comments on these limitations.

--> I agree with these limitations.

7) Minimum Offering Amount Requirement. Sec. 8 of the Crowdfunding Exemption requires
the issuer to establish a minimum offering amount that is needed to accomplish the business
plan. The minimum offering amount shall be not less than 30% of the maximum offering
amount. The Securities Division requests comments on all aspects of this requirement, including
the 30% standard for a minimum offering amount.

--> This is a reasonable limit, and I don't think it should be considered particularly restrictive. The goal of a minimum limit is to ensure that no projects go forward with clearly too little funds to have any chance of success.

8) Escrow of Funds until Minimum Offering Amount is Reached. Pursuant to Sec. 9 of the
Crowdfunding Exemption, funds raised in a crowdfunding offering must be placed in an escrow
account at an insured bank until the minimum offering amount is reached. The Securities
Division requests comments on the practicability of this escrow requirement. Should the
Securities Division consider any alternatives to requiring that escrowed funds be held in an
insured bank account?

--> This is not unreasonable, but do ensure that an alternative option would be for the offerer to hold off drawing any funds from would-be investors until the threshold is cleared, and then draw all down at once, eliminating the expense and complexity of the escrow process.

9) Bad Actor Disqualification. The disqualification language in Sec. 10 of the Exemption is
modeled on the bad actor disqualification under Rule 506 of SEC Regulation D. The Securities
Division requests comments on this provision.

--> I have not studied this issue but this sounds reasonable.

10) Required Disclosures. Under Sec. 11 of the Crowdfunding Exemption, issuers are required
to provide certain disclosures. The regulation also reminds issuers of their obligation to provide
full and fair disclosure of all material facts relating to the offering.

Would it be appropriate for the Exemption to spell out more details about required disclosures?
Would such disclosure requirements provide useful guidance to issuers? Should the Securities
Division consider requiring the use of a disclosure form? Are the specified items of disclosure
sufficient to protect investors’ interests in crowdfunding transactions?

--> Again, the goal here should be to keep things simple. A disclosure form could be fine. Just make sure there is no language in the law that effectively means you have to hire an outside expert to navigate this section (lest you inadvertently leave out some advisable boilerplate).

11) Specific Required Risk Disclosures. Section 12 of the Exemption requires that specific risks
of crowdfunded securities be disclosed, particularly the risks that that there will probably be no
ready market for the securities and that the securities will be illiquid. The Securities Division
requests comments regarding these disclosures.

--> Again, please design it so that a parent with no legal or business training can navigate whatever you put in there, easily. Imagine a soccer mom or dad decides to launch a catering business. Can they easily and simply navigate your rules, entirely over the internet? If the answer is "no", your regs are too complex.

12) Annual Reporting by the Issuer. Sec. 14 of the Exemption requires that issuers provide a
report to the Securities Division after 12 months, or when the offering has been completed or
terminated. The Securities Division requests comments on this requirement.

13) Ongoing Company Reporting. The Crowdfunding Exemption does not mandate that issuers
provide ongoing reports to investors about the business and financial condition of the company.
Should the Exemption require such reports? If the Exemption does not require such reports, will
there be any way for investors to receive ongoing information about the issuer?

14) Sellers of Crowdfunding Securities. Unlike the proposed SEC rules for crowdfunding, the
Crowdfunding Regulation does not require the use of a crowdfunding portal to offer and sell
crowdfunded securities. Only broker-dealers may receive compensation for offering and selling
securities. At this time, it is anticipated that issuers would sell their own crowdfunding offerings
or that they would be sold through licensed broker-dealers.

The Securities Division seeks information about how it is anticipated that these offerings will be
sold. Should the Crowdfunding Exemption require or permit the use of a crowdfunding portal to
offer and sell the securities? If so, what would be the characteristics of such a portal? What
kinds of regulation and registration should apply to such a portal?

--> So, the reason we required a portal in the federal regs was that we believe that it ads accountability and transparency to the transaction. If you will, it introduces a "grownup" into the room. Ebay very effectively allows transactions between complete strangers, often at high values, with very little fraud. It does this principally through its reputation ranking system. If you remove this from the equation, you get Craigslist. While craigslist works, particularly for low-value items, and it is much loved, it is also the home of a fair amount of fraud and mis-behavior. My view is that a portal should be required. Many such portals have been built in the past couple of years, and we can anticipate healthy competition from the private sector to provide this portal function. These portals should be licensed by the securities division of operated under the state law. The licensure should be simple and minimalist, however it should state that the portal must provide a log of any allegations or claims of fraud against it on a regular basis. If a given portal either does not report, or reports but has a high incidence, they should be subject to delicensure. I envision a world in which the portals become quite specialized, e.g. a crowd-fund portal specialized in restaurants. It could provide tools for investors to evaluate business plans, location value, etc. This would substantially deepen the value and effectiveness of this funding mechanism.

15) Investor Feedback – The “Wisdom of the Crowd.” The Crowdfunding Exemption currently
does not require that there be an Internet-based forum for potential investors to comment on and
discuss these offerings. Should such a forum be required under the Exemption?

--> Yes, it should be required. This is what ensures transparency, and helps eliminate fraud. These topics received great debate and scrutiny at the federal level. The best thing to do is to follow that lead, in my opinion. The thing to be careful of in the federal example is that by giving rulemaking authority to the SEC and FINRA, the feds essentially mired crowdfunding in red tape, and it has yet to see the light of day. I wouldn't do that. Make it simple and launch it. This is the spirit of crowdfunding: let people risk a small amount of money on highly risky investments as a way of helping a friend, having an impact, and growing the economy. We can afford to see how this experiment unfolds. The sky has not fallen in places like England where this is already legal. Lets start the experiment here.

Thank you!
Tim

--
Tim Rowe
Founder and CEO
Cambridge Innovation Center

 

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Friday, January 23, 2015 6:09 PM

Peter-

I saw that Massachusetts just passed it's intrastate exemption regulation. Looks promising. I really hope it gains traction and helps the small business community in your State thrive.

Cheers, Jeff

The Office of the Secretary of the Commonwealth, Securities Division is registered under the provisions of MASS. GEN. LAWS c. 6, § 172 to receive and review Criminal Offender Record Information (“CORI”) for the purpose of screening current registrants and otherwise qualified prospective registrants.

Subsequent to January 1, 2014 and pursuant to a change in Massachusetts Regulations at 950 MASS. CODE REGS. 12.205(2)(d)(1), each applicant for registration as an investment adviser representative in Massachusetts will be required to submit an executed CORI acknowledgement form to the Division as part of the application procedure. The CORI acknowledgement form is available below and is a required component of a complete application.

The completed and executed CORI acknowledgement form shall be filed electronically with the Division via e-mail submission to the address CORI@sec.state.ma.us. An application for investment adviser representative registration will not be deemed complete and processed until the CORI acknowledgement form has been received by the Division. This requirement applies to all investment adviser representatives applying for registration in Massachusetts, irrespective of whether they are associated with state or federally registered investment advisers. This requirement shall not apply to applicants for annual renewal registration which have made their renewal filings timely with the Division.

Criminal Offender Record Information (CORI) Acknowledgement Form (PDF)

The period to receive written public comments on the Proposed Regulations Regarding Additional Requirement for Investment Adviser Representative Registration Applications was originally scheduled to close on May 15, 2013. The Securities Division has received notice that some persons wish to submit comments on the proposed regulations and that some commenters wish to supplement their initial comments with more detailed comments. Commenters are advised that all comments are public. Accordingly, the Securities Division will extend the deadline for the filing of written comments on the proposed regulations until July 8, 2013.

Proposed Regulations (PDF)

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Submitted Comments

Monday, March 18, 2013

From: Christopher Grande
Sent: Monday, March 18, 2013 4:58 PM

HI,

CORI background checks are fine. Would not be a challenge to incorporate them into the process. An easy way to submit (secure fax/email/etc) would make the process a snap.

Thanks for sharing the proposals.
Warmly,

Chris Grande

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Konstantin Litovsky
Monday, March 18, 2013 5:49 PM

1.What are the potential effects of requiring a CORI Acknowledgement Form as part of the registration process?

What is the purpose for this? We are already finger-printed, so what's the use of this for small firms with one or more principals and no other employees? As it is, the paperwork is burdensome for small firms such as ours. Any more paperwork is certainly not appreciated. And this is really a total waste of time for us as it accomplishes no purpose whatsoever.

2.What are the potential costs to an applicant or his or her firm (including the added time needed to complete an application) should the CORI Acknowledgement Form be made part of the application?

The cost is more than we are currently interested in paying.

3.Should the Division specifically designate methods of filing CORI Acknowledgement Forms?

This may be something that can be asked of bigger firms with say 10 or more employees. There is absolutely no need for this for smaller firms. Thus, they should be excluded from this requirement.

4.The completed CORI Acknowledgement Form contains personal information including the applicant’s name, partial social security number, and date of birth. What are the potential effects of this regulation change as it relates to
Massachusetts privacy laws (including, but not limited to, M.G.L. Ch. 93H)?

