
[Federal Register Volume 76, Number 105 (Wednesday, June 1, 2011)]
[Proposed Rules]
[Pages 31518-31543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-13370]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

[Release No. 33-9211; File No. S7-21-11]
RIN 3235-AK97


Disqualification of Felons and Other ``Bad Actors'' From Rule 506 
Offerings

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to our rules to implement Section 
926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 
Section 926 requires us to adopt rules that disqualify securities 
offerings involving certain ``felons and other `bad actors''' from 
reliance on the safe harbor from Securities Act registration provided 
by Rule 506 of Regulation D. The rules must be ``substantially 
similar'' to Rule 262, the disqualification provisions of Regulation A 
under the Securities Act, and must also cover matters enumerated in 
Section 926 (including certain state regulatory orders and bars).

DATES: Comments should be received on or before July 14, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-21-11 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-21-11. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's Web 
site (http://www.sec.gov/rules/proposed.shtml). Comments also are 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Room 1580, Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Johanna Vega Losert, Special Counsel; 
Karen C. Wiedemann, Attorney-Fellow; or Gerald J. Laporte, Office 
Chief, Office of Small Business Policy, at (202) 551-3460, Division of 
Corporation Finance, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We propose to amend Rules 501\1\ and 506 \2\ 
of Regulation D \3\ and Form D \4\ under the Securities Act of 1933 
(``Securities Act'').\5\
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    \1\ 17 CFR 230.501.
    \2\ 17 CFR 230.506.
    \3\ 17 CFR 230.501 through 230.508.
    \4\ 17 CFR 239.500.
    \5\ 15 U.S.C. 77a et seq.

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[[Page 31519]]

Table of Contents

I. Background and Summary
II. Discussion of the Proposed Amendments
    A. Introduction
    B. Covered Persons
    C. Disqualifying Events
    1. Criminal Convictions
    2. Court Injunctions and Restraining Orders
    3. Final Orders of Certain Regulators
    4. Commission Disciplinary Orders
    5. Suspension or Expulsion From SRO Membership or Association 
With an SRO Member
    6. Stop Orders and Orders Suspending the Regulation A Exemption
    7. U.S. Postal Service False Representation Orders
    D. Reasonable Care Exception
    E. Waivers
    F. Transition Issues
    1. Disqualifying Events That Pre-Date the Rule
    2. Effect on Ongoing Offerings
    3. Timing of Implementation
    G. Amendment to Form D
III. Possible Amendments To Increase Uniformity
    A. Uniform Application of Bad Actor Disqualification to 
Regulations A, D and E
    B. Uniform Look-Back Periods
IV. General Request for Comment
V. Chart--Comparison of Felon and Other Bad Actor Disqualification 
Under Current Rule 262, Dodd-Frank Act Section 926 and Proposed Rule 
506(c)
VI. Paperwork Reduction Act
VII. Cost-Benefit Analysis
VIII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition and Capital Formation
IX. Initial Regulatory Flexibility Act Analysis
X. Small Business Regulatory Enforcement Fairness Act
XI. Statutory Authority and Text of Proposed Amendments

I. Background and Summary

    Section 926 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act''),\6\ entitled ``Disqualifying 
felons and other `bad actors' from Regulation D offerings,'' requires 
the Commission to adopt rules to disqualify certain securities 
offerings from reliance on the safe harbor provided by Rule 506 for 
exemption from registration under Section 4(2) of the Securities Act of 
1933. This release proposes amendments to Rules 501 and 506 and Form D 
to implement Section 926 of the Dodd-Frank Act.
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    \6\ Public Law 111-203, Sec.  926, 124 Stat. 1376, 1851 (July 
21, 2010) (to be codified at 15 U.S.C. 77d note).
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    Rule 506 is one of three exemptive rules for limited and private 
offerings under Regulation D.\7\ It is by far the most widely used 
Regulation D exemption, accounting for an estimated 90-95% of all 
Regulation D offerings \8\ and the overwhelming majority of capital 
raised in transactions under Regulation D. Rule 506 permits sales of an 
unlimited dollar amount of securities to be made, without registration, 
to an unlimited number of accredited investors \9\ and up to 35 non-
accredited investors, so long as there is no general solicitation, 
appropriate resale limitations are imposed, any applicable information 
requirements are satisfied and the other conditions of the rule are 
met.\10\
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    \7\ The others are Rule 504 and Rule 505, 17 CFR 230.504 and 
230.505, which are discussed in notes 100 and 98 below.
    \8\ For the twelve months ended September 30, 2010, the 
Commission received 17,292 initial filings for offerings under 
Regulation D, of which 16,027 (approximately 93%) claimed a Rule 506 
exemption.
    \9\ Rule 501 of Regulation D lists eight categories of 
``accredited investor,'' including entities and natural persons that 
meet specified income or asset thresholds. See 17 CFR 230.501. In a 
separate rulemaking required by Section 413(a) of the Dodd-Frank 
Act, the Commission has proposed amendments to the accredited 
investor standards in our rules under the Securities Act of 1933 to 
exclude the value of a person's primary residence for purposes of 
the $1 million accredited investor net worth determination. See 
Release No. 33-9177 (Jan. 25, 2011) [76 FR 5307] (available at 
http://www.sec.gov/rules/proposed/2011/33-9177.pdf.)
    \10\ Offerings under Rule 506 are subject to all the terms and 
conditions of Rules 501 and 502, including limitations on the manner 
of offering (no general solicitation), limitations on resale and, if 
securities are sold to any non-accredited investors, specified 
information requirements. Where securities are sold only to 
accredited investors, the information requirements do not apply. See 
17 CFR 230.502 and 230.506. In addition, any non-accredited 
investors must satisfy the investor sophistication requirements of 
Rule 506(b)(2)(ii). Offerings under Rule 506 must also comply with 
the notice of sale requirements of Rule 503. See 17 CFR 230.503.
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    ``Bad actor'' disqualification requirements, sometimes called ``bad 
boy'' provisions, prohibit issuers and others (such as underwriters, 
placement agents and the directors, officers and significant 
shareholders of the issuer) from participating in exempt securities 
offerings if they have been convicted of, or are subject to court or 
administrative sanctions for, securities fraud or other violations of 
specified laws. Rule 506 in its current form does not impose any bad 
actor disqualification requirements.\11\ In addition, because 
securities sold under Rule 506 are ``covered securities'' under Section 
18(b)(4)(D) of the Securities Act, state-level bad actor 
disqualification rules do not apply.\12\
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    \11\ Rule 507 of Regulation D imposes a different kind of 
disqualification specific to Regulation D offerings. Under Rule 507, 
any person that is subject to a court order, judgment or decree 
enjoining such person for failure to file the notice of sale on Form 
D required under Rule 503 is disqualified from relying on Regulation 
D. 17 CFR 230.507(a). We are not proposing to amend Rule 507 at this 
time.
    \12\ See 15 U.S.C. 77r(b)(4)(D). This provision of Section 18 
was added by Section 102(a) of the National Securities Markets 
Improvement Act of 1996, Public Law 104-290,110 Stat. 3416 (Oct. 11, 
1996) (``NSMIA''). NSMIA preempts state registration and review 
requirements for transactions involving ``covered securities,'' 
including securities offered or sold on a basis exempt from 
registration under Commission rules or regulations issued under 
Securities Act Section 4(2). Rule 506 is a safe harbor under Section 
4(2).
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    In 2007, we proposed a number of amendments to Regulation D, 
including bad actor disqualification rules that would have applied to 
all Regulation D offerings (the ``2007 Proposal'').\13\ Although we did 
not take final action on the 2007 Proposal, we have considered the 
issues raised and the comments received in respect of the 2007 Proposal 
in developing the rules we propose today.\14\ We have also considered 
advance comments in letters we have received to date on this rulemaking 
project.\15\
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    \13\ See Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116] 
(available at http://www.sec.gov/rules/proposed/2007/33-8828.pdf.)
    \14\ Comment letters received on the 2007 Proposal are available 
at http://www.sec.gov/comments/s7-18-07/s71807.shtml.
    \15\ To facilitate public input on its Dodd-Frank Act rulemaking 
before issuance of actual rule proposals, the Commission has 
provided a series of e-mail links, organized by topic, on its Web 
site at http://www.sec.gov/spotlight/regreformcomments.shtml. In 
this release, we refer to comment letters we received on this 
rulemaking project in response to this invitation as ``advance 
comment letters.'' The advance comment letters we received in 
anticipation of this rule proposal appear under the heading ``Adding 
Disqualification Requirements to Regulation D Offerings,'' Title IX 
Provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
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    Section 926 of the Dodd-Frank Act instructs the Commission to issue 
disqualification rules for Rule 506 offerings that are ``substantially 
similar'' to Rule 262,\16\ the bad actor disqualification provisions of 
Regulation A,\17\ and that are also triggered by an expanded list of 
disqualifying events, including certain actions by state regulators, 
enumerated in Section 926. The disqualifying events currently covered 
by Rule 262 include:
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    \16\ 17 CFR 230.262.
    \17\ 17 CFR 230.251 through 230.263. Regulation A is a limited 
offering exemption that permits public offerings of securities not 
exceeding $5 million in any 12-month period by companies that are 
not required to file periodic reports with the Commission. 
Regulation A offerings are required to have an offering circular 
containing specific mandatory information, which is filed with the 
Commission and subject to review by the staff of the Division of 
Corporation Finance.
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     Felony and misdemeanor convictions in connection with the 
purchase or sale of a security or involving the making of a false 
filing with the Commission (the same criminal conviction standard as in 
Section 926 of the Dodd-Frank Act) within the last five years in the 
case of issuers and ten years in the case of other covered persons;

[[Page 31520]]

