Despite the regulatory debacles on Wall Street, the private placement broker (“PPB”) and M&A broker (“M&AB”) proposals continue to advance within the SEC’s Division of Trading and Markets, which is the Division with responsibility for policy and rulemaking with respect to broker-dealer regulation. This is an update since September 2008 on the status of the PPB, M&AB, and Small Business Sale Exemption rulemaking proposals that are before the staff of the Securities and Exchange Commission (”SEC”) and representatives of the North American Securities Administrators Association (”NASAA”). There have been several encouraging developments since the September report.
SEC Developments
The 2008 SEC Forum on Small Business Capital Formation was held at the SEC’s Headquarters on November 20, 2008. This year’s Forum featured a panel presentation and discussion of the PPB and M&AB proposals, which the SEC staff organized and coordinated. The program was held in the SEC’s main auditorium, from which the panel presentations were webcast by the SEC. An archive of the webcast can be viewed at:
http://www.connectlive.com/events/secgovtbusinessforum112008/.
The prominent role of this year’s PPB and M&AB panel at the Forum is noteworthy by virtue of its heightened visibility, both to the public and to the SEC Commissioners, and the SEC’s allocation of time and resources to host it. In each of the last several years, the PPB and M&AB proposals have been the subject of breakout discussion sessions, which were attended by SEC staff in a passive, information gathering role. At this year’s Forum, the SEC staff took an active role by putting the PPB and M&AB proposals on the Forum’s afternoon agenda and organizing the panel, in addition to hosting a breakout session for discussion of the proposals. A representative of the SEC staff and a representative of NASAA were active participants on the panel, summarizing their regulatory views and providing useful feedback on various aspects of the proposals. The Forum’s discussion of the proposals demonstrates that they are a staff priority within the Division of Trading Markets.
We anticipate that the PPB, M&AB, and Small Business Sale Exemption (based on the Country Business no-action letter) proposals will again be among the Forum’s final written report of recommendations, as they were in 2006 and 2007. The Forum’s report is published and provided to the SEC Commissioners and staff, as well as members of Congress. As in prior years, when completed the 2008 Forum’s report will be posted to the SEC’s website at:
http://www.sec.gov/info/smallbus/sbforumreps.htm
The Forum panel was comprised of Kristina Fausti, an SEC staff member actively involved in the proposals, Denise Crawford, the Texas Securities Commissioner and president-elect of NASAA, Faith Colish, Mike Ribet, Dennis Roberts, and Shane Hansen. The panel’s biographies can be read at:
http://www.sec.gov/info/smallbus/2008gbforumbios.htm.
During the panel presentation, Ms. Fausti described the progress that has been made by the SEC staff and she said they are currently vetting the PPB proposal with representatives of NASAA. She observed that the PPB and M&AB proposals are viewed as being closely related and the M&AB proposal will closely follow the PPB proposal. The PPB and M&AB proposals are premised on similar regulatory concepts of a federal exemption coupled with simplified state-level regulation. Coordination by the SEC with NASAA is critical to achieving a uniform approach among the states. Guided by their discussions with NASAA, Ms. Fausti indicated that the SEC staff will be prepared to make recommendations to the SEC Commissioners. Indeed, the day after the Forum, the director of the SEC’s Division of Trading and Markets, Erik Sirri, indicated that the Division’s staff would be ready to make their recommendations to the Commission, speaking at a November meeting of the American Bar Association’s Committee on Federal Securities Regulation.
At the Commission level, the three previously vacant seats on the Commission have all been filled and President-elect Obama has announced that he will nominate Mary Schapiro to succeed Chairman Christopher Cox to lead the Commission. Given Ms. Schapiro’s current role as FINRA’s chief executive officer and past service as an SEC Commissioner, she is familiar with these and the many other regulatory issues facing the SEC. We anticipate little delay to be caused by the transition of the SEC’s leadership to Ms. Schapiro. Having been senior executives with FINRA, both Ms. Schapiro and Commissioner Elise Walter have an understanding of the roles played by PPBs and M&ABs in working with small businesses, as well as the impact on FINRA if, as required by current law, every intermediary and capital-raising finder were to become FINRA members. Therefore, we believe these changes in the Commission’s leadership and composition will be helpful in the advancement of these proposals.