The State does not have a good record for safeguarding privacy of IARs, so privacy is definitely a big concern.

Thank you,

--
Konstantin Litovsky, Principal
Litovsky Asset Management
Newton, MA

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From: "J. Christopher Boyd, CFP®"
Sent: Monday, March 18, 2013 6:05 PM

The addition of a CORI component to the IAR application seems a reasonable addition to the process. Although I am uncertain whether notarization is necessary, I favor this addition in an effort to protect our clients from those who may have unscrupulous intentions. If it exists, I would favor a national version of the CORI check that has a scope beyond criminal activity in Massachusetts. We are uncertain as to how to complete such a criminal background check, but would like to do that as a part of our advisor hiring practice anyway.

Thank you for your interest in advisor input in this matter.

Sincerely,

Chris Boyd

J. Christopher Boyd, CFP®, CASL®
Chief Investment Officer & Managing Member
Asset Management Resources, LLC
1060 Falmouth Road, Suite B-2
Hyannis, MA 02601

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From: Peggy McGillin,CFP(R)
Sent: Monday, March 18, 2013 6:13 PM

I would have no problem with this. I think it will help the profession and prevent criminals from ruining the industry’s reputation. I think this helps the RIAs and investors.

Thank you for asking,

Best regards,

Peggy McGillin, CFP®

Principal
Journey Financial Planners


Understanding Your PrioritiesTM

747 Main Street
Suite 120
Concord, MA 01742

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Tuesday, March 19, 2013

From: Dennis Conlon
Sent: Tuesday, March 19, 2013 6:46 AM

sounds reasonable. I'd be happy to comply.

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From: Matie Krebs
Sent: Tuesday, March 19, 2013 8:03 AM

We don’t have any IARs in Massachusetts.

Matie Krebs, CCO
Advanced Investment Partners, LLC
100 Main Street, #301
Safety Harbor, FL 34695

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Tuesday, March 26, 2013

From: Neil Collins
Sent: Tuesday, March 26, 2013 1:45 PM
Subject: dissent

To whom it may concern:

In regards to the proposal to include a CORI form in the IAR registration process, I would like to voice my dissent. The process as it stands currently works fine for our firm and any additional form would require more time and complexity for which we see no benefit. All proposals for new regulation are done with good intentions however they have consequences. I can't help think of how an applicant would be treated with Marijuana offenses on his record. Would that preclude him from registration? What would or wouldn't preclude or delay registration and employment? Marijuana has been decriminalized and now is going to be legal for medicinal use. I am more fearful of over regulation and the consequences to small business than I am of what someone had done in the past. Principals of RIA firms should be the gatekeepers of their Reps behavior and ethics, not a digital depository.

I consider this form to be a slippery slope toward more regulation for little or no benefit undermining the democratic business model that so many of us rely on to make a living and compete against much larger rivals.

Neil R. Collins
managing member
Marblehead Capital, LLC
100 Cummings Center Suite 223F
Beverly, MA 01915

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Saturday, March 30, 2013

Peter Canniff Comment Letter Dated 3.30.13 (PDF)

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Tuesday, May 14, 2013

SIFMA Comment Letter Dated 5.14.13 (PDF)

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Thursday, May 15, 2013

Commonwealth Financial Network Comment Letter Dated 5.15.13 (PDF)

Financial Services Institute Comment Letter Dated 5.15.13 (PDF)

Market Council Comment Letter Dated 5.15.13 (PDF)

Letter to U.S. Securities and Exchange  (PDF)

Survey  (PDF)

Compliance with Bonding Requirements for Advisers with Discretion Over Client Assets

November 14, 2012

The Massachusetts Securities Division (the “Division”) would like to remind advisers that the Code of Massachusetts Regulations at 950 CMR 12.205(5)(a) requires that Massachusetts-registered investment advisers that have discretion over client accounts to be bonded in an amount not less than $10,000.00 by a bonding company qualified to do business in the Commonwealth.¹

The Division generally takes the position that, for the purpose of this requirement, discretion means that the adviser has authority to execute buy or sell transactions for a client’s securities portfolio. An adviser can have such authority granted to it through, for example, advisory contracts, powers of attorney, trustee relationships, or an executed limited trading authority.

Advisers, on occasion, have a limited trading authorization form on file with a custodian for the convenience of their clients, but do not buy or sell securities without first authorizing each trade with the client prior to execution. In such cases, the adviser will not be subject to the bonding requirement of 950 CMR 12.205(5)(a) but only if:

1) the adviser’s contract with the client explicitly states that the adviser does not have trading discretion;

2) the adviser acquires permission or clears each and every trade prior to and on the same day that the adviser issues the order to buy or sell; and

3) the adviser documents all such clearances in a written form, such as an e-mail or a log or journal and maintains such documentation for a period of five (5) years from the date of the transaction.

During routine books and records examinations, examiners will be reviewing adviser’s practices to ensure compliance with these requirements.

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¹ This policy is applicable to Massachusetts advisers that are both registered with and located in Massachusetts. Advisers that maintain their principal office in another state and are registered there are subject to their home state’s books and records rules and bonding requirements.

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)

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)

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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 #000man, 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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 by calling 617-727-3548 or 800-269-5428 (Massachusetts only).

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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.

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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.

Comments on Proposes New Regulations

General comments

No comments

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Section I Comments - Use of Matching or Expert Networks

June 21, 2011
Comment from David Good, Chairman, Investorside Research Association (PDF)

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June 14, 2011
Comment from Floyd S. Greenwood, Greenwood Research, LLC (PDF)

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May 23, 2011
Comment from Tamara K. Salmon, Senior Associate Counsel, Investment Company Institute (PDF)

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Section II Comments - Change in Registration Requirements

July 1, 2011
Hi Peter,

Per your request, I am sending you this email to express concerns that our Massachusetts-based investment adviser clients have in connection with the timing of the proposed changes to the Massachusetts institutional buyer exclusion (the "Proposed Changes"). Specifically, our clients are concerned that the Proposed Changes will be made effective before the newly adopted federal registration deadline of March 30, 2012.

As you are aware, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA") repealed the "private adviser" exemption found in Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), applicable to investment advisers with fewer than 15 clients. On June 22, 2011, the Securities and Exchange Commission ("SEC") adopted new rules and rule amendments under the Advisers Act to implement provisions of the DFA. Among other things, these final rules extend the registration deadline for advisers currently relying on Section 203(b)(3) of the Advisers Act from July 21, 2011 to March 30, 2012. As such, these Massachusetts-based advisers have until March 30, 2012 to register with the SEC. The SEC extended this deadline to "assure an orderly transition to registration and . . . promote efficiency."

Of course, advisers currently exempted by Section 203(b)(3) must comply with applicable state registration requirements. Most Massachusetts-based private fund advisers relying on Section 203(b)(3) satisfy the institutional buyer exclusion from the Massachusetts investment adviser registration requirements. However, if the Proposed Changes in Massachusetts are adopted with a compliance date before March 30, 2012, these advisers would no longer satisfy the institutional buyer exclusion, and, because they are not yet federally registered, would have to register in Massachusetts for the short period between the compliance date of the Proposed Changes and March 30, 2012 (i.e., the date such advisers would register federally and, therefore, not be subject to the Massachusetts investment adviser registration requirements). That said, it is likely that most of these advisers would elect to register federally prior to the deadline established by the SEC, rather than register with Massachusetts for such a short time period. Consequently, contrary to the "orderly transition" envisaged by the SEC, these advisers would have a limited time period to prepare and file their registration documents, develop an Advisers Act compliance program and make numerous other changes to their business to ensure compliance with the Advisers Act. Coordinating the effective date of the Proposed Changes with the SEC rules (i.e. delaying the compliance date of the Proposed Changes until March 30, 2012) would provide Massachusetts-based advisers adequate time to take these necessary steps. I note that California issued an emergency order temporarily extending its private adviser exemption in recognition of this predicament.

Thank you for your consideration. Please feel free to contact me with any questions.

Respectfully Submitted,

Michael M. Jurasic
ROPES & GRAY LLP

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June 24, 2011
Comment from constituent of Will Brownsberger State Representative (PDF)

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Received on May 24, 2011
Comment from Matthew L. Schwartz, Esq., Government Affairs Counsel, Financial Services Institute, Inc. (PDF)

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Section III Comments - Investment Adviser Discretion and Custody Requirements

June 24, 2011
Comment from Scott Brown, JD, MarketCounsel (PDF)

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June 24, 2011
I believe that the proposed 950 CMR 12.205(5)(a) change (increasing the bond to $50,000) should be amended or eliminated, as it imposes an onerous and unfair burden on the independent RIA, while failing to achieve any measurable improvement for the Massachusetts client.

Abuses in the investment marketplace revolve principally around the marketing of special products. The products are either unlisted, or the advisor has (or has access to) a "special" proprietary method for generating one of the two grand illusions of the investment world: stable returns of around eight to fifteen percent, or home-run, double-digit returns that for some reason are easily repeatable.