     Injunctions and court orders within the last five years 
against engaging in or continuing conduct or practices in connection 
with the purchase or sale of securities, or involving the making of any 
false filing with the Commission;
     U.S. Postal Service false representation orders within the 
last five years;
     Filing, or being or being named as an underwriter in, a 
registration statement or Regulation A offering statement that is the 
subject of a proceeding to determine whether a stop order should be 
issued, or as to which a stop order was issued within the last five 
years; and
     For covered persons other than the issuer:
    [cir] Being subject to a Commission order:
     Revoking or suspending their registration as a broker, 
dealer, municipal securities dealer, or investment adviser;
     Placing limitations on their activities as such;
     Barring them from association with any entity; or
     Barring them from participating in an offering of penny 
stock; or
    [cir] Being suspended or expelled from membership in, or suspended 
or barred from association with a member of, a registered national 
securities exchange or national securities association for conduct 
inconsistent with just and equitable principles of trade.
    The disqualifying events specifically required by Section 926 are:
     Final orders issued by state securities, banking, credit 
union, and insurance regulators, Federal banking regulators, and the 
National Credit Union Administration that either
    [cir] Bar a person from association with an entity regulated by the 
regulator issuing the order, or from engaging in the business of 
securities, insurance or banking, or from savings association or credit 
union activities; or
    [cir] Are based on a violation of any law or regulation that 
prohibits fraudulent, manipulative, or deceptive conduct within a ten-
year period; and
     Felony and misdemeanor convictions in connection with the 
purchase or sale of a security or involving the making of a false 
filing with the Commission.
    We are proposing revisions to Rule 506 of Regulation D to implement 
these requirements. The substance of our proposal is derived from 
Section 926 of the Dodd-Frank Act and Rule 262. However, the proposed 
rule has been formatted in a way that is designed to make it easier to 
understand and apply than current Rule 262. Rule 262 currently provides 
three different categories of offering participants and related 
persons, with different disqualification triggers for each category. 
The amendments we propose would incorporate the substance of Rule 262, 
but simplify the framework to include one list of potentially 
disqualified persons and one list of disqualifying events. We propose 
to codify this in a new paragraph (c) of Rule 506.
    To clarify the issuer's obligations under the new rules, we are 
also proposing a ``reasonable care'' exception, under which an issuer 
would not lose the benefit of the Rule 506 safe harbor, despite the 
existence of a disqualifying event, if it can show that it did not know 
and, in the exercise of reasonable care, could not have known of the 
disqualification. To establish reasonable care, the issuer would be 
expected to conduct a factual inquiry, the nature and extent of which 
would depend on the facts and circumstances of the situation.
    In Part III of this Release, we discuss other possible amendments 
to our rules to make bad actor disqualification more uniform across 
other exemptive rules. We are soliciting public comment on these 
possible amendments, which would go beyond the specific mandates of 
Section 926. The possible amendments we are considering and on which we 
are soliciting comment include:
     Applying the new bad actor disqualification provisions 
proposed for Rule 506 offerings uniformly to offerings under Regulation 
A, Rule 505 of Regulation D and Regulation E (all of which are 
currently subject to bad actor disqualification under existing Rule 262 
or under similar provisions based on that rule) and offerings under 
Rule 504 of Regulation D (which currently are not subject to Federal 
disqualification provisions); and
     For all disqualifying events that are subject to an 
express look-back period under current law (e.g., criminal convictions 
within the last five or ten years, court orders within the last five 
years), providing a uniform ten-year look back period, to align with 
the ten-year look-back period required under the Dodd-Frank Act for 
specified regulatory orders and bars.
    Part V of this Release is a chart that compares the provisions of 
Rule 262, Section 926 of the Dodd-Frank Act and proposed Rule 506(c).

II. Discussion of the Proposed Amendments

A. Introduction

    Section 926(1) of the Dodd-Frank Act requires the Commission to 
adopt disqualification rules that are substantially similar to Rule 
262, the bad actor disqualification provisions applicable to offerings 
under Regulation A, and that also cover the triggering events specified 
in Section 926. Accordingly, the rules we are proposing reflect the 
persons covered by and triggering events specified in those two 
sources.

B. Covered Persons

    We propose that the disqualification provisions of Rule 506(c) 
would cover the following, which we sometimes refer to in this release 
as ``covered persons'':
     The issuer and any predecessor of the issuer or affiliated 
issuer;
     Any director, officer, general partner or managing member 
of the issuer;
     Any beneficial owner of 10% or more of any class of the 
issuer's equity securities;
     Any promoter connected with the issuer in any capacity at 
the time of the sale;
     Any person that has been or will be paid (directly or 
indirectly) remuneration for solicitation of purchasers in connection 
with sales of securities in the offering; and
     Any director, officer, general partner, or managing member 
of any such compensated solicitor.\18\
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    \18\ See Proposed Rule 506(c)(1).
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    This generally corresponds to the persons covered by Rule 262, with 
the changes discussed below.
    To clarify the treatment of entities organized as limited liability 
companies, we propose to cover managing members expressly, just as 
general partners of partnerships are covered.
    To address the types of financial intermediaries likely to be 
involved in private placements under Rule 506, we are proposing to look 
to the current standards under Rule 505 of Regulation D rather than to 
Rule 262 directly. The disqualification provisions of Rule 505 are 
substantially identical to Rule 262 (and in effect incorporate it by 
reference), but adapt it to the private placement context. In 
particular, because Rule 505 transactions do not involve traditional 
underwritten public offerings but may involve the use of compensated 
placement agents and finders, Rule 505 substitutes ``any

[[Page 31521]]

person that has been or will be paid (directly or indirectly) 
remuneration for solicitation of purchasers'' for the ``underwriters'' 
that are covered by Rule 262.\19\ Since Rule 506 transactions, like 
transactions under Rule 505, would not involve traditional underwritten 
public offerings but may involve the use of compensated placement 
agents and finders, we propose to include the current Rule 505 standard 
described above in the proposed new rule.\20\
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    \19\ This is achieved by applying the Rule 262 disqualification 
standards but redefining the term ``underwriter,'' for purposes of 
Rule 505, to mean ``any person that has been or will be paid 
(directly or indirectly) remuneration for the solicitation of 
purchasers.'' Rule 505(b)(iii)(B), 17 CFR 230.505(b)(iii)(B). See 
Proposed Rule 506(c)(1).
    \20\ The current disqualification provisions of Rule 505 apply 
to any ``partner, director or officer'' of a compensated solicitor. 
We propose to incorporate the references to directors and officers, 
add a reference to managing members and modify the reference to 
include only general partners. When the current rules were adopted, 
financial intermediaries were often structured as general 
partnerships and the possibility of their having limited partners 
may not have been considered. We see no policy basis for imposing 
disqualification on a partnership based on violations of law by its 
limited partners, and accordingly propose to clarify that only 
general partners would be covered.
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    We also propose to incorporate and clarify the applicability of the 
second sentence of current Rule 262(a)(5), under which events relating 
to certain affiliated issuers are not disqualifying if they pre-date 
the affiliate relationship.\21\ Under the existing rule, orders, 
judgments and decrees entered against affiliated issuers before the 
affiliation arose do not disqualify an offering if the affiliated 
issuer is not (i) in control of the issuer or (ii) under common 
control, together with the issuer, by a third party that controlled the 
affiliated issuer at the time such order, judgment or decree was 
entered. The proposed rule would clarify that this exclusion applies to 
all potentially disqualifying events that pre-date the affiliation.\22\ 
We believe this is appropriate because the current placement of this 
language within paragraph (5) of Rule 262 may incorrectly suggest that 
it applies only to Postal Service false representation orders.
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    \21\ The sentence provides: ``The entry of an order, judgment or 
decree against any affiliated entity before the affiliation with the 
issuer arose, if the affiliated entity is not in control of the 
issuer and if the affiliated entity and the issuer are not under 
common control of a third party who was in control of the affiliated 
entity at the time of such entry does not come within the purview of 
this paragraph (a) of this section.'' 17 CFR 230.262(a)(5).
    \22\ See Proposed Rule 506(c)(3).
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    Given the legislative mandate to develop rules ``substantially 
similar'' to current Rule 262, however, we are not proposing to make 
other changes in the classes of persons that would be covered by the 
new disqualification rules. For example, we are proposing that 
beneficial owners of 10% of any class of an issuer's equity securities 
would be covered,\23\ as they are under current Rule 262, rather than 
20% holders, as in the 2007 Proposal.\24\ For the same reason, we are 
proposing that all the officers of issuers and compensated solicitors 
of investors be covered, as provided in current rules, rather than only 
executive officers, as provided in the 2007 Proposal.\25\
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    \23\ See Proposed Rule 506(c)(1) and 17 CFR 230.262(b).
    \24\ See 2007 Proposal.
    \25\ See 2007 Proposal, Proposed Rule 506(c)(1).
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    With the extension of bad actor disqualifications to Rule 506 
offerings, we are, however, concerned that continued use of the term 
``officer'' may present significant challenges, particularly as applied 
to financial intermediaries. The term ``officer'' is defined under 
Securities Act Rule 405 to include ``a president, vice president, 
secretary, treasurer or principal financial officer, comptroller or 
principal accounting officer, and any person routinely performing 
corresponding functions with respect to any organization.'' \26\ 
Financial institutions that are acting as placement agents may have 
large numbers of employees that would come within this definition, many 
of whom would not have any involvement with any particular offering, 
but all of whom would be covered persons for purposes of 
disqualification. Issuers could potentially devote substantial amounts 
of time and incur significant costs in making factual inquiries.\27\ 
Accordingly, we are requesting comment on whether disqualification 
should be reserved for executive officers \28\--those performing 
policy-making functions for a covered person--whether disqualification 
should apply only to officers actually involved with the offering or 
limited in some other way, or whether using the same broad category 
employed in the existing rules would be justified because it would 
provide a greater degree of investor protection.
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    \26\ 17 CFR 230.405.
    \27\ While some types of disqualifying events are readily 
ascertainable from public records, others are not. See note 81 and 
accompanying text.
    \28\ The term ``executive officer'' is defined in Rule 501(f) of 
Regulation D (and in Rule 405) to mean a company's ``president, any 
vice president * * * in charge of a principal business unit, 
division or function (such as sales, administration or finance), any 
other officer who performs a policy making function or any other 
person who performs similar policy making functions.'' 17 CFR 
230.501(f), 230.405.
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    We are also not proposing to cover the investment advisers of 
issuers, or the directors, officers, general partners, or managing 
members of such investment advisers. These persons are not currently 
covered under Rule 262 of Regulation A. However, a significant 
percentage of issuers in Rule 506 offerings are funds,\29\ and in many 
fund structures, the investment adviser and the individuals that 
control it are the real decision-makers for the fund. For that reason, 
it may be appropriate for investment advisers and their directors, 
officers, general partners and managing members to be covered by the 
bad actor disqualification provisions of Rule 506, at least for issuers 
that identify themselves as ``pooled investment funds'' in Item 4 of 
Form D, or that are registered as investment companies under the 
Investment Company Act of 1940,\30\ are ``private funds'' as defined in 
Section 202(a)(29) of the Investment Advisers Act of 1940 \31\or that 
elect to be regulated as ``business development companies'' (or 
``BDCs''),\32\ and perhaps for other types of issuers.
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    \29\ For the twelve months ended September 30, 2010, 
approximately 24% of issuers in transactions claiming a Rule 506 
exemption described themselves as ``pooled investment funds.''
    \30\ 15 U.S.C. 80a-1 through 80a-52.
    \31\ A ``private fund'' is defined as ``an issuer that would be 
an investment company, as defined in Section 3 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-3), but for section 3(c)(1) or 
3(c)(7) of that Act.''
    \32\ A BDC is a closed-end investment company that has elected 
to be subject to Sections 55 through 65 of the Investment Company 
Act and that is operated for the purpose of investing in and making 
significant managerial assistance available to certain types of 
companies. See Investment Company Act Sec.  2(a)(48), 15 U.S.C. 80a-
2(48) and note 99.
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Request for Comment
    (1) Is it appropriate to apply the provisions of Section 926 of the 
Dodd-Frank Act to all of the persons covered under existing Rule 262, 
as proposed? Should other categories of persons be included?
    (2) Should we exclude any of the proposed covered persons for 
purposes of disqualification? If so, please explain why such persons 
should not subject an offering to disqualification, providing as much 
factual support for your views as possible.
    (3) Is it appropriate to include the managing members of limited 
liability companies for purposes of disqualification in Rule 506(c), as 
proposed?
    (4) Is the proposed coverage of 10% shareholders (which mirrors 
current rules) appropriate? Or should our disqualification provisions 
cover only persons that actually control the issuer (or that hold a 
larger percentage of its equity)? Should we increase the