Ms. Schapiro’s nomination and confirmation as SEC chair in late January 2009 should coincide with the staff’s initial feedback from NASAA representatives. In the same time frame, we anticipate communicating directly with SEC Commissioners and their staff to further heighten the visibility of these proposals and individual meetings may be arranged to underscore their importance to small business owners and our economy. Understandably, the timing of the Commission’s consideration and decision to publish and seek public comment on the proposals will be affected by significant economic and political events that will affect the SEC’s priorities. We do believe the rulemaking process can and will advance even while Congress begins the anticipated debate about the future form of federal securities regulation.
NASAA Developments
As summarized above, we understand that representatives of NASAA are in dialog with the SEC staff about coordinating a uniform state approach to these rulemaking proposals, focusing initially on the PPB proposal, because it was first proposal to reach the regulators’ desks, and then the M&AB proposal, which is based on a similar regulatory framework. We are anticipating fruits from those regulatory discussions early in 2009 because NASAA’s leadership has been supportive of these proposals.
Reflecting the importance of these issues to the states, Tanya Solov, the Illinois Securities Commissioner, will be the keynote speaker on Wednesday, January 21, 2009, at the AM&AA’s Winter Conference in Orlando, Florida. Ms. Solov continues to chair NASAA’s Board-level Finders Project Group. Other members include Ms. Crawford, noted above, William Donahue (MA), and Henry Tanji (HI).
In December, NASAA hosted a national Regulatory Reform Roundtable emphasizing the important role of state securities regulators in protecting investors. In connection with the event, NASAA articulated guiding principles for regulatory reforms. We believe NASAA’s proactive involvement in regulatory reform efforts will further reinforce state-level support for the PPB and M&AB proposals because of the primary role to be played by the states under these proposals. An audio archive of the Roundtable’s discussion and NASAA’s guiding principles are available at:
http://www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/9910.cfm
http://www.videonewswire.com/event.asp?id=53986
Next Steps
With indications from the SEC staff that they are ready to make recommendations to the Commission, to be guided in part by their current dialog with NASAA, in the coming weeks we anticipate the following next steps:
1.Communicating directly to the SEC Commissioners and their legal staffs about the PPB, M&AB, and Small Business Sale Exemption proposals. Our communications will highlight the broad support of these proposals from the national and regional professional associations.
2.Develop and provide the SEC with testimonials from small business sellers and buyers about the need for regulatory reform. These testimonials will help to express the realities that have faced small business owners who needed competent professional assistance with the sale of their businesses.
3.Continue working at the SEC staff level to address specific aspects of the proposals. At the SEC Forum the staff identified a couple ancillary issues about which they would welcome further information and analysis. We will be responding to that invitation in the coming weeks. As part of that response, we will:
Prepare a “white paper” addressing the SEC staff’s concern that the M&AB proposal have a size cap. If a size cap is to be included in the proposal published for comment by the SEC, our recommendation would likely be in the $75 million to $100 million range. We will first look to existing dollar thresholds used by the SEC in other contexts that have already addressed the interests of small business owners. With respect to the Small Business Sale Exemption, we will also be addressing possible thresholds that complement the Country Business no-action letter’s use of the Small Business Administration’s size criteria.
More precisely define the M&A middle market with statistical information about transaction size, volume, and other transaction characteristics. All SEC rulemaking requires the staff to conduct an extensive analysis of this kind of information in order for the Commission to assess the impact of any proposed rules on small businesses. By gathering and providing this statistical information to the staff, we hope to guide their analysis and resulting conclusions.
Warner Norcross & Judd LLP
Hugh Makens and Shane Hansen
www.WNJ.com