The key to fraudulent practice is the portfolio statement. Since the proof of any strategy is in the pudding - the portfolio statement - a successful deception must control the statement in one way or another. There are principally three ways to fudge the valuation process.

The most direct method (as well as the most infamous) is to falsify the statements. When the advisor is also the custodian, valuations can be invented as necessary (Madoff, Ponzi, et al). Failing that, the advisor can try to substitute fake statements for true ones, such as the Manhattan Fund did.

Alternatively, one may employ fake valuations rather than fake statements. The advantage to this approach is that a third-party custodian is used, thereby making the client's assets theoretically "safe" and skirting the more delicate issue of producing faked statements. Here the deception depends on unlisted instruments of various types, often resource and land partnerships. Other examples include proprietary notes with "guaranteed" returns or yields, such as Allen Stafford is alleged to have sold. Or it may simply involve penny-stock manipulation on the bulletin board system, where month-end pricing can be easily influenced. The common-thread in this approach is the broker-dealer: for the scam to work, either a captive or crooked broker-dealer is needed for trade execution.

The third method is to churn the account for mark-up and commission revenue, while trying to confuse the client about the meaning of the statement. This of course is the most common complaint in the broker-dealer world, and involves abuse of trust. The victim may be elderly or sick, and susceptible to confusion or fear, or too busy, or too intimidated, or even too trustworthy to read the statements in a timely way until it's too late. Some are placed in wildly unsuitable or dangerous investments (that pay large spreads), but are slow to confront a "reputable" agent, or more likely a well-known broker-dealer name, in the belief (often heavily pushed) that it's all "part of the game" (e.g., the marketing of CDOs to pension and endownment funds).

The common thread here again is the broker-dealer, since it functions as the conveyor of revenue to the perpetrating fraudster.

In brief, losses nearly always involve a) an unlisted product; b) a Ponzi scheme where the fraudmaster has custody of the assets, or c) an unscrupulous broker-dealer. In the latter case, even "name" organizations are susceptible when the branch manager is flawed.

The proposed change to Massachusetts regulations 950 CMR 12.205(5)(a) doesn't address the issue of statement abuse, the Ponzi scheme problem or the regulation of unlisted products (which are certainly not evil by definition, only more easily abused). Nor does it address one of the more common seeding grounds of bad practice, namely the financially desperate broker-dealer. Any registered broker-dealer is already sufficiently insured or bonded to meet the requirement for a $50,000 bond. Removing the bonding requirement for custody and shifting compliance to a federal standard may make prosecution easier after the money is gone, but this will be of limited help to the victim.

There is an additional way to fleece victims, namely theft. An advisor - or accountant, or attorney, or anyone with power of attorney - may simply take client funds out of their accounts. Presumably this is why the bonding requirement is raised for advisors with "discretionary" authority.

However, the change fails to make an important distinction that is elsewhere present in securities law. For example, the law distinguishes between types of security: U.S. Treasury securities are extremely liquid, presumed suitable for every investor and can be easily bought and sold without the intervention of licensed broker-dealers. At the other end, limited partnerships require high standards of financial worth and can be very difficult to trade.

The distinction missing here is the one between full discretion and "limited" discretion. The granting of full discretion over a third-party account allows an entity to move funds in and out, as well as execute trades, on behalf of the account owner. This is equivalent to power of attorney and is relatively tightly regulated. Limited discretion (commonly called "limited trading authority" by clearing houses) allows trade execution only on behalf of a client, without granting the ability to move funds in or out of the account. This provides a high level of safety.

I do not personally know any RIAs who have, or would like to have, full discretion over client accounts. There is rarely any good business reason to have one outside of a trust department, which is another line of business. The regulatory hurdles are high, the potential liability is higher, and the potential for client dissatisfaction is even higher. We are content with limited trading authority (including my own RIA, which expressly refuses full discretion accounts as a matter of company policy).

Most of the RIAs I have met in the last few years have been victims of the downturn in the financial services business. They are now independent advisors with relatively small practices that provide some financial planning and portfolio management. The latter is typically based upon asset allocation and the use of mutual funds, exchange-traded funds (ETFs) and unit trusts. It's a friends-and-family, fixed-fee business where the clients benefit from high degrees of individual attention.

One of the advantages of the small advisor is that the corporate managed-accounts business is invariably affiliated with a larger organization that includes a broker-dealer and an asset management company. There is an inherent conflict in such an arrangement: the client is guided towards funds and vehicles that have a commercial arrangement with the corporate entity. Asset allocation practices very often reflect the product needs of the corporation (or registered representative), rather than the needs of the client.

A common question I hear posed at seminars for RIAs organized by fund management companies is, "why do you (the fund manager") have so little cash in the fund?" The answer is always the same: cash allocations are the client's decision. The fund manager is paid to invest in securities, and that's what they do. Understandable, but after 28 years in this business, including stints with very large companies, I can tell you that it is very, very difficult for the representative of any sizable investment manager to hold large amounts of cash in a client account. Cash doesn't earn revenue.

However, cash can provide the client with an excellent margin of safety during volatile or uncertain markets. Unfortunately, the client of the large investment corporation will almost never enjoy this advantage (excluding the elderly, who will usually have some minimum degree of cash equivalents, if not cash itself).

The proposed change imposes a much higher financial and regulatory burden upon our typical friends-and-family RIA. Insurance premiums will skyrocket, and the reinsurers of the bonding agencies will reflexively impose much higher standards of paperwork and liquid net worth upon the RIAs. It will unduly penalize them and drive many out of business.

The biggest result of the change will be to transfer a great deal of money to the reinsurers (who will demand higher premiums, yet pay out none of it) and the large investment companies making a push into the managed-account business. For the latter, this will represent a significant business advantage. The regulatory change does not touch them. Indeed, it almost appears as if the change was proposed by a very large local financial services business wishing to capture more client accounts.

How will the Massachusetts client benefit? The proposed changes do not address the principal types of fraud. They do not discourage or hinder unsuitable products, fraudulent statements or the crooked or desperate broker-dealer. Eliminating the bonding requirement for custody makes no sense at all. It fails as an exchange of regulatory burdens - raising the bonding requirement for discretion, eliminating it for custody - because custody is usually a third-party issue, except for the very large financial services corporation and the well-heeled crook (e.g., Stafford). The Staffords would even be freed from the imposition of bonding. If anything, this change facilitates fraud, particularly by organized crime.

The change will help deprive Massachusetts clients of investment advice more individually specialized to the client, and unbiased by corporate conflicts of interest. It will mean lower cash levels and greater portfolio losses during market downturns, which do no rate to end for some years to come.

Therefore I propose that the bonding requirement for custody be increased, in order to impose more private-sector scrutiny upon potential Madoffs and to present an obstacle to organized crime. I also propose that a distinction be made in bond requirements for full discretion accounts, which can easily be stolen from, and limited discretion accounts, so that the small-business Registered Investment Advisor is not needlessly financially penalized, or even driven out of business.

Thank you for your attention to my comments.

M. Kevin FLynn, CFA, RIA

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June 23, 2011
To Whom It May Concern
I would urge the Division to reconsider the proposed increase in the bonding requirement to $50,000 as it applies to small advisory firms, especially when no custody is involved. The increased costs, while seemingly small, do represent a burden for small firms.

It is in the public interest to keep the barriers to entry in this industry as low as possible. Small firms play an important role. Besides providing a livelihood for investment professionals who do not work well in large, bureaucratic settings, small firms often provide quality investment services to individuals of more limited means (there is a lot of wealth among a lot of people), who receive scant attention from the larger operators in the business. They can provide a vastly different experience, in terms of quality of service and, conceivably, results, for individuals looking for an alternative to the "cookie-cutter" approach found too often in large outfits.

Finally, to the best of my knowledge, the industry's problems, ethical and otherwise, have not emanated from small firms--"assets under management" is a poor criteria for judging quality and adherence to high standards of behavior.

Thank you.

Dennis Butler
President

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June 14, 2011
Greetings,
There is a need for reform in the investment industry; I watch the discussions, and generally agree, with the small steps that are taken to move towards codifying common sense.

I am writing today to comment on the proposal to increase the bond coverage for advisers with discretionary accounts from $10,000 to $50,000.

My understanding of this bond is to protect investors from damages and to create an asset that can be used to cover those damages. I would be interested to know if these bonds are ever triggered or if anyone has ever successfully been covered by one. It does not make intuitive sense that $10,000 would go very far, but increasing the amount to $50,000 doesn't feel much better. Any rogue adviser worth his salt should be able to create a much bigger problem.

I just called my insurance agent. The increase in coverage would make my annual expense go from $150 to $750 a year. Ouch. I seem to recall being able to increase my auto insurance (coverage I might even use!) from $25,000 to $100,000 for something on the order of $25.

Thank you for your consideration.