[[Page 31522]]

threshold share ownership for covered persons to 20%, or to some other 
threshold of ownership (e.g., 25% or a majority)? If we adopted a 
requirement based on actual control, would issuers be able to easily 
determine which shareholders were within the scope of the rule? \33\ 
Should the requirements be different for privately-held companies as 
opposed to companies whose stock trades in the public markets? If so, 
should the ownership thresholds be higher or lower for private 
companies as compared to public companies?
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    \33\ We would look to the definition of ``control'' contained in 
Securities Act Rule 405, id.
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    (5) We intend that the terms used in the proposed rules would have 
the meanings provided in Rule 405. Would it be helpful to incorporate 
the relevant definitions as part of the rules?
    (6) Is it appropriate, as proposed, to provide an exception from 
disqualification for events relating to certain affiliates that 
occurred before the affiliation arose, based on the current standard 
set forth in Rule 262(a)(5)?
    (7) Should we replace the reference to ``officers,'' which is based 
on current Rule 262, with a reference to ``executive officers'' (using 
the definition provided in Rule 501(f) \34\), at least as it applies to 
covered persons other than the issuer? In many organizations, titular 
officers such as vice presidents may not play an executive or policy-
making role. Would it be more appropriate to limit coverage to 
individuals with policy-making responsibilities, as would result from 
using the term ``executive officer''?
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    \34\ 17 CFR 230.501(f). The same definition appears in Rule 405.
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    (8) Alternatively, with respect to officers of covered persons 
other than the issuer, should we limit coverage to those who are 
actually involved with or devote time to the relevant offering, or to 
some other specified subgroup of officers--perhaps together with 
executive officers?
    (9) Would it be appropriate to expand the coverage of our rule to 
include investment advisers and their directors, officers, general 
partners, and managing members? If we were to do so, should such an 
extension apply only for particular types of issuers, such as those 
that identify themselves as ``pooled investment funds'' on Form D, or 
for registered ``investment companies,'' ``private funds'' and BDCs? Or 
should it apply for all issuers?

C. Disqualifying Events

    After covered persons, the other critical element of bad actor 
disqualification is the list of events and circumstances that give rise 
to disqualification. In this regard, our proposal would implement the 
Dodd-Frank Act requirement that our rules be substantially similar to 
existing Regulation A and also include the specific events listed in 
Section 926(2) of the Dodd-Frank Act.
    The proposed rule would include the following types of 
disqualifying events:
     Criminal convictions;
     Court injunctions and restraining orders;
     Final orders of certain state regulators (such as state 
securities, banking and insurance regulators) and Federal regulators;
     Commission disciplinary orders relating to brokers, 
dealers, municipal securities dealers, investment advisers and 
investment companies and their associated persons;
     Suspension or expulsion from membership in, or suspension 
or bar from associating with a member of, a securities self-regulatory 
organization;
     Commission stop orders and orders suspending a Regulation 
A exemption; and
     U.S. Postal Service false representation orders.
    We discuss each of these in turn below.
    1. Criminal convictions. Section 926(2)(B) of the Dodd-Frank Act 
provides for disqualification if any covered person ``has been 
convicted of any felony or misdemeanor in connection with the purchase 
or sale of any security or involving the making of any false filing 
with the Commission.'' This essentially mirrors the language of current 
Rule 262(a)(3), covering criminal convictions of issuers, and Rule 
262(b)(1), covering criminal convictions of other covered persons. 
Section 926(2)(B) differs from Rule 262, however, in two ways.
    First, unlike Rule 262(b)(1), Section 926(2)(B) does not address 
criminal convictions ``arising out of the conduct of the business of an 
underwriter, broker, dealer, municipal securities dealer or investment 
adviser.'' We are not aware of any legislative history that explains 
why this type of conviction was not mentioned in Section 926(2)(B). 
However, because such convictions are covered in existing Rule 262, we 
believe that rules ``substantially similar'' to the existing rules 
should cover them. Accordingly, the proposed revision to Rule 506 would 
cover such convictions, and would add a reference to convictions 
arising out of the conduct of the business of a person compensated for 
soliciting purchasers, as provided in current Rule 505(b)(2)(iii).\35\
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    \35\ See Proposed Rule 506(c)(1)(i).
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    Second, Section 926(2)(B) does not include any express time limit 
on convictions that trigger disqualification. By contrast, Rule 262 
provides a five-year look-back for criminal convictions of issuers and 
a ten-year look-back for criminal convictions of other covered persons 
(i.e., only convictions handed down within the preceding five or ten 
years count, and older convictions are no longer disqualifying).\36\ 
There currently are time limits on criminal convictions, as with other 
disqualifications, and we are therefore proposing the same five-year 
and ten-year look-back periods that apply under current Rule 262. We 
are soliciting comment on whether a longer, or permanent, look-back 
period would be appropriate for either issuers or other covered 
persons.
---------------------------------------------------------------------------

    \36\ The look-back period is to the date of the conviction, not 
to the date of the conduct that led to the conviction. This is 
similarly the case with the other look-back periods discussed below; 
the measurement date is the date of the relevant order or other 
sanction, not the date of the conduct that was the subject of the 
sanction.
---------------------------------------------------------------------------

    We are also soliciting comment on whether there are circumstances 
in which the rules for disqualification of entities should focus on the 
beneficial owners and management of such entities at the time of the 
disqualifying event, rather than the legal entities themselves, and 
provide for different treatment of entities that have undergone a 
change of control since the occurrence of the disqualifying event. This 
would be a broader application of the principle underlying existing 
Rule 262(a)(5) (reflected in the proposal in Rule 506(c)(3), discussed 
above), under which events relating to certain affiliates are not 
disqualifying if they pre-date the affiliate relationship.
    For purposes of establishing the relevant look-back periods, we 
propose to measure from the date of the sale for which exemption is 
sought. Rule 262 of Regulation A currently measures from the date of 
the requisite filing with the Commission, which occurs before any offer 
of securities can be made under that exemption. This approach is not 
appropriate for Rule 506 offerings because no filing is required to be 
made with the Commission before an offer or sale is made in reliance on 
Regulation D.\37\ Current Rule 505, which effectively applies Rule 262 
in a Regulation D context, addresses this issue by substituting ``the 
first sale of securities under this section'' for the Rule 262 
reference to filing a document with the

[[Page 31523]]

Commission.\38\ For purposes of Rule 506, we are proposing to refer to 
the date of the relevant sale, rather than the date of first sale, 
because we believe it creates a more appropriate look-back period for 
offerings that may continue for more than one year. Multiyear offerings 
are not uncommon under Rule 506.\39\
---------------------------------------------------------------------------

    \37\ Under Rule 503, a notice on Form D is not required to be 
filed until 15 days after the first sale. 17 CFR 230.503.
    \38\ See 17 CFR 230.505(b)(2)(iii)(A) and 17 CFR 230.602(b)(2).
    \39\ Of the 16,027 initial Form D filings claiming a Rule 506 
exemption in the twelve months ended September 30, 2010, 3,812 (or 
24%) indicated that the offering was expected to last more than a 
year.
---------------------------------------------------------------------------

Request for Comment
    (10) Are the proposed look-back periods for criminal convictions 
(five years for issuers, their predecessors and affiliated issuers; ten 
years for all other covered persons) appropriate? Or should we provide 
for a longer period? Should the look-back period for convictions be 
aligned with the ten-year look-back period required in some instances 
under Section 926 of the Dodd-Frank Act?
    (11) Are there circumstances where a longer period of 
disqualification, even lifetime disqualification for individuals or 
permanent disqualification for entities, would be appropriate?
    (12) Should our rules provide different disqualification periods 
for individuals and entities? In particular, should we provide 
different treatment under our rules (e.g., a shorter look-back period 
or an exception from disqualification) for entities that have undergone 
a change of control since the occurrence of a disqualifying event? If 
so, how should change of control be defined for these purposes?
    (13) Is the scope of the proposed provisions on criminal 
convictions sufficiently broad? In connection with the 2007 Proposal 
\40\ and in an advance comment letter on this rulemaking,\41\ the North 
American Securities Administrators Association (``NASAA'') has urged 
that, in the interest of investor protection and uniformity with state 
laws, disqualification should apply to a broader range of criminal 
convictions. NASAA suggested that disqualification should arise from 
any criminal conviction involving fraud or deceit, as provided in the 
Model Accredited Investor Exemption and the Uniform Securities Act of 
2002 adopted by many states, as well as ``the making of a false filing 
with a state, or involving a commodity future or option contract, or 
any aspect of a business involving securities, commodities, 
investments, franchises, insurance, banking or finance.'' \42\ Would it 
be appropriate for the new rules to impose disqualification for some or 
all of these other offenses, even though Section 926 of the Dodd-Frank 
Act does not require it?
---------------------------------------------------------------------------