Catherine Ryan, CFA
Cedar Rock Investment Advisors

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June 10, 2011
I am currently working with a client regarding being self-insured versus the bonding requirement. If the regulations are modified, I do agree that there should not be a one shoe fits all. If the investment advisor has discretionary authority, $10K should be sufficient and those that have custodial authority should have more rigorous guidelines. The greater the risk, the greater the bond should be. I agree with others that state that it should be on a sliding scale based on the FMV that one manages.

Marcy L. Fink, CPA
President
Marcy L. Fink, C.P.A., P.C.

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June 8, 2011
As an adviser/manager with approximately $17,000,000 of assets managed with discretion and $3,000,000 managed without discretion, and who does not take custody of any client assets, the increased cost of a $50,000 bond instead of the current $10,000 bond would be a significant hardship. The cost would increase from $150 a year to $750 a year.

Without custody of client assets there is very little opportunity for malfeasance, and no motivation for same. Clients receive monthly statements from the custodian in addition to quarterly portfolio reports from my firm. They receive trade confirmations within 2 days of execution. Clients pay for asset management services based on a percentage of the assets managed. The motivation for the manager is to preserve, protect and grow the clients' assets, and hence the fees they generate.

Fees charged to clients are acknowledged on their custodial brokerage statements as well as by separate billings sent from my firm. Except for the payment of regular management fees, the custodian, Raymond James Financial Services, does not permit movement of any funds or securities without specific, direct authorization by the client for each event.

Raising the bonding requirement to $50,000 contributes little or nothing to the protection or benefit of the client and causes a significant hardship to smaller firms with good compliance records like mine. I pray that the Securities Division withdraws the proposal to raise the bonding requirement to $50,000.

Thank you for your consideration.

Signed,
Dennis M. O'Connor, President
Brae Head, Inc.

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June 8, 2011
Comment from Gordon R. Williams, Jr., President and owner, Guardian Trust, Inc.

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June 8, 2011
To whom it may concern:

The proposed five-fold increase in the bonding requirement will impose a significant financial cost on the businesses of smaller, independent investment advisers. With $5 million under management, I do not have the advantage of spreading overhead costs among a large asset base.

For those advisers without full power of attorney over managed assets, who do not collect fees in advance but rather only after services are provided and whose clients' assets are securely held under the custody of a third-party brokerage, I fail to see the benefit that such an increase in the bonding requirement provides.

The required coverage as proposed would only be 1% on the asset base of even the smaller advisers. This means that the bond might become completely exhausted following the claim of even one client. For larger advisers, the fraction of covered assets would be even more minuscule.

I would suggest that the bond be proportionate to the assets or number of accounts under management. Rulemaking should also consider those advisers who have taken proactive steps to minimize potential risks.

As far as investment risks, in my case, I offer my clients formal, written reviews of performance and management on a quarterly or semiannual basis in addition to periodic in-person meetings and telephone conversations, together building portfolios that are in accordance with clients' goals. As a CFA charterholder, the level of care, expertise, reasonable judgment and appropriateness that this involves, as mandated under the CFA Institute's Code of Ethics and Professional Conduct, are primary standards that minimize investment risks for my clients' accounts.

The penalties for potential misconduct and misappropriation under the Commonwealth's enforcement and the CFA Institute's disciplinary processes are of course good incentives for advisers such as myself to stay on the straight and narrow. We have not only our livelihoods and professional dignities at stake, but also our personal reputations. Therefore, raising costs for smaller advisers would be a disincentive for those who are trying their very best to do the right thing.

Sincerely,
Eric W. Bright, CFA

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June 7, 2011
Regarding the change in bonding requirements:

1. The bonding requirement is a "one size fits all" rule. There is a great difference between firms with large, affluent, client bases managing 8+ digit portfolios and small firms such as mine with a limited number of clients and a small portfolio. A $50,000 bond represents 10% of the total assets I manage. It represents an insignificant amount of the larger firm's portfolio. If the purpose of the new rule is to increase the protection for the investor, it does essentially nothing for clients of a large advisory firm. Moreover, the cost of the bond is trivial to a large firm, but represents a very significant expense to a small firm such as myself. This bonding requirement discriminates against the small adviser who is trying help the small investor. I suggest that any bonding requirement be made size sensitive. Either have it for $10,000 for up to $25,000,000 in assets under management and $50,000 beyond that or, even better; make it a bond for $10,000 or .2% of the assets under management - whichever is greater.
   
   
2. I think it is more important to require the bond on custodial accounts, rather than discretionary accounts. In the case of malfeasance regarding a custodial account, the bond can be used to compensate the investor for the misappropriated assets. In the case of a discretionary account, there is no misappropriation of the client's assets. While the client may suffer from bad investment judgment, the bond is not an appropriate answer to that problem. Investment results are not guaranteed. I believe the bonding requirements should be on custody not discretion.
   

Herbert Shanzer
Shanzer Management
IARD #: 124452

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June 6, 2011
Dear Massachusetts Securities Regulators,

The proposal to raise the bonding requirement from $10,000 to $50,000 adds additional costs to Registered Investment Advisors while seemingly adding precious little in any real tangible benefits to the public...

Small businesses, especially in this industry have so many regulations and compliance costs, and while many of them in isolation are small, together they are an ever increasing burden.

This serves to lessen competition (harder for small companies to start and compete) and pushes business owners to hire less staff and take on fewer clients.

As a business owner and a CFP professional, I am strongly slowing my rate of client acquisition, I plan to raise my minimum AUM requirement and I am revising plans so as not to have to hire staff mainly because of the ever mounting cost of compliance, something that I know many people in my profession are doing. This adds to our country's unemployment rate and while I am in a position to hire staff, I will not in the current regulatory environment.

I know that the bonding change in isolation is very small, but regulators should resist adding costs of compliance without a clear business case that this will have a positive impact for the public. The companies that issue the bonds will surely profit, but will the investing public of Massachusetts have a net positive result?

As a bigger picture item: I personally would be willing to pay higher taxes (State & Federal) for a greatly simplified tax code and for more simplified business compliance; Too many compliance regulations, while based on good intentions of the regulatory bodies, do far too little to protect consumers and add far too much in terms of business costs.

Thank you for considering my comments,

Jonathan Lachowitz
JJK Investment Management

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June 6, 2011
Thank you for providing the opportunity to comment on the proposed regulation.

The increase in bonding from $10,000 to $50,000 will have a direct negative impact to the bottom line of a smaller RIA firm in Mass. It is understandable that with the new SEC requirement that RIA firms under $100MM will now be state registered, thus requiring MA to revamp some of the regulations. However, leaving the $10k bonding on firms under $25MM would be fair (if not broken, do not fix it). For those new firms that the state will now be required to oversee ($25MM to $100MM) a graded bonding schedule would be fair and equitable for everyone.

Regards,
Joseph Grella, CFP

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Received on June 3, 2011
Commentary on Investment Adviser Discretion and Custody Requirements. I am concerned about raising a bonding requirement to $50,000. It is an added cost and it is not a real deterrent from wrong doing. As a small firm, the increasing costs with no real public benefit become burdensome.

I would also like to comment that this proposed change starts to infer that custody and discretionary powers are equals. I believe many firms are diligently trying to avoid custody. However, an unintended consequence of this change may make it more feasible to just take custody.

Best Wishes,
William Harris, CFP

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June 3, 2011
This email is being sent in response to proposed regulations that would affect RIA's operating in MA which would include my firm, Vision Financial Planning, Inc.

The proposal to increase the bonding requirement for discretion to $50,000 would place an unnecessarily high financial burden on my small business. I also do not believe that clients are in any way better served as a result of this fee increase.

With my operational costs escalating and fee revenues under pressure, I am strongly opposed to this extreme increase in required bond coverage.

Most Sincerely,
Phillips (Flip) Ruben, CFP
Certified Financial Planner
Principal, Vision Financial Planning, Inc., a Registered Investment Advisor

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Received on May 30, 2011
Investment Adviser Discretion and Custody Requirements

Background: The Division proposes to modify the minimum financial requirement for investment advisers found at 950 CMR 12.205(5). Among other changes, the proposal would raise the bonding requirement for discretion from $10,000 to $50,000.

Comment: As a Massachusetts registered investment adviser, the proposed increase in the bonding requirement from $10,000 to $50,000 would apply to my company under subsection (b). It would impose a nearly five folder increase in the annual cost for the bonding premium and impose a disproportionately large financial burden on my company as a small Massachusetts registered investment advisor.

As now proposed, the change does not take into account the magnitude of assets under management by the Massachusetts registered investment advisor. As a small investment adviser with less than $10M under management, this change is onerous and disproportionate to the financial risk of clients sought to be protected by the financial requirement of 12.205(5). At the very least the financial requirement should be proportioned to the magnitude of assets under management and/or the amount of fees paid more than six months in advance by clients. To do otherwise is to penalize small advisors with a regulatory requirement disproportionate to the client exposure for misappropriation or misconduct by a Massachusetts registered investment advisor and to unfairly benefit larger advisors, whose activities may expose more clients to a larger risk given the magnitude of assets under management and of fees received in advance.

Submitted: May 30, 2011 by Peter P. Twining, President

Hilltop Financial Consulting LLC

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Received on May 16, 2011
To Whom It May Concern:

I am writing regarding the correspondence from the Securities Division dated April 27, 2011 regarding proposed changes to regulations. Specifically, I am writing regarding the proposed to changes to Investment Adviser Discretion & Custody Requirements (excerpt from April 27th correspondence pasted below).

An increase in the bonding requirement for discretion generally makes sense, however in my opinion I think that investment advisers with less than $10,000,000 in assets under discretion should be exempted from the increase in the existing $10,000 bonding requirement. In my practice, in particular, I attempt to provide comprehensive wealth management services to individuals and families who are generally precluded from these services due to high minimum assets requirements. I can do this because I am able to keep my costs low, and thus can pass these savings along to my clients.

However, the increase in the bonding fee would add yet another cost to my business - a cost that does not directly improve services for my clients. The higher the costs are for businesses like mine to operate, the more those business will, at best, look more like the larger, more discriminating firms that I am trying to compete with and, at worst, be priced out of the market.

If that latter happens, middle class families will not have access to comprehensive wealth management services - or will have access to fewer and fewer options. On the other hand, the more "small" investment firms there are that tailor their services to families that are typically priced out of the market, the better the pricing can and will be for those middle class families who so benefit from the services.

I appreciate your office taking into consideration my recommendation to maintain the $10,000 bonding requirement for Investment Advisers with less than $10,000,000 in assets under discretion. I am willing to discuss my practice and the types of families I serve in more detail at any time. I can be reached at this email address, or by phone at 508-577-1037.

Sincerely,
Brian C. Foley
BCF Law Group, LLC

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May 13, 2011
In my view, this proposal would eviscerate any liability accorded by certain forms of business organization; require a substantial increase in the net worth of any existing and prospective investment adviser, and fail to differentiate by risk, most notably the size of investment firms. Keeping the segregated account option should be restored.

In researching surety bonds and the process of getting one, it became clear that almost all surety bonds issued to investment advisers require personal indemnification. Companies issuing these bonds require not only corporate statements, but also credit reports and personal financial statements of the net worth of the individual signing the surety bond application. And, many require spousal indemnification. Types of corporate structure, ie. Sub S, LLC, LLP and the like, simply do not matter because the bond is being issued on the strength of the individual's personal finances. The most glaring problems are the forced disclosure of personal financial information and the total lack of a corporate liability shield.

The general underwriting standards for surety bonds require that an individual have ten times the face amount of the bond in liquid assets and twenty times the face amount in net worth. Liquid assets do not include retirement plan assets of any kind. Only assets in the name of the person are counted; having assets in revocable trusts only complicates the matter mainly because these may not be easy for the insurance company to reach. Based on the current $10,000 requirement, this would mean that an applicant would need $100,000 in directly owned liquid assets and a net worth of $200,000.

If the proposed $50,000 standard were to be adopted, every investment adviser would be generally be compelled to have $500,000 in a liquid account and a net worth of $1.0 million. At this level, the size of the liquid account requirement might be reduced somewhat, but the point stands. These are very large figures and could possibly pose a large hurdle to many existing and prospective registrants.

Rather than picking one size of a bond for all registered investment advisers, a scale based on the size and loss experience makes much more sense. While it would be worth it to look at actual past losses relative to the size of assets managed, my sense is that a formula, probably rounded to the nearest one hundred thousand, would make sense. For example, consider using a formula that requires the current size surety bond, $10,000, for assets up to $1.0 million and then scale it up by 0.01 for every $10.0 million in assets. More thought and work needs to be done here, but it would be better to stand on a philosophy that the more assets a firm has under management the higher the surety bond should be.

Another important point would be the recommendation that the segregated account option should be retained as a choice. The size of this account should also be scaled to this size of the firm. By retaining this option, investment advisers would have the option of standing behind the liability shield in a corporate or partnership structure as many accountants, attorneys and other service providers presently do. Furthermore, no personal financial information would have to be disclosed nor a guarantee of personal indemnification be given. Advisers would be freed form the underwriting ratios of liquid and net worth.

My recommendation is that the Securities Division rethink this proposal. Any new proposal should afford investment advisers some liability protection and be sized according to perceived risk.

Thank you for the opportunity to comment.

Bill Holder

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May 6, 2011
Good morning,

Regarding the bonding requirement. I would like to propose keeping it as is or on a sliding scale.

My reasoning: costs have been increasing for smaller advisors like me, who have had to follow the same regulatory requirements as larger firms with much more spendable money. And since some of my client-base are flat-fee retainer clients, I can not offset my cost increases with out raising my prices. My bonding costs would increase from $150/yr-$750/yr under this scenario (1.5% of bonded amt).

Some background: in the past 2 years, I have made some of my services more affordable for regular, middle-income people as both part of my mission to serve more in my city of Medford and also to make my services approachable. For example, I have some flat annual retainer programs which I have lowered the fee on. So my revenue expectations are lower.

Consequences: I have to decide whether I should raise my fees and just pass along these increases to clients or stop working with middle-income people and just serve the more affluent.

Suggestion: keep it at $10,000 for advisers under 15 or 20M of discretionary assets then slide scale it up.

Thanks for listening.

Warmly,

Chris Grande

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May 5, 2011
If I might, I would like to comment on the prospective new regulation that would require a $50,000 bond for firms with discretionary accounts. First, I think there is a huge difference between having discretion over trading and discretion over check writing. If I were guilty of churning and lost money for the account, the bond is not going to cover my poor judgment. Presumably, the bond is only going to cover if I were to somehow abscond with the funds. I can understand the need for a bond, if I am a trustee on the account and have check-writing capability. But unless the bond will compensate for bad trades, I do not understand the need for covering trading authority.

Second, being a very small money manager, I am sensitive to costs. Heretofore, I have absorbed all of the costs myself, but at some point I have to pass them along to clients. Neither I nor they would be happy with this development. Maybe I am particularly sensitive at the moment but before you came yesterday, I just paid $425 for my annual CFA dues. I receive no benefit today from being a CFA, but in some small way I think I am helping the profession and just maybe helping educate some new people. But a bond is just subsidizing the bad guys. I appreciate that to the big guys paying $425 for CFA dues and $500 or so for a bond and $xyz for ABC is not a big deal, but for the small guy these fees are a big deal.

Peace be with you,

Skip Wells

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May 4, 2011
Increasing the bonding requirement 5 times the previous level seems a bit harsh. The cost of a $10,000 bond averages $150 per year. Increasing to $50,000 will now cost between $600 and $1,000…depending on the surety company. Any of us that have been state regulated have a relatively small amount of assets under management and this extra cost will have to be spread over that small client base i.e. the cost will be disproportionately high for our clients compared with Advisors that had been federally regulated.

I would suggest a $25,000 bond at a maximum.

Respectfully,
Jerry Siver, CPCU

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April 28, 2011
My only response is that this proposed increase in bonding poses a 5 fold increase in cost for this requirement. That's a pretty dramatic jump. You might consider at least phasing it in to effect.

Thanks for the opportunity to comment.

Chris

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April 27, 2011
We understand the need to increase the surety bonding requirement in order to accommodate the state's oversight of larger firms. However, an increase from $10,000 to $50,000 for ALL SIZE FIRMS is not fair or reasonable and creates a burden especially for smaller firms. We have learned from our insurance agent that such a change would increase our premium 5 fold! Further, why should a small firm (AUM $25 million or less) have to increase their bond when the $10,000 requirement has worked to date for those size firms? The state should adopt an appropriate level of bond dependent upon the size of the firm. Firms with assets greater than $25 million should have a larger bond requirement and certainly those with $100 million AUM should have an even larger bond requirement. Without such a scaling, the $50,000 bond = .20% of AUM for a $25 million firm versus only .05% for a firm with $100 million AUM. One asks how such a small bond can protect investors whose advisor has $100 million in assets?
We ask that the Securities Division reconsider this proposal and adopt a surety bond value which scales to the AUM of the firm.

Diane E Wood CFA

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Section IV Comments - Updated References from NASD to FINRA

No comments

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Section V Comments - Update References to Forms U-4 and U-5 and to Sections of Form U-4

No comments

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Section VI Comments - Update Fees to Match Sec. 178 of c.184 of Acts of 2002

No comments

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Section VII Comments - Stock Exchanges

No comments

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Section VIII Comments - Technical Correction to Fee Charts

No comments

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Section IX Comments - Performance Based Fees

No comments

New regulations have been adopted that are almost identical to those proposed on November 2, 2011.

The regulations are effective February 3, 2012. The Division will not enforce these provisions until August 3, 2012.

The exact text of the adopted regulations will be available after February 3, 2012.