    \40\ See NASAA Comment Letter (Oct. 26, 2007) (available at 
http://www.sec.gov/comments/s7-18-07/s71807-57.pdf).
    \41\ See NASAA Advance Comment Letter (Nov. 4, 2010) (available 
at http://www.sec.gov/comments/df-title-ix/regulation-d-disqualification/regulationddisqualification-1.pdf).
    \42\ See Unif. Sec. Act Sec.  508 (amended 2002) (available at 
http://www.abanet.org/buslaw/newsletter/0009/materials/uniformsecure.pdf).
---------------------------------------------------------------------------

    (14) Under current rules and under our proposal, disqualification 
arises only from actions taken by U.S.-based courts and regulators. 
From the standpoint of disqualification, is conduct outside the United 
States as relevant as conduct within the United States? Should 
corresponding convictions in foreign courts trigger disqualification on 
the same basis as U.S. criminal convictions? Or are there reasons not 
to treat foreign criminal convictions on a par with U.S. Federal or 
state criminal convictions? What would be the impact on issuers and 
covered persons if the Commission included foreign court convictions as 
a disqualifying event under the proposed disqualification provision?
    2. Court injunctions and restraining orders. Under current Rule 
262(a)(4), an issuer is disqualified from reliance on Regulation A if 
it, or any predecessor or affiliated issuer, is subject to a court 
injunction or restraining order against engaging in or continuing any 
conduct or practice in connection with the purchase or sale of 
securities or involving the making of a false filing with the 
Commission.\43\ Similarly, under current Rule 262(b)(2), an offering is 
disqualified if any other covered person is subject to such a court 
injunction or restraining order, or to one ``arising out of the conduct 
of the business of an underwriter, broker, dealer, municipal securities 
dealer or investment adviser.'' \44\ Disqualification is triggered by 
temporary or preliminary injunctions and restraining orders that are 
currently in effect, and by permanent injunctions and restraining 
orders entered within the last five years.\45\
---------------------------------------------------------------------------

    \43\ See 17 CFR 230.262(a)(4).
    \44\ 17 CFR 230.262(b)(2).
    \45\ The look-back period means that disqualification no longer 
arises from an injunction or restraining order after the requisite 
amount of time has passed, even though the injunction or order is 
still in effect. Because disqualification is triggered only when a 
person ``is subject to'' a relevant injunction or order, injunctions 
and orders that have expired or are otherwise no longer in effect 
are not disqualifying, even if they were issued within the relevant 
look-back period.
---------------------------------------------------------------------------

    The proposed provision would reflect the substance of these two 
provisions in a slightly simplified format.\46\ To align with current 
Rule 505, the proposed rule would cover orders arising out of the 
conduct of business of paid solicitors of purchasers of securities.
---------------------------------------------------------------------------

    \46\ See Proposed Rule 506(c)(1)(ii).
---------------------------------------------------------------------------

Request for Comment
    (15) We note that certain regulatory orders and bars are required 
to have a ten-year look-back period under Section 926(2)(a)(ii) of the 
Dodd-Frank Act (discussed below). Is it appropriate to limit the look-
back period for court injunctions and restraining orders to five years, 
as proposed, based on current Rule 262? Or should we adopt a ten-year 
look-back period for injunctions and restraining orders? Should any 
disqualifying events, criminal and otherwise, result in permanent 
disqualification from participating in Rule 506 offerings?
    (16) Alternatively, should we establish different look-back periods 
for different types of court orders and injunctions and restraining 
orders? For example, should we provide for a ten-year look-back for 
court injunctions and restraining orders involving fraudulent, 
manipulative or deceptive conduct, and a five-year look-back period for 
other court injunctions and restraining orders? If we did this, would 
it be easy to determine which category applied to a given court 
injunction or order? Should we provide different look-back periods for 
Federal and state court injunctions and restraining orders?
    (17) Under current rules and under our proposal, a court injunction 
or restraining order issued more than five years before the relevant 
sale is no longer disqualifying, even if it is still in effect. Is it 
appropriate that court injunctions and restraining orders should cease 
to be disqualifying after a stated time, as proposed, or should 
disqualification continue for as long as the triggering injunction or 
order continues in effect (even if it is permanent)?
    (18) Under our proposal, disqualification for court injunctions and 
restraining orders would be narrower in scope and would have a shorter 
look-back period than disqualification for regulatory orders (discussed 
in C.3 below).\47\ The

[[Page 31524]]

treatment of court injunctions and restraining orders would reflect the 
position under current rules, while the treatment of regulatory orders 
is mandated by Section 926 of the Dodd-Frank Act. Should the two 
provisions be conformed? Or are there policy or other reasons that 
support differentiating between them?
---------------------------------------------------------------------------

    \47\ For example, under the proposal and current Rule 262, court 
injunctions and restraining orders are disqualifying only if they 
relate to conduct or practices (i) in connection with the purchase 
or sale of a security, (ii) involving making a false filing with the 
Commission or (iii) arising out of the conduct of certain 
businesses. The proposed provisions for regulatory orders, discussed 
below, are broader, and would impose disqualification for any final 
order based on a violation of law that prohibits fraudulent, 
manipulative or deceptive conduct. As a result, under the proposal 
certain types of orders (e.g., a ban on serving as an officer or 
director of a public company) would be disqualifying if issued by a 
regulator but may not be disqualifying if issued by a court.
---------------------------------------------------------------------------

    (19) Should injunctions and orders of foreign courts have no 
consequences for disqualification, as proposed? Or should they trigger 
disqualification on the same basis as U.S. Federal and state court 
injunctions and orders, or on some other basis? Why? Should foreign 
court injunctions and orders have to meet additional criteria to be 
considered for disqualification purposes? If so, what should those 
criteria be?
    3. Final orders of certain regulators. Section 926(2)(A) of the 
Dodd-Frank Act provides that Commission rules for Rule 506 offerings 
must disqualify any covered person that A) is subject to a final order 
of a State securities commission (or an agency or officer of a State 
performing like functions), a State authority that supervises or 
examines banks, savings associations, or credit unions, a State 
insurance commission (or an agency or officer of a State performing 
like functions), an appropriate Federal banking agency, or the National 
Credit Union Administration, that--
    (i) Bars the person from--
    (I) Association with an entity regulated by such commission, 
authority, agency, or officer;
    (II) Engaging in the business of securities, insurance, or banking; 
or
    (III) Engaging in savings association or credit union activities; 
or
    (ii) Constitutes a final order based on a violation of any law or 
regulation that prohibits fraudulent, manipulative, or deceptive 
conduct within the 10-year period ending on the date of filing of the 
offer or sale.
    Section 926(2)(A) is identical to Section 15(b)(4)(H) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') \48\ and Section 
203(e)(9) of the Investment Advisers Act of 1940 (the ``Advisers 
Act),\49\ except that Section 926(2)(A)(ii) contains a ten-year look-
back period for final orders based on violations of statutes that 
prohibit fraudulent, manipulative and deceptive conduct, and the 
Exchange Act and Advisers Act provisions have no express time limit for 
such orders. These existing provisions form a basis on which the 
Commission may censure, suspend or revoke the registration of brokers, 
dealers and investment advisers based on financial industry bars and 
final regulatory orders issued against them by specified regulators, in 
the context of statutory provisions that provide for such sanctions 
based on a wide variety of other events.\50\
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78o(b)(4)(H).
    \49\ 15 U.S.C. 80b(e)(9).
    \50\ For example, Section 15(b)(4) authorizes the Commission to 
sanction registered brokers and dealers for such matters as false 
statements in Commission filings; certain U.S. or foreign criminal 
convictions; certain court injunctions, willful violations of the 
securities laws or the Commodity Exchange Act, or the rules and 
regulations issued thereunder; aiding, abetting, counseling or 
procuring such a violation or failing adequately to supervise 
someone who committed such a violation; and professional bars issued 
by the Commission or non-U.S. financial regulatory authorities. See 
15 U.S.C. 78o(b)(4). Section 203(f) authorizes the Commission to 
sanction registered investment advisers for similar matters. See 15 
U.S.C. 80b-3(f).
---------------------------------------------------------------------------

    We propose to codify Section 926(2)(A) almost verbatim as new 
paragraph (c)(1)(iii) of Rule 506, with clarifying changes intended to 
eliminate potential ambiguities and make the new rule easier to apply.
    With respect to bars, the proposed rule would provide that the 
order must bar the person ``at the time of [the] sale'' from one or 
more of the specified activities. This would clarify that a bar is 
disqualifying only for as long as it has continuing effect.\51\ Thus, 
for example, a person who was barred by a state regulator from 
association with a broker-dealer for three years would be disqualified 
for three years. A person who was barred indefinitely, with the right 
to apply to reassociate after three years, would be disqualified until 
such time as he or she successfully applied to reassociate, assuming 
that the bar had no continuing effect after reassociation. (This would 
be true even if the bar order were also a ``final order based on a 
violation of any law or regulation that prohibits fraudulent, 
manipulative, or deceptive conduct,'' as contemplated by Dodd-Frank 
Section 926(2)(A)(ii), because the person would not be considered to be 
``subject to'' an order that had no continuing effect.)
---------------------------------------------------------------------------

    \51\ This accords with the Commission's current interpretive 
position on Rule 262. See Release No. 33-6289 (Feb. 13, 1981) [46 FR 
13505, 13506 (Feb. 23, 1981)] (Commission consistently has taken the 
position that a person is ``subject to'' an order under section 
15(b), 15B(a) or (c) of the Exchange Act or section 203(e) or (f) of 
the Investment Advisers Act only so long as some act is being 
performed (or not performed) pursuant to the order).
---------------------------------------------------------------------------

    Also, recognizing that no Commission filing is required in a 
Regulation D offering before an offer or sale, we propose to measure 
the ten-year period required under 926(2)(A)(ii) from the date of the 
relevant sale, as would be the case for other look-back periods in the 
proposed rule. Finally, we propose to clarify that the orders described 
in Section 926(2)(A)(ii) must have been ``entered'' within the relevant 
ten-year period, so it is clear that we are measuring from the date of 
the order and not the date of the underlying conduct.
Request for Comment
    (20) Should the rules clarify what constitutes a ``bar''? For 
example, should the rule state that all orders that have the practical 
effect of a bar (prohibiting a person from engaging in a particular 
activity) be treated as bars, even if the relevant order is not called 
a bar?
    (21) Under current interpretations of Rule 262, bars are 
disqualifying for as long as they have continuing effect, which means 
that permanent bars (for example, an ``unqualified'' bar, which does 
not contain any proviso for re-application after a specified period) 
are permanently disqualifying. By contrast, most other disqualifying 
events operate only for a specified period (for example, criminal 
convictions give rise to a disqualification period of five or ten 
years). Would it be appropriate to provide a cut-off date (for example, 
ten years), for permanent bars? \52\
---------------------------------------------------------------------------

    \52\ If we established such a cut-off date, persons subject to a 
permanent bar would still be prevented from engaging in the barred 
conduct. (Someone permanently barred from the securities industry 
would still not be permitted to act as a placement agent, for 
example.) The difference would be that their presence or 
participation in an offering in some otherwise permissible 
capacity--as, for example, a 10% shareholder of the issuer--would 
not be disqualifying.
---------------------------------------------------------------------------

    Final Orders. The Dodd-Frank Act does not specify what should be 
deemed to constitute a ``final order'' that triggers disqualification. 
The term ``final'' suggests that only orders issued at the conclusion 
of a matter should be considered, but beyond that, it is not clear 
whether other procedural or substantive criteria should be applied.
    As noted above, Section 15(b)(4)(H) of the Exchange Act and Section 
203(e)(9) of the Advisers Act contain language identical to Section 
926(2)(A), including the use of the term ``final order.'' The 
Commission has not provided a definitive interpretation of ``final 
order'' in those contexts either, although it has approved forms for 
broker-dealers and their associated persons that include such a 
definition.\53\ For purposes of

[[Page 31525]]

registration of broker-dealers and associated persons, the Financial 
Industry Regulatory Authority (``FINRA'') collects data regarding 
disciplinary actions, including relevant final orders, through its 
uniform registration Forms BD, U4, U5 and U6.\54\ In that context, 
FINRA has defined ``final order'' to mean ``a written directive or 
declaratory statement issued by an appropriate federal or state agency 
* * * pursuant to applicable statutory authority and procedures, that 
constitutes a final disposition or action by that federal or state 
agency.'' \55\
---------------------------------------------------------------------------

    \53\ See Release Nos. 34-48161 (Jul. 10, 2003) [68 FR 42444] 
(available at http://www.sec.gov/rules/sro/nasd/34-48161.pdf) and 
34-49779 (May 27, 2004) [69 FR 32084] (available at http://www.sec.gov/rules/sro/nyse/34-49779.pdf).
    \54\ Form BD is the Uniform Application for Broker-Dealer 
Registration, used by entities to register as broker-dealers. Form 
U4 is the Uniform Application for Securities Industry Registration 
or Transfer, used by broker-dealers to register associated persons. 
Form U5 is the Uniform Termination Notice for Securities Industry 
Registration, used by broker-dealers to report the termination of an 
associated person relationship. Form U6 is the Uniform Disciplinary 
Action Reporting Form, used by SROs and state and federal regulators 
to report disciplinary actions against broker-dealers and associated 
persons. Information on disciplinary history collected via these 
forms (as well as other information) can be reviewed through 
BrokerCheck. See note 81 for more information about BrokerCheck.
    \55\ See ``Explanation of Terms'' applicable to FINRA Forms U4, 
U5 and U6 (available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p116979.pdf).
---------------------------------------------------------------------------

    We also understand that at least some state securities laws may 
provide that orders do not become ``final'' unless the state securities 
administrator makes findings of fact and conclusions of law on a record 
in accordance with the state administrative procedure act and files a 
certified copy of the findings with a clerk of a court of competent 
jurisdiction, as provided in the Uniform Securities Act of 2002.\56\ We 
are not aware that the laws covering orders of Federal and state 
banking, insurance, and credit union regulators, which are required to 
be covered in our Rule 506 disqualification rules by the Dodd-Frank 
Act, provide guidance on which of their orders should be regarded as 
``final orders.''
---------------------------------------------------------------------------

    \56\ See Unif. Sec. Act Sec.  604 (2002).
---------------------------------------------------------------------------

    Our preliminary view is that including a definition of ``final 
order'' in the rule would help issuers and other market participants 
determine whether any given regulatory action is disqualifying (and 
conversely, not including a definition could give rise to uncertainty 
in that regard). We are therefore proposing to amend Rule 501 of 
Regulation D to add a definition of ``final order'' for purposes of bad 
actor disqualification.\57\ The proposed definition is based on the 
FINRA definition, and therefore is consistent with current practices 
implementing statutory language in the Exchange Act that is identical 
to Section 926. We believe that this definition is sufficiently broad 
to cover the different types of regulatory orders that might be 
relevant, but we are soliciting comment on that question.
---------------------------------------------------------------------------

    \57\ See Proposed Rule 501.
---------------------------------------------------------------------------

    The proposal defines ``final order'' to mean the final steps taken 
by a regulator. In at least some cases, however, judicial appeal of a 
regulatory order will be available. It may be appropriate for us to 
define ``final order'' to mean an order for which all rights of appeal 
have terminated or been exhausted. Given that the appeals process could 
take several years, however, we are concerned that such an approach 
could compromise investor protection. We are soliciting comment on 
whether and how to address rights of judicial appeal. We are also 
soliciting comment more generally on whether it is appropriate to 
include a definition of ``final order'' in the rule.
Request for Comment
    (22) Is it appropriate, as proposed, to define the term ``final 
order'' for purposes of our disqualification rules? What general 
effects would a defined term or lack of a defined term impose on 
issuers and other covered persons?
    (23) Is the proposed definition of ``final order'' (which is based 
on the FINRA definition) appropriate?
    (24) Should we use a definition based on the Uniform Securities Act 
interpretation of final order instead? Alternatively, should we add 
concepts from that definition (for example, the requirement that the 
regulator have made findings of fact) to the proposed definition?
    (25) Should an order be considered final only if it is a ``final 
order'' within the meaning of the law that governed its issuance? What 
if the law lacks clear guidance on what constitutes a final order?
    (26) Should we consider an order final if it is the conclusion of 
an action by the relevant regulator? Or should only non-appealable 
orders be considered final, so that disqualification would not apply 
until all appeals, including potential judicial appeals, are exhausted? 
Would investor protection be compromised if judicial appeals are taken 
into account?
    (27) Should specified minimum criteria apply in determining what 
constitutes a final order? For example, should we include only orders 
issued after a proceeding that affords the respondent certain due 
process rights, such as notice, a right to be heard, and a requirement 
for a record with written findings of fact and conclusions of law? 
Should settled matters be treated the same as non-settled matters in 
this respect?
    (28) Should the authority that issues the relevant order be asked 
to express a view about whether the particular action is a final order 
for purposes of our disqualification rules? Would such authorities be 
authorized or be willing to express such a view? Should the Commission 
defer to the interpretation of the regulator that issued the order to 
determine whether an order is final?
    Fraudulent, manipulative or deceptive conduct. Section 
926(2)(A)(ii) of the Dodd-Frank Act provides that disqualification must 
result from final orders of the relevant regulators that are ``based on 
a violation of any law or regulation that prohibits fraudulent, 
manipulative, or deceptive conduct.'' We have received advance comment 
urging us to ``differentiate between technical violations and 
intentional or other more egregious conduct,'' \58\ and to impose 
disqualification only with respect to the latter.
---------------------------------------------------------------------------

    \58\ Advance Comment Letter of Managed Funds Ass'n (Sept. 22, 
2010) (available at http://www.sec.gov/comments/df-title-iv/exemptions/exemptions-16.pdf).
---------------------------------------------------------------------------

    In light of the specificity of the language of Section 926, we are 
not proposing to include standards or guidance with respect to this 
requirement. We are aware, however, that any rule we adopt would apply 
to orders issued by regulators under a wide variety of different state 
and Federal laws and regulations. We understand that there may be 
concerns that this language could be interpreted or applied very 
broadly, and in particular that under some state laws and regulations, 
conduct that some may consider to be a ``technical'' violation might be 
defined as fraudulent, manipulative or deceptive.\59\ We are, 
therefore, requesting comment on whether we should set forth minimum 
standards for this provision.
---------------------------------------------------------------------------

    \59\ See Advance Comment Letter of Investment Program Ass'n 
(Mar. 2, 2011) (available at http://www.sec.gov/comments/df-title-ix/regulation-d-disqualification/regulationddisqualification-3.pdf). 
See also Record of Proceedings of 29th Annual SEC Government-
Business Forum on Small Business Capital Formation, at 18 (Nov. 18, 
2010) (remarks of Deborah Froling) (available at http://www.sec.gov/info/smallbus/sbforumtrans-111810.pdf).
---------------------------------------------------------------------------

Request for Comment
    (29) Should we provide guidance on what constitutes ``fraudulent, 
manipulative or deceptive conduct'' for purposes of bad actor 
disqualification under Rule 506? If so, should we provide such guidance 
by rule, and what should the rule say?

[[Page 31526]]

    (30) Should disqualifying conduct be required to be fraudulent, 
manipulative or deceptive at common law or under some other standard? 
Should scienter be required?
    (31) Should the Commission defer to the regulator that issued the 
order with respect to the determination of whether conduct is 
fraudulent, manipulative or deceptive?
    (32) Should the authority that issues the relevant order be asked 
to express a view about whether the particular violation is the sort of 
violation that should give rise to disqualification under Rule 506? 
Should the Commission defer to the interpretation of the regulator on 
that issue? In that connection, should we provide greater scope for a 
regulator to determine that disqualification should not arise (in 
effect, a waiver of disqualification)?