Proposed regulations involve

• Private Fund Exemption
• Change to the Definition of Institutional Buyer
• Changes to Investment Adviser Discretion and Custody Requirements

On April 20, 2011, the Massachusetts Securities Division (the “Division”) requested comment on proposed changes to 950 CMR 12. 00 et. seq. (the “Regulations”). Among other things, the Division proposed changes to the definition of institutional buyer found at 950 CMR 12.205(1)(a)(6), proposed an exemption for certain “private fund” advisers (a “private fund exemption”), and proposed changes to the regulatory requirements for those investment advisers with discretion over, or custody of, client funds (collectively, the “original proposed rules” or “original proposal”). A public hearing on this matter was held on June 23, 2011. In light of the comments received on these matters and certain developments in the regulatory framework since the original proposal, the Division has amended these proposals (the “amended proposed rules” or “amended proposals”) and is now seeking additional comment.

The amended proposal, after consideration of previously submitted public comments, makes substantive changes to the definition of institutional buyer, re-proposes a broadened private fund exemption (including the introduction of a grandfathering provision), and proposes requirements for advisers with discretion over, or custody of, client funds. This Request for Comment also proposes a technical change to 950 CMR 12.203(5)(a) to correct a typographical error. The substantive changes, as well as areas in which the Division is requesting additional comment, are described in more detail through the links below.

New Regulations effective February 3, 2012 (PDF)

Letter Approving New Regulations (1/19/2012) (PDF)

Request for Comment (PDF)

Submitting a Comment

Please Note: The hearing has been rescheduled from Tuesday, December 6, 2011, to Thursday, January 5, 2012 at 10:00 a.m. The comment submission deadline is Friday, January 6, 2012 at 5:00.

Written comments on the amended proposed regulations should be received by the Division no later than Friday, January 6, 2012 at 5:00 p.m. All comment letters should reference the specific question or question(s) the comment addresses, if applicable.

All comments are subject to public posting on the Securities Division website. We do not edit personal indentifying information from submissions; submit only information that you wish to make available publicly.

Submission Via E-Mail

E-mail comments or submissions of scanned comment letters attached to an e-mail may be submitted to securitiesregs-comments@sec.state.ma.us.

Submission Via Regular Mail

Please mail any comments on the proposed changes to:

Office of the Secretary of the Commonwealth Attn: Proposed Regulations Securities Division, Room 1701 One Ashburton Place Boston, MA 02108

Submission Via Facsimile

Faxed comments may be sent to 617-248-0177. Comments sent via facsimile should include a cover sheet to the attention of “Proposed Regulations.”

Public Hearing

A public hearing on these proposed changes will be held at 10:00 a.m. on Thursday, January 5, 2012 at One Ashburton Place, 17th Floor, Boston, MA 02108.

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, January 6, 2012 to the Securities Division, One Ashburton Place, Room 1701, Boston, Massachusetts 02108. Copies of the proposed amendments are available on the Division's website or by calling 617-727-3548 or 800-269-5428 (Massachusetts only).

Comments on Regulations Proposed November 2, 2011

January 6, 2012
Comment from Louis E. Conrad II, COMPASS Wealth Management, LLC (PDF)

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December 29, 2011
Comment from Brad Richardson Bradyco Financial (PDF)

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December 23, 2011

To Whom it May Concern,
I am writing in response to the new proposals set forth in the custody laws, specifically amending the SEC version regarding invoices and audits. Obviously, full disclosure for clients is an extremely important part of a fair and honest financial advisory relationship. However, it's important that each law/regulation be very carefully thought out and not overly burdensome to the client or the advisor, or too lenient for the client or the advisor. I think that the current proposal can be EASILY improved upon for both the advisor and the client, with very little changes. I'm in operations, and the current proposed law is a logistical nightmare, mostly for the advisor, but very much so for the client as well. Let's examine it and it should become quite clear that something would need to change:

1) COST: If you charge your clients monthly, which is the most common way to charge (or quarterly), sending an invoice to a client every single month is quite costly. Let's say you have 400 clients (small firm), with stamps/paper/envelopes/ink, it's probably around $1 per mailing, so $400 total. Now factor in the staff time it takes to address all the envelopes, stuff them, stamp them, etc, that's several days worth of work for 2 people, so that would average about $480 at two staff people at $15 an hour for two days. So now we are talking about $880 per month, or $10,560 per year, all to send an invoice, that is simply a duplicate of what shows up on the statements. If you choose to instead simply have a surprise audit, the costs range from around $7k - $10k per year - and this is for a small firm!!

2) DOESN'T SOLVE THE PROBLEM: If the argument for providing a separate invoice is that most people don't look at their statements, what makes you think they will look at these invoices? Realistically, even clients who think it's great to send it, are they really going to open it every month and examine the fees? No, overtime the will absolutely ignore it - people are much more likely to examine their client statements to see how much money they have for retirement, education, etc.

3) ANNOYANCE TO CLIENT: From a client's perspective, there is NO doubt that MANY of them will request to opt out of this mailing, as they don't want to receive 12 letters each year that is a duplicate of the statements that they are already receiving. Obviously, we can say, sorry, but the state requires us to do so. This will frustrate them, cut down a lot of unnecessary trees, burn a lot of CO2, all so that the many who want to opt out can simply throw it in the trash. Will there be an opt out system? Even with an opt out system, logistically, that is very hard to track.

4) ANNOYANCE TO CLIENT: Let's say the opt out of regular mailing, and they prefer to have it emailed - which most will do as most people prefer email to regular mail. There are many issues with this.
a)First, the same issue occurs as the mailing as they now start to get 1 email a month, that would probably be set up to go to their junkmail folder, or completely ignored.
b) MOST IMPORTANTLY, once they are trained to ignore our emails (or mailings), which they most certainly will be trained to do, think of how detrimental that is to the client relationship!!!! I would be furious if I kept getting junkmail from my advisor, and would be considerably less responsive to any emails as again, they will be trained to ignore them. So now if it's a very important email, it could be ignored. Perhaps we are trying to get the client to come in for their annual review, or imagine if the client really needs to rebalance their portfolio, update their beneficiary, etc, and the client simply ignores the emails, as they have been trained to do, it could be extremely costly!
c) It's going to be very difficult to email this information to them, because it needs to be done through a secure server to comply with MA security laws, greatly increasing the time it takes to process this, and greatly reducing the likelihood that the client goes and accesses that email.
d) Clients will especially start to ignore secure emails in this way, which are of course, the most important emails since it usually contains statement, financial plans, analysis, portfolio performance - all the stuff that clients pay us for
e) Trying to figure out which clients want it securely, which clients want it regular email, which clients want it mailed, is logistically very hard to keep track of

5) NOT EFFECTIVE: The client seeing the monthly, or quarterly charge, is not nearly as relevant as what the annual charge is.

SOLUTION:
Simply change the requirement to have an annual invoice delivered to the client, that will include the entire fees for the year.

This proposed solution will solve virtually all of the logistical problems, is more effective for the purpose of the law (to protect the client and fully disclose the fees), and is considerably less burdensome for the advisor. It's very helpful for the client to have this annual number, because they can use this information to provide it to their tax preparer because they can potentially write off some/all of the fees. They also have a much better understanding of all of the fees that are charged for the year and they don't have to perform all sorts of calculations to see what the annual fee actually was. For those that are actually interested in the monthly or quarterly fees, they will be motivated enough to look at their investment statements either online or mailed to them, which clearly state their fees.

Please take this suggestion seriously! The balance of what is the proper regulation and what protects the client is always a difficult and conentious issue. I think if you examine the current proposal, it negatively affects both the client as well as the advisor - while the proposed solution has a much more positive affect on the client. Any new regulation is burdensome on the advisor, however, the proposed solution is much less burdensome, and I think it's ultimately a fair deal. Thank you for considering this and for your continued help with this issue.

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December 7, 2011

Please note that most of our billing invoice or statements can be or are done electronically. In our case, fees are calculated by our portfolio management system and a file is generated and submitted electronically to our custodian Charles Schwab. They deduct the fees from the client accounts and transfer them to our corporate account held at Schwab. So if a separate bill is sent to the custodian it would be redundant and arrive at the custodian after it has already been processed.

Similarly, our portfolio management system generates a billing statement for each client showing all the details of the calculation and the fees deducted. This statement is uploaded to our website where all our client are encouraged to visit for updates and receive all our regular communications. Clients can go to their secure website portal to review their billing details at any time. All our fees are represented on our website in many different formats and levels of granularity. Additionally, our custodian Charles Schwab shows any and all fees that are deducted on a separate line in all client statements. Statement are sent by the custodian monthly or at least quarterly on retirement accounts. So in our case the clients are notified by both our firm and our custodial firm of the actual fees that are deducted.

So hopefully, website postings and/or electronic notification can be used in lieu of what could be interpreted as a paper invoice or statement. Hopefully, some clarification and text will be added to this language that electronic notification would satisfy the requirement for “sending the client an invoice or statement”.

Thank you for your consideration.