Orders of Other Regulators

    As mandated by Section 926 of the Dodd-Frank Act, bad actor 
disqualification would result under our proposed rule from final orders 
issued within a ten-year period by the state and Federal regulators 
identified in Section 926(2)(A) of the Dodd-Frank Act, a list that does 
not include the Commission or the Commodity Futures Trading Commission 
(``CFTC''). We are considering and soliciting comment on whether orders 
of the Commission and the CFTC should have the same effect for 
disqualification purposes as the orders of these other regulators.
    Some types of orders issued by the Commission are covered by 
current bad actor disqualification rules, and some are not.\60\ Most 
significantly, orders issued in stand-alone Commission cease-and-desist 
proceedings \61\ are not disqualifying under current rules.\62\ The 
reason for this omission appears to be largely historical: The 
Commission did not have authority to bring cease-and-desist proceedings 
when Rule 262 was originally adopted, and the rule has not been amended 
to take account of that authority.\63\ Unless our disqualification 
rules cover Commission cease-and-desist orders, entities and 
individuals outside the securities industry would be subject to bad 
actor disqualification for Commission actions only if those persons are 
subject to a court order. In the 2007 Proposal, we proposed to include 
Commission and certain other cease-and-desist orders as disqualifying 
events in the Regulation D bad actor provisions.\64\ Some commenters 
opposed this proposal on the basis that it would be overinclusive and 
could result in disqualification being imposed for minor technical 
violations.\65\ We are soliciting comment as to whether Commission 
cease-and-desist orders may be an appropriate basis for 
disqualification and, if so, whether the rules should differentiate 
among different types of orders.
---------------------------------------------------------------------------

    \60\ Certain Commission orders involving regulated entities in 
the securities industry (e.g., broker-dealers and investment 
advisers) and their associated persons already give rise to 
disqualification under Regulation A, Rule 505 and Regulation E as 
currently in effect. See Rule 262(b)(3) and Rule 602(b)(5) and 
(c)(3), 17 CFR 230.262(b)(5) and 230.602(c)(3).
    \61\ In cease-and-desist proceedings, the Commission can issue 
orders against ``any person,'' including entities and individuals 
outside the securities industry, imposing sanctions such as 
penalties, accounting and disgorgement or officer and director bars. 
In contrast, administrative proceedings are generally limited to 
regulated entities and their associated persons.
    \62\ Current rules also exclude other types of Commission 
actions. For example, the Commission has authority under Section 
9(b) of the Investment Company Act to bring proceedings against 
``any person'' and may impose investment company bars, civil 
penalties and disgorgement under Sections 9(d) and (e) of the 
Investment Company Act. 15 U.S.C. 80a-9(b), (d) and (e). The 
Commission also has authority under Rule 102(e) of its Rules of 
Practice to censure persons (such as accountants and attorneys) who 
appear or practice before it, or to deny them the privilege of 
appearing before the Commission temporarily or permanently. 17 CFR 
201.102(e). Orders under these sections are not currently 
disqualifying.
    \63\ The disqualification provisions of Rule 505 and Regulation 
E are derived from Rule 262 and reflect the same omission.
    \64\ Under the 2007 Proposal, disqualification would have arisen 
if a covered person ``is currently subject to a cease and desist 
order, entered within the last 5 years, issued under federal or 
state securities, commodities, investment, insurance, banking or 
finance laws.'' See Release 33-8828, note 13 above.
    \65\ See, e.g, Comment Letter of Managed Funds Association (Oct. 
19, 2007) (available at http://www.sec.gov/comments/s7-18-07/s71807-56.pdf); Comment Letter of G. Philip Rutledge (Oct. 5, 2007) 
(available at http://www.sec.gov/comments/s7-18-07/s71807-26.pdf).
---------------------------------------------------------------------------

    We are also considering whether orders of the CFTC are relevant for 
disqualification purposes. The CFTC is the only regulator in the 
financial services area whose orders are not directly addressed by the 
proposed rules, and the conduct that would typically give rise to CFTC 
sanctions is similar to the type of conduct that would trigger 
disqualification if it were the subject of action by a regulator in the 
securities, insurance, banking or credit union sectors. On that basis, 
we are soliciting comment as to whether CFTC orders may be an 
appropriate basis for disqualification.
    Our preliminary view is that, if we were to include Commission and 
CFTC orders in our bad actor disqualification rules, we would do so by 
adding references to the Commission, the CFTC and the commodities 
business in the paragraph of the rules that addresses ``final orders'' 
of certain regulators.\66\ In that way, any requirements the rule may 
impose on such orders and any interpretive positions that may apply 
(for example, on what constitutes a final order and what constitutes 
fraudulent, manipulative and deceptive conduct) would apply to orders 
of the Commission and the CFTC on the same basis as it did to orders of 
state and other Federal regulators covered by the rule. We would 
exclude from this provision Commission disciplinary orders that are 
already covered under current rules, and continue to treat them 
separately.\67\
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    \66\ See Proposed Rule 506(c)(1)(iii).
    \67\ See Part II.C.4 of this Release and Proposed Rule 
506(c)(1)(iv).
---------------------------------------------------------------------------

    If we were to adopt bad actor disqualification provisions that 
included orders of the Commission and the CFTC, we would also have to 
consider the impact on competition, efficiency and capital formation 
and the impact on small businesses. Our preliminary view is that adding 
new disqualifying events for Commission and CFTC orders would probably 
increase the number of offerings that would be disqualified, may enable 
the disqualification rules to more effectively screen out felons and 
other bad actors, and would contribute to creating an internally 
consistent set of rules that would treat relevant sanctions similarly 
for disqualification purposes. It may result in increased compliance 
costs for companies and funds that are seeking to raise capital. 
However, adding Commission and CFTC orders to the new rules could 
improve investor protection and reduce the risks of investment in 
private placements and limited offerings, and thereby help to reduce 
the cost or increase the availability of capital. We do not expect that 
it would affect small businesses differently than the rules we are 
proposing.
Request for Comment
    (33) Would it be appropriate to include the Commission in the list 
of regulators whose final orders are potentially disqualifying?
    (34) If so, should the rules specify that certain types of 
Commission cease-and-desist orders would always give rise to 
disqualification? For example, we could treat cease-and-desist orders 
related to violations of the anti-fraud provisions of our statutes and 
rules in this way (or perhaps those that require an element of 
scienter), by analogy to the Section 926 standard of ``fraudulent, 
manipulative or deceptive conduct.'' Similarly, we could treat cease-
and-desist orders related to

[[Page 31527]]

violations of Section 5 of the Securities Act in this way, on the basis 
that persons who violate Section 5 should lose the benefit of exemptive 
relief from Section 5 for some period of time afterward. Should other 
categories of orders be expressly covered in this way?
    (35) Conversely, should some categories of cease-and-desist orders 
(for example, those relating to recordkeeping violations) be expressly 
excluded from coverage by the rule, so they could never give rise to 
disqualification? If so, what types of orders should be excluded?
    (36) Would it be appropriate to include the CFTC in the list of 
regulators whose final orders are potentially disqualifying? If so, 
should the rules specify that certain types of CFTC orders would always 
give rise to disqualification, or that certain types would never give 
rise to disqualification? If so, what types of orders should be 
included or excluded?
    (37) If we were to cover Commission and CFTC orders in our bad 
actor disqualification rules, should we do that by simply including 
references to them in the paragraph that addresses ``final orders'' of 
certain regulators? Or should we treat orders of the Commission and/or 
the CFTC separately? If so, why?
    (38) What would the costs and benefits be of covering Commission 
and CFTC orders? Would the benefits justify the costs? How would 
extending our disqualification rules in that way affect competition, 
efficiency and capital raising? Would small businesses be affected 
differently than they would be under the rules as proposed and, if so, 
how?
    (39) Are there any other regulators whose final orders should be 
taken into account for disqualification purposes?
    (40) Under the proposal, corresponding orders of foreign securities 
regulators would not trigger disqualification. Should such orders be 
disqualifying on the same basis as U.S. Federal and state regulatory 
orders? If so, should the rules refer to any securities regulator or a 
country's principal securities regulator?
    4. Commission disciplinary orders. Rule 262(b)(3) of Regulation A 
imposes disqualification on an issuer if any covered person is subject 
to an order of the Commission ``entered pursuant to section 15(b), 
15B(a), or 15B(c) of the Exchange Act, or section 203(e) or (f) of the 
Investment Advisers Act.'' \68\ Under the cited provisions, the 
Commission has authority to order a variety of sanctions against 
registered brokers, dealers, municipal securities dealers and 
investment advisers and their associated persons, including suspension 
or revocation of registration, censure, placing limitations on their 
activities, imposing civil money penalties and barring individuals from 
being associated with specified entities and from participating in the 
offering of any penny stock. The Commission has historically 
interpreted Rule 262(b)(3) to require disqualification only for as long 
as some act is prohibited or required to be performed pursuant to the 
order, with the consequence that censures are not disqualifying, and a 
disqualification based on a suspension or limitation of activities 
expires when the suspension or limitation expires.\69\ We are seeking 
comment on whether this, as well as certain interpretive positions of 
the staff of the Division of Corporation Finance, should be codified in 
the new rule.\70\
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    \68\ 17 CFR 230.262(b)(3) (citing 15 U.S.C. 78o(f), 78o(4)(a), 
78o(4)(c), 80b-3(e) and 80b-3(f)). Section 21B(a) of the Exchange 
Act, 15 U.S.C. 78u-2(a), and Section 203(i) of the Investment 
Advisers Act, 15 U.S.C. 80b-3(i), give the Commission authority to 
impose civil money penalties in these disciplinary proceedings.
    \69\ See Release No. 33-6289 (Feb. 13, 1981) [46 FR 13505, 13506 
(Feb. 23, 1981)] (in adopting amendments to Rule 252 of Regulation A 
(the predecessor to Rule 262), the Commission noted ``In those 
instances where persons are subject to orders containing no definite 
time limitations, the Commission has consistently taken the position 
that a person is subject to an order only so long as some act is 
being performed pursuant to such order, [such as] establishing 
procedures to assure appropriate supervision of salesmen and 
reporting on such procedures.'') The staff of the Division of 
Corporation Finance has taken the same view. See Release No. 33-
6455, Question 66 (Mar. 3, 1983) [48 FR 10045, 10053 (Mar. 10, 
1983)] (in interpretive release on Regulation D, the staff advised 
that censure has no continuing force and thus censured person is not 
``subject to an order of the Commission entered pursuant to section 
15(b)'' within the meaning of Rule 505); Howard, Prim, Rice, 
Nemerovski, Canady & Pollak, SEC No-Action Letter, 1975 WL 11300 
(Jan. 8, 1975, publicly available Feb. 11, 1975) (Rule 252 does not 
comprehend a situation where an underwriter of a Regulation A 
offering has stipulated to a consent order in a Commission 
administrative proceeding providing only for a censure, with no 
suspension or other sanction); Samuel Beck, SEC No-Action Letter, 
1975 WL 11471 (May 15, 1975, publicly available June 24, 1975).
    \70\ Based on similar reasoning as has been applied to censures, 
the staff of the Division of Corporation Finance has informally 
interpreted orders to pay civil money penalties as not 
disqualifying. We seek comment on whether we should formally codify 
that position, and also on whether orders to pay money penalties 
should be disqualifying if the fines are not paid as ordered.
---------------------------------------------------------------------------

    We are not proposing substantial changes to the substance of the 
current rule or its interpretation.\71\ In particular, we do not 
believe that any look-back period is appropriate or should be added, on 
the basis that the duration of the suspension or limitation on 
activities imposed by the Commission should be sufficient from an 
investor protection standpoint.
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    \71\ Because of our approach of having one list of covered 
persons and one list of disqualifying events, this provision would 
have slightly broader reach under the proposal than under current 
rules. Under current Rule 262(b)(3), disqualification for Commission 
disciplinary orders applies to covered persons other than issuers 
and their predecessors and affiliated issuers Under the proposal, 
all covered persons would be subject to it. For issuers that are (or 
whose predecessors or affiliated issuers are or were) registered 
brokers, dealers, municipal securities dealers or investment 
advisers, the proposal would therefore create a new triggering event 
for disqualification.
---------------------------------------------------------------------------

    To make the new provisions easier to understand and use, however, 
we are proposing to simplify the presentation and codify the current 
interpretation.\72\ We are also proposing to eliminate an apparent 
anomaly in the current rule, whereby orders issued under Section 15B(a) 
of the Exchange Act (the basic registration requirements for municipal 
securities dealers) are treated as disqualifying. Section 15B(a) is not 
generally a source of sanctioning authority and we do not believe it is 
appropriate to refer to it in the context of bad actor 
disqualification. Disciplinary orders against municipal securities 
dealers are issued under Section 15B(c), a reference to which we 
propose to include in the new disqualification provisions.
---------------------------------------------------------------------------

    \72\ See Proposed Rule 506(c)(1)(iv).
---------------------------------------------------------------------------

Request for Comment
    (41) Is it appropriate for the new rule to largely codify the 
current rule, as proposed?
    (42) Should we impose any look-back period for Commission 
disciplinary sanctions?
    (43) Should the rules provide that censure is disqualifying? If so, 
how long should disqualification last?
    (44) For orders limiting activities and financial industry bars, 
should we impose a longer period of disqualification than the period 
that the order or bar remains in effect? For example, should we impose 
a look-back period so that anyone who was subject to such an order or 
bar within the prior five or ten years would be disqualified?
    (45) Should the rules provide that orders to pay civil money 
penalties are disqualifying if the penalties are not paid as ordered? 
Should such orders be disqualifying in other circumstances?
    (46) Should the reference to Section 15B(a) in the current rule be 
eliminated, as proposed, or included? If we include it, should coverage 
be limited to orders denying registration because of prior misconduct?
    5. Suspension or expulsion from SRO membership or association with 
an SRO member. Rule 262(b)(4) imposes disqualification on an offering 
if any

[[Page 31528]]

covered person is suspended or expelled from membership in, or 
suspended or barred from association with a member of, a securities 
self-regulatory organization or ``SRO'' (a registered national 
securities exchange or national securities association) for any act or 
omission to act constituting conduct inconsistent with just and 
equitable principles of trade.\73\ Again, we are not proposing to 
change the substance of the current rule (and in particular, are not 
proposing to add any look-back period).\74\ The proposal would update 
the rule by adding a reference to a registered affiliated securities 
association.\75\
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    \73\ See 17 CFR 230.262(b)(4).
    \74\ The application of this provision is slightly broader under 
the proposal than under Rule 262(b)(4), in that it would apply to 
all covered persons, including issuers and their predecessors and 
affiliated issuers (which are excluded under Rule 262(b)(4)). See 
Proposed Rule 506(c)(1)(v).
    \75\ In 2007, the SEC approved the formation of FINRA, a 
consolidation of the enforcement arm of the New York Stock Exchange, 
NYSE Regulation, Inc. and the NASD. Once formed, FINRA became 
responsible for regulatory oversight of all securities firms that do 
business with the public. See SR-NASD-2007-023, Release No. 34-
56145, Order Approving Proposed Rule Change to Amend the By-Laws of 
NASD to Implement Governance and Related Changes to Accommodate the 
Consolidation of the Member Firm Regulatory Functions of NASD and 
NYSE Regulation, Inc. (available at http://www.sec.gov/rules/sro/nasd/2007/34-56145.pdf.) Registered national securities exchanges 
maintain the right to enforce their own rules.
---------------------------------------------------------------------------

Request for Comment
    (47) Should the rule also cover suspension or expulsion from 
membership or participation in any commodities exchange or commodities 
self-regulatory organization, or from any other organization?
    (48) Should a look-back period be applied?
    (49) Should suspension or expulsion from participation in foreign 
securities exchanges be covered?
    6. Stop orders and orders suspending the Regulation A exemption. 
Paragraphs (a)(1) and (2) of Rule 262 impose disqualification on an 
offering if the issuer, or any predecessor or affiliated issuer, has 
filed a registration statement or Regulation A offering statement that 
was the subject of a Commission refusal order, stop order or order 
suspending the Regulation A exemption within the last five years, or is 
the subject of a pending proceeding to determine whether such an order 
should be issued.\76\ In a similar vein, paragraphs (c)(1) and (2) 
impose disqualification if any underwriter of the securities proposed 
to be issued was, or was named as, an underwriter of securities under a 
registration statement or Regulation A offering statement that was the 
subject of a Commission refusal order, stop order or order suspending 
the Regulation A exemption within the last five years, or is the 
subject of a pending proceeding to determine whether such an order 
should be issued.\77\ We propose to incorporate the substance of these 
four paragraphs into the rule but simplify the presentation and combine 
them into a single paragraph that would apply to all covered 
persons.\78\
---------------------------------------------------------------------------

    \76\ 17 CFR 230.262(a)(1) and (2).
    \77\ 17 CFR 230.262(c)(1) and (2).
    \78\ See Proposed Rule 506(c)(1)(vi).
---------------------------------------------------------------------------

Request for Comment
    (50) Is it appropriate to include the current Regulation A five-
year look-back period for these actions? Or should we impose a longer 
period, such as, for example, ten years?
    (51) Should this provision cover comparable actions by commodities 
regulators or other regulators? If so, what actions, by which 
regulators, should be covered?
    (52) Should this provision cover comparable actions by foreign 
securities regulators?
    7. U.S. Postal Service false representation orders. Paragraphs 
(a)(5) and (b)(5) of Rule 262 impose disqualification on an offering if 
the issuer or another covered person is subject to a U.S. Postal 
Service false representation order entered within the preceding five 
years, or to a temporary restraining order or preliminary injunction 
with respect to conduct alleged to have violated the false 
representation statute that applies to U.S. mail.\79\ We propose to 
incorporate the substance of these paragraphs but combine them into a 
single paragraph and simplify the presentation to eliminate unnecessary 
statutory citations. We are proposing to mirror the current five-year 
look-back period for U.S. Postal Service false representation 
orders.\80\
---------------------------------------------------------------------------

    \79\ Paragraph (a)(5) relates to issuers and their predecessors 
and affiliated issuers, and paragraph (b)(5) relates to other 
covered persons. Disqualification results if any covered person ``is 
subject to a United States Postal Service false representation order 
entered under 39 U.S.C. Sec.  3005 within 5 years prior to the 
filing of the offering statement, or is subject to a temporary 
restraining order or preliminary injunction entered under 39 U.S.C. 
Sec.  3007 with respect to conduct alleged to have violated 39 
U.S.C. Sec.  3005.'' 17 CFR 230.262(a)(5) and (b)(5).
    \80\ See Proposed Rule 506(c)(1)(vii).
---------------------------------------------------------------------------

    (53) Is it appropriate to mirror the current five-year look-back 
period for U.S. Postal Service false representation orders? Or should 
we extend the look-back period to ten years to correspond with the ten-
year look-back period for regulatory orders under the Dodd-Frank Act?

D. Reasonable Care Exception

    Under Section 926 of the Dodd-Frank Act, the events that generally 
give rise to bad actor disqualification under current rules, plus 
specified orders issued by a variety of state regulators (including 
securities, banking, credit union, savings association and insurance 
regulators) and Federal banking and credit union regulators, are 
required to result in disqualification under Rule 506. Once Section 926 
is implemented, a substantially greater number of exempt securities 
offerings than before will be subject to bad actor disqualification 
requirements, effectively imposing a new burden of inquiry on many 
issuers with respect to potential disqualifying events.
    Although some disqualifying events will be a matter of public 
record,\81\ there is no central repository that aggregates information 
from all the Federal and state courts and regulatory authorities that 
would be relevant in determining whether a covered person has a 
disqualifying event in his or her past. In addition, the number of 
covered persons whose presence or participation could be disqualifying 
may be quite large, particularly if, as proposed, the rules cover all 
``officers'' of persons compensated for soliciting investors. As noted 
above, broker-dealers may have large numbers of officers, many of whom 
would not have any involvement with the offering in question, but all 
of whom would be covered persons for purposes of disqualification.
---------------------------------------------------------------------------

    \81\ For example, FINRA maintains BrokerCheck, an online tool 
that enables the public to check the licensing and securities 
industry disciplinary history of registered broker-dealers and their 
associated persons. The information included in BrokerCheck is 
derived from the Central Registration Depository, the securities 
industry online registration and licensing database. The staff of 
the Office of Investor Education and Advocacy has prepared a study, 
including recommendations, required by Section 919B of the Dodd-
Frank Act on ways to improve investors' access to registration 
information (including disciplinary actions; regulatory, judicial 
and administrative proceedings; and other information) about broker-
dealers, investment advisers and their associated persons. See Staff 
of the Office of Investor Education and Advocacy, Study and 
Recommendations on Improved Investor Access to Registration 
Information about Investment Advisers and Broker-Dealers (Jan. 2011) 
(available at http://www.sec.gov/news/studies/2011/919bstudy.pdf). 
In addition, FINRA has recently launched its new Disciplinary 
Actions Online database, which provides access to FINRA complaints 
against firms and individual brokers, settlement agreements, 
decisions by FINRA hearing panels and National Adjudicatory Council 
decisions. BrokerCheck reports will provide links to this new 
database.
---------------------------------------------------------------------------