Steve Doucette, CFP®
Proctor Financial - Retire Better™
66 Central St, Wellesley, MA 02482
781-235-0405 Fax 781-235-0610

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November 3, 2011

Dear Secretary Galvin,
I am unalterably opposed to Registered Investment Advisers having custody of funds. This is how Madoff made off with billions. In my opinion, all client funds should be held by nationally recognized third-party custodians such as Fidelity, Schwab, etc. who are members of SIPC. This arrangement would prevent the creation of false client statements... the very thing that Bernie the Bum and many like him have done in the past.

We often read about lawyers who have comingled client funds then used them for their own personal purposes.

Thank you.

Sincerely,
Robert W. Brimmer, CFP®
59 Finlay Road
P O Box 2806
Orleans, MA 02653
508-240-0320

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November 2, 2011

Dear Sirs;
I am an investment adviser in the state of MA and my clients assets are held in custody at Charles Schwab &Co. I take my fees directly from most clients accounts and send the client a detailed invoice. In the past I used to send a copy of those invoices to Charles Schwab & Co. until two times they subsequently charge my client's accounts a second time for the fee which I had to have retracted. I am loathe to do this again since I can excuse one time but not two. I do send a list of the accounts and fee amounts to be withdrawn but currently I do not send the invoice.

I am not against having to do this again but have some reluctance because of past errors. I can not determine a good suggestion for your regulation but I would think that sending a listing of the amount to be deducted for a fee would be sufficient for Schwab to determine if the fee is excessive.

Sincerely,
Alan Lachowitz

Policy Statement Regarding Changes to Part 2 of Form ADV

The United States Securities and Exchange Commission (the "SEC") has recently issued a final rule regarding amendments to Part 2 of Form ADV. A copy of the rule can be found here. The changes become effective October 12, 2010.

In the past, Form ADV Part II ("Part II") required advisers to respond to a series of multiplechoice and fill-in-the-blank questions organized in a "check-the-box" format, supplemented in some cases with brief narrative responses on Schedule F. "Part II" will now be called "Part 2". Part 2 is being changed so that, rather than a check-the-box format, each adviser will be required to provide clients with a narrative that describes the adviser"s business, identifies conflicts of interest, discloses disciplinary history, provides information on certain supervised persons, and other information. These changes will affect all Massachusettsregistered investment advisers. Massachusetts-registered investment advisers should consult the General Instructions to Form ADV for details on how to respond to the questions.

Each Massachusetts-registered investment adviser whose fiscal year ends on or after December 31, 2010 will be required to file their next annual updating amendment using the "new" Form ADV (including the new Part 2). Annual updating amendments will continue to be required within ninety (90) days of the end of the registrant"s fiscal year. Until an adviser is required to file its annual updating amendment, it may make amendments to the "old" Part II to disclose any material changes to its business. All amendments will continue to be made electronically using the IARD system.

Registrants are required to provide Part II (or another written document containing the equivalent information) to new clients or prospective clients. A Registrant must also, without charge, deliver or offer in writing to deliver to each of its advisory clients a copy of this disclosure document on an annual basis. See 950 C.M.R. 12.205(8). As of the time the Registrant is required to have updated to the "new" Part 2, the Registrant will also be required to deliver (or offer to deliver) the new version of Form ADV Part 2 as part of its disclosure obligations.

Lastly, as part of this rule, the SEC has altered the definition of "custody" for purposes of Form ADV. Please be advised that this definition is incorporated by reference into the Regulations' discretion and custody requirements found at 950 CMR 12.205(5).

For details concerning these changes and applicable Regulations, contact the Massachusetts Securities Division at 617-727-3548.

Questions & Answers Regarding Part 2 of Form ADV

1. What is Form ADV used for, and how has it changed?

Massachusetts-registered investment advisers use Form ADV to register with the Massachusetts Securities Division, and to subsequently amend those registrations as necessary. Investment advisers registered with the United States Securities and Exchange Commission (the "SEC") also use the same form. Most of the recent changes enacted by the SEC relate to the "new" Part 2 of the Form. There are also changes to certain instructions and the definitions of terms found in the General Instructions to Form ADV (the "General Instructions").

2. How has the Form ADV Part 2 changed?

In the past, Form ADV Part II ("Part II") required advisers to respond to a series of multiplechoice and fill-in-the-blank questions organized in a "check-the-box" format, supplemented in some cases with brief narrative responses on Schedule F. "Part II" will now be called "Part 2". Part 2 is being changed so that, rather than a check-the-box format, each adviser will be required to provide clients with a narrative that describes the adviser"s business, identifies conflicts of interest, discloses disciplinary history, provides information on certain supervised persons, and other information. These changes will affect all Massachusetts-registered investment advisers. Massachusetts-registered investment advisers should consult the General Instructions for Part 2 to Form ADV for details on how to respond to the questions.

3. What Glossary Terms Found in the General Instructions have changed?

Although several defined terms have been added to account for new terms used in the new Form ADV Part 2, the only existing definition that has changed is the definition of "custody". This definition change is of particular importance to Massachusetts-registered advisers as it is incorporated by reference into the minimum financial requirements found in the Code of Massachusetts Regulations at 950 C.M.R. 12.205(5). Please consult the definition to determine whether an investment adviser would be deemed to have custody and therefore potentially be required to comply with the minimum financial requirements found at 950 C.M.R. 12.205(5).

4. How is the "new" Part 2 organized?

Form ADV Part 2 contains two parts:

• Part 2A is called the "Brochure". The Brochure requires advisers to create narrative statements containing information about the advisory practice. The information contained in the Brochure relates to a registrant"s investment advisory business, the fees and compensation it receives, a description of the type of clients it generally services, and other information. All Massachusetts-registered investment advisers will be required to complete Part 2A and update it at least annually.
• Part 2B is called the "Brochure Supplement". The Brochure Supplement requires advisers to create narrative statements containing information about certain "supervised persons". These supervised persons are generally those investment adviser representatives ("IARs") that provide investment advice and interact with clients, or have discretion over client accounts. Because the Brochure Supplement is specific to a firm"s IARs, a firm may have more than one supplement. All Massachusetts-registered investment advisers will be required to complete Part 2B and update it at least annually.

5. I wish to register as an investment adviser. Which form do I use?

All investment advisers applying for registration in Massachusetts will be required to use the "new" Form ADV (including the new Part 2) as of January 1, 2011. All filings will continue to be made electronically using the Investment Adviser Registration Depository ("IARD") system.

6. I am a Massachusetts-registered investment adviser. Must I use the "new" Form ADV (including the new Part 2)?

Yes. Each Massachusetts-registered investment adviser will be required to file their next annual updating amendment using the "new" Form ADV (including the new Part 2) as of their fiscal year ending on or after December 31, 2010. Annual updating amendments will continue to be required within ninety (90) days of the end of the registrant"s fiscal year. See 950 CMR 12.205(6)(a).

For example, if an adviser"s fiscal year end is December 31, 2010, that adviser will be required to update its Form ADV (including the new Part 2) by March 31, 2011. When an adviser submits its annual updating amendment, it must update its responses to all items. All updates will continue to be made electronically using the IARD system.

Until an adviser is required to file its annual updating amendment, it may make amendments to the "old" Part II to disclose any material changes to its business. All amendments will continue to be made electronically using the IARD system (see below).

7. To whom must I deliver Part 2A (Brochure) and 2B (Brochure Supplements)?

After updating to the "new" Part 2, an adviser will begin to deliver Form ADV Part 2 in the same manner as the "old" Part II. Similarly, an adviser will begin to offer in writing to deliver the "new" Part 2 annually to existing clients in the same manner as was done with the "old" Part II. See 950 CMR 12.205(8)(a). Investment advisers with more than one Brochure Supplement should consult the "Instructions for Part 2B of Form ADV: Preparing a Brochure Supplement," to determine which Brochure Supplement(s) that it should provide to its clients.

8. How do I file my Form ADV?

Massachusetts-registered investment advisers will continue to complete and update Form ADV electronically using the Investment Adviser Registration Depository (IARD). See 950 CMR 12.205(2)(a)(1). Questions regarding this process may be directed to the FINRA Helpdesk at 240-386-4848.

9. Where can I get more information on completing Form ADV, electronic filing, and the IARD?

NASAA has information on the "new" Form ADV (including the new Part 2) including modifiable forms and guidance on how to complete them. Visit the NASAA website for more information.

SEC rules and information about the Investment Advisers Act of 1940 can be found here.

Information on completing Form ADV can be found here.

FINRA provides information about the IARD and the electronic filing process on the IARD website at www.iard.com or by calling 240-386-4848.

If you have any questions regarding the new Form ADV and its applicability to Massachusetts-registered investment advisers, contact the Massachusetts Securities Division at 617-727-3548.

Secretary of the Commonwealth William F. Galvin warns Massachusetts citizens to beware of unsolicited e-mails purporting to be from financial institutions requesting personal information under the guise of ordinary account communications.

Similar e-mails contain unsolicited advertisements for financial services.

“Phishing” is Internet lingo for the practice of sending widespread e-mails in an attempt to gather personal data for the purpose of identity theft and other criminal efforts.

“Do not answer these e-mails, even if they seem to come from a legitimate company or mention a particular account,” said Secretary Galvin, the Commonwealth’s chief securities regulator. “Even if it has a ‘.com address’ of a company you do business with, you should call the company directly through their representative or call the customer service number on your account statement.”

“When in doubt about suspicious, unsolicited e-mails, just hit the ‘delete’ key,” Galvin said.

While e-mails of this sort seem like legitimate communications from a reputable brokerage, banking or advisory firm, they really come from con artists or criminals masquerading as legitimate companies in attempts to “phish” for personal information.

These “phishing” expeditions are an attempt to fraudulently acquire citizens’ personal information – account numbers, birthdates, Social Security numbers – for the phisher’s own nefarious purposes.

Tips On Detecting Phishing Scams

Eight Tips to Avoid Phishing Scams (PDF)

Concerned about identity theft through internet schemes to obtain personal financial data, Secretary of the Commonwealth William F. Galvin has prepared a brochure entitled “Eight Tips to Avoid Phishing Scams”.

The brochure offers detailed information on how to read a website address so you will not be taken in by a site that appears legitimate, but is not.

The Secretary’s Securities Division has recently received reports that citizens of the Commonwealth are receiving e-mails purporting to be from the U.S. Internal Revenue Service but in reality are from criminals trying to lure unsuspecting citizens with the promise of eligibility for a tax refund.

This is only one in a series of phishing scams cast under an official-seeming logo of the IRS. Over the past five months phishers have sent mass e-mails claiming that the recipient is under criminal investigation for submitting falsified tax returns, must complete an “investigation form: from the “IRS’ Fraud Department,” or may receive $80 by filling out a customer satisfaction survey.

The latest phony message promises a refund yet asks for credit card information, which the bona fide IRS form does not. Further, the IRS does not send unsolicited e-mails to taxpayers asking them for access information for credit cards or financial accounts.

Also, if someone followed the link in the e-mail and looked at the address bar of his or her internet browser, he or she would see that the website begins with a suspicious string of numbers, one of the warning signs the Secretary cites in his new brochure.

“The lure of a possible tax refund and the sophisticated mimicry of legitimate government forms make this a particularly insidious case of phishing,” Secretary Galvin said. “But it is only one example. Often private sector financial firms have seen their good name hi-jacked by scam artists trolling for personal financial information.”

“Before you even think of sending any personal data,” Secretary Galvin said, “check the address bar of the e-mail you’ve received and put the company’s name into an internet search engine to see if the addresses match. The brochure lists many other tips for spotting phony e-mails that you should be aware of.”

Additional information of phishing scams is available on the Secretary’s website, in person at the Securities Division, One Ashburton Place, Boston, MA 02108 or by calling toll-free 1-800-269-5428.

Submission of Form ADV Part II through the IARD System

May 21, 2007
On April 23, 2007, the IARD began accepting Part II of the Form ADV (including Schedule F). Prior to this date, all state-registered investment advisers had to file, in paper format, their then-current Form ADV Part II and any amendments and annual updates directly with the Massachusetts Securities Division (the “Division”). Now, the Form ADV Part II, also known as the “brochure,” can be filed electronically with the Division, via the IARD, just as Part 1 of the Form ADV has been so filed.

All Massachusetts registered investment advisers must file their current brochure (Form ADV Part II) electronically with the Division, via the IARD, no later than September 1, 2007. (See 950 CMR 12.205(2)(a)1.)

Also, as part of the usual post-registration requirements, all subsequent amendments and annual updates to the brochure must likewise be filed electronically. (See 950 CMR 12.205 (6).)

Please refer to the instructions and websites listed below for directions and guidance on filing your firm’s brochure electronically via the IARD. If you have any questions, please contact the NASD Gateway Call Center at 240-386-4848.

Form ADV Part II must be submitted to the IARD as a searchable text, portable document format (PDF) file.

A free editable PDF version of the current Form ADV Part II is available on the North American Securities Administrators Association Inc. (NASAA) website.

Guidance is available on the IARD website:
Form ADV Part II (IARD System Instructions)
Form ADV Part II Navigation Guide (PDF)

Please remember the deadline for electronically filing your firm’s Form ADV Part II is September 1, 2007.

Investment Adviser Licensing Section, Massachusetts Securities Division
One Ashburton Place, 17th Floor
Boston, MA 02108
617-727-3548

A Grandparent Scam is a fraud that preys on the elderly by taking advantage of their love and concern for their grandchildren.

In the typical scenario, a grandparent receives a phone call late at night from a scam artist claiming to be one of his or her grandchildren. The phony grandchild is in a panic, saying that it’s an emergency situation and he/she needs money immediately. The sense of urgency that the scam artist creates make concerned grandparents act quickly, without verifying who is calling.

While this scam has been around for years, it has become more sophisticated due to the Internet and social networking sites which allow a scam artist to uncover personal information about their targets which makes the impersonations more believable.
Common scenarios include:

The Grandparent Scam

The grandparent scam is possibly the most widespread senior scam, where the victim receives a call supposedly from a grandchild in trouble. The “grandchild” is calling from a friend's cell phone and he's gotten into a bad situation, like being arrested for drugs, getting in a car accident, or being mugged. He's out of state or in a foreign country and needs his grandparent to wire some money as soon as possible. The “grandchild” begs that his parents not be told.

The Fake Accident Ploy

The scam artist gets the victim to wire or send money on the pretext that the victim’s child or another relative is in the hospital and needs the money. Sometimes the scam artist will call and pretend to be an arresting police officer, a lawyer, or a doctor at a hospital. The phony grandchild may talk first and then hand the phone over to an accomplice of the impersonator...to further spin the fake scenario.

Kidnapping and Ransom

The scam artist tells the victim that his/her grandchild has been kidnapped and that the victim has to pay a ransom.

In some cases, the scam artist will have phoned the actual grandchild earlier, pretending to be from a cell phone company, telling the grandchild to switch off his phone for a maintenance project, thus preventing the grandparent from calling the grandchild and checking the story.

What are the Red Flags?

• Caller specifically asks the grandparent not to let other relatives know what has happened by saying “Can you please help me? I'm in jail (or in the hospital /or in some type of financial need). But don't tell Dad. He would kill me if he found out, please send the money ASAP. I'm scared."
• Caller asks that the money be sent by a money transfer company such as Money Gram or Western Union. Wire transfers allow scammers to retrieve money anywhere using a reference number and phony ID. Once you send the money, you can’t get it back.

What should you do to protect yourself and avoid being victimized in the first place:

• Resist the pressure to act quickly.
• Tell the caller you’ll call them back at a known number, not a number that they give you.
• Contact your grandchild or another family member to determine whether or not the call is legitimate, and confirm the whereabouts of the grandchild.
• Never volunteer names or other personal information to "grandkids" that don't immediately identify themselves. Ask some questions that would be hard for an imposter to answer correctly – the name of the person’s pet or the date of their mother’s birthday.
• Develop a secret code or password with family members that can be used to verify a true emergency.
• Limit personal information, such as vacation plans, shared on social media sites.
• Never wire money based on a request made over the phone or in an e-mail...especially overseas. Wiring money is like giving cash—once you send it, you can’t get it back.

Chances are good that the caller will hang up if you challenge him.

Example:

The senior answers his phone and a young voice says, "Hey, Grandpa, it's your favorite grandson, and I'm in trouble."

Do not fill in any “blanks” for the scammer:

“John, is that you?” It will be easy for the caller to then respond, “Yes, it's John…”

Best way to get the scammer to hang up the phone:

“Do you know who this is?” “No, I don’t. Who is this?”
“It’s your granddaughter.” “Really? Which one?”

What can you do if you have been scammed?

• Contact the money transfer service immediately to report the scam. If the money hasn’t been picked up yet, you can retrieve it, but if it has, unlike a check that you can stop payment on—the money is gone.
• Contact your local authorities or state consumer protection agency if you think you have been victimized.
• File a complaint with Internet Crime Complaint Center, which not only forwards complaints to the appropriate agencies, but also collates and analyzes the data—looking for common threads that link complaints and help identify the culprits.

If you have questions, please contact the Massachusetts Securities Division:

Massachusetts Securities Division
800-269-5428 or 617-727-3548
MSD@sec.state.ma.us

By an act of the Massachusetts legislature, some of the Massachusetts Securities Division's filing fees will increase effective Wednesday, August 7, 2002.

The increases are as follows:

• Securities brokerage firm registration (initial and renewal) will increase from $300 to $450.
• Securities agent registration, initial, renewal and transfer, will increase from $50 to $75 (includes issuer-agents).
• Mutual Fund (open-end investment company) Notice Filing - Initial Filing will increase from $2000 to $2500.
• Mutual Fund (open-end investment company) Notice Filing - Renewal Filing will increase from $1000 to $1250.