    Our proposal attempts to address the potential difficulty of 
ascertaining

[[Page 31529]]

whether disqualifications apply by including an exception from 
disqualification for offerings where the issuer establishes that it did 
not know and, in the exercise of reasonable care, could not have known 
that a disqualification existed because of the presence or 
participation of another covered person.\82\ We are proposing a 
reasonable care exception out of a concern that the benefits of Rule 
506--which, among other things, is intended to create a cost-effective 
method of raising capital, particularly for small businesses--may 
otherwise be substantially reduced. Issuers may be reluctant to offer 
or sell securities in reliance on an exemptive rule if the exemption 
could later be found, despite the issuer's exercise of reasonable care, 
not to have been available; the risk of a potential Section 5 violation 
or blue sky law violation may outweigh the potential benefits of 
relying on the exemption. On the other hand, issuers must have a 
responsibility to screen bad actors out of their Rule 506 offerings. We 
believe that providing a reasonable care exception would help to 
preserve the intended benefits of Rule 506 and avoid creating an undue 
burden on capital-raising activities, while giving effect to the 
legislative intent to screen out felons and bad actors.\83\
---------------------------------------------------------------------------

    \82\ See Proposed Rule 506(c)(2)(ii).
    \83\ Regulation D already has a provision, Rule 508, under which 
``insignificant deviations'' from the terms, conditions and 
requirements of Regulation D will not necessarily result in loss of 
the exemption from Securities Act registration requirements. Rule 
508 provides that the exemption will not be lost with respect to any 
offer or sale to a particular individual or entity as a result of a 
failure to comply with a term, condition or requirement of 
Regulation D if the person relying on the exemption shows that: (i) 
the failure to comply did not pertain to a term, condition or 
requirement directly intended to protect that particular individual 
or entity; (ii) the failure to comply was insignificant with respect 
to the offering as a whole (provided that certain Regulation D 
requirements, including limitations on general solicitation and any 
applicable limits on the amount of securities offered and the number 
of investors, are always deemed significant); and (iii) a good faith 
and reasonable attempt was made to comply. 17 CFR 230.508. We do not 
believe that Rule 508 would cover circumstances in which an offering 
was disqualified based on Proposed Rule 506(c).
---------------------------------------------------------------------------

    The language of the proposed exception is based on the standard of 
the Model Accredited Investor Exemption (``MAIE''), which was approved 
by NASAA in 1997.\84\ We included a similar exception in the 2007 
Proposal. Under both the MAIE and our proposed exception, the burden 
would be on the issuer to establish that it had exercised reasonable 
care (most likely in the context of an enforcement proceeding brought 
by a regulator or a private action brought by investors). The MAIE 
incorporates as part of the standard that reasonable care must be 
``after factual inquiry.'' In the 2007 Proposal, we did not include an 
express reference to ``factual inquiry,'' but requested comment on 
whether the rule should require that reasonable care be based on a 
factual inquiry, as provided in the MAIE. The commenters who responded 
to this point were generally supportive of a requirement that issuers 
make an effort to assure themselves that no bad actors are involved 
with their offerings, but differed on whether an express reference to 
factual inquiry must be included in the rule itself.\85\
---------------------------------------------------------------------------

    \84\ As of the date of this Release, 31 states plus the District 
of Columbia had adopted some form of the MAIE. See CCH 
SmartCharts\TM\, Blue Sky Topics, ``Did the State Adopt the NASAA 
Model Accredited Investor Exemption?.''
    \85\ See NASAA Comment Letter, note 40. See also Comment Letter 
from Carol Bavousett Mattick, P.C. Chair of the Securities Law 
Committee, Business Law Section of the State of Texas (Oct. 9, 2007) 
(available at http://www.sec.gov/comments/s7-18-07/s71807-36.pdf) 
(using questionnaires similar to the current practices for 
establishing a reasonable basis for determining accredited investor 
status would seem to be appropriate).
---------------------------------------------------------------------------

    We believe the concept of reasonable care necessarily includes 
inquiry by the issuer into the relevant facts. Our proposed reasonable 
care exception, therefore, would include an instruction specifying that 
reasonable care would entail a factual inquiry, the nature of which 
would depend on the facts and circumstances.\86\
---------------------------------------------------------------------------

    \86\ See Proposed Rule 506(c)(2)(ii), where the instruction 
states: ``Instruction to paragraph (c)(2)(ii) An issuer will not be 
able to establish that it has exercised reasonable care unless it 
has made factual inquiry into whether any disqualifications exist. 
The nature and scope of the requisite inquiry will vary based on the 
circumstances of the issuer and the other offering participants.''
---------------------------------------------------------------------------

    The steps an issuer should take to exercise reasonable care would 
vary according to the circumstances of the covered persons and the 
offering, taking into account such factors as the risk that bad actors 
could be present, the presence of other screening and compliance 
mechanisms and the cost and burden of the inquiry. In some 
circumstances, factual inquiry of the covered persons themselves (for 
example, by including additional questions in questionnaires issuers 
may already be using to support disclosures regarding directors, 
officers and significant shareholders of the issuer) may be adequate. 
Issuers should also consider whether investigating publicly available 
databases is reasonable. In some circumstances, further steps may be 
necessary.
Request for Comment
    (54) Is it appropriate and consistent with investor protection to 
include a reasonable care exception in our disqualification rules?
    (55) What would be the practical effect on issuers and other market 
participants of not including such an exception?
    (56) What steps do issuers typically take to confirm the absence of 
a disqualification for offerings under current Regulation A and Rule 
505 of Regulation D? How would practice norms under the proposed rules 
applicable to Rule 506 offerings be expected to compare to current 
norms if a reasonable care exception were introduced?
    (57) Is it appropriate to condition the reasonable care exception 
on factual inquiry? Are there any circumstances in which factual 
inquiry should not be required? Should the rule specify what factual 
inquiry is required or provide examples of specific factual inquiries 
that might be undertaken by the issuer?
    (58) With respect to officers of compensated solicitors of 
investors, in light of the potentially significant volume of inquiries 
required to determine whether there are disqualifying covered persons 
associated with a broker-dealer, should the rules provide specific 
steps to establish reasonable care? If so, what should those steps be?

E. Waivers

    Currently, issuers may seek waivers from disqualification from the 
Commission under Regulation A.\87\ The Commission may grant a waiver if 
it determines that the issuer has shown good cause ``that it is not 
necessary under the circumstances that the [registration] exemption * * 
* be denied.''\88\ Consistent with Section 926 and its mandate to the 
Commission to promulgate disqualification rules ``substantially 
similar'' to Regulation A, we propose to carry over the current waiver 
provisions of Rule 262 to our new disqualification provisions.\89\
---------------------------------------------------------------------------

    \87\ 17 CFR 230.262.
    \88\ Id.
    \89\ See Proposed Rule 506(c)(2)(i). Under current rules, the 
Commission has delegated authority to the Director of the Division 
of Corporation Finance to grant disqualification waivers under 
Regulation A. See 17 CFR 200.30-1(b). Under the proposal, there 
would be no delegation of authority for waivers of bad actor 
disqualification under new Rule 506(c), and all such waivers would 
have to be issued by a direct order of the Commission itself.
---------------------------------------------------------------------------

Request for Comment
    (59) Is it appropriate for our bad actor disqualification rules to 
provide for Commission authority to waive disqualification, as 
proposed?
    (60) Should the Commission exercise waiver authority under its

[[Page 31530]]

disqualification rules for cases involving final orders of state 
regulators? Under what circumstances should the Commission exercise 
that authority? With regard to state regulatory matters, should there 
be additional requirements (such as concurrence by the relevant 
regulator or lack of objection after notice) before the Commission 
should consider issuing a waiver?
    (61) Should we provide guidance on circumstances that are likely to 
give rise to the grant or denial of a waiver?
    (62) Should our rules include a provision (such as currently 
included in the MAIE) \90\ that provides an exception from 
disqualification if the relevant authority of the state to which the 
disqualification relates waives the disqualification?
---------------------------------------------------------------------------

    \90\ See NASAA, Model Accredited Investor Exemption (D)(2)(b) 
(available at http://www.nasaa.org/content/Files/Model_Accredited_Investor_Exemption.pdf).
---------------------------------------------------------------------------

F. Transition Issues

    1. Disqualifying events that pre-date the rule. Under the proposal, 
the new disqualification provisions would apply to all sales made under 
Rule 506 after the effective date of the new provisions. (The 
provisions would not affect any transaction that was completed before 
the effective date.) Offerings made after the effective date would be 
subject to disqualification for all disqualifying events that had 
occurred within the relevant look-back periods, regardless of whether 
the events occurred before enactment of the Dodd-Frank Act, or the 
proposal or effectiveness of the amendments to Rule 506. We believe 
that giving full effect to the bad actor provisions upon adoption 
carries out Congress' mandate.\91\ We nevertheless recognize that 
application of the new disqualification provisions could affect a 
number of market participants. We are, therefore, seeking comment on 
potential approaches to alleviate any concerns about possible 
unfairness, as explained more fully below.
---------------------------------------------------------------------------

    \91\ Statement of Senator Christopher Dodd, CR S3813 (May 17, 
2010).
---------------------------------------------------------------------------

    We believe that, under the text of Section 926 as enacted by 
Congress, past disqualifying events should be taken into account under 
our new disqualification rules.\92\ Dodd-Frank Act Section 
926(2)(A)(i), for example, states that these rules shall disqualify any 
offering or sale by a person who ``is subject'' to a final order of a 
State securities commission or other regulator that bars the person 
from certain activities. Section 926(2)(A)(ii) similarly requires 
disqualification of any offering or sale by a person subject to a final 
State order ``that constitutes a final order based on a violation of 
any law or regulation that prohibits fraudulent, manipulative, or 
deceptive conduct within the 10-year period ending on the date of the 
filing of the offer or sale''. Section 926(2)(B) requires 
disqualification of any person who ``has been convicted'' of any felony 
or misdemeanor in connection with the purchase or sale of any security 
or involving the making of any false filing with the Commission. In 
each case, the statutory directive states that our rules shall provide 
for disqualification based on a past event. In addition, Section 926(1) 
requires the new disqualification rules to be ``substantially similar'' 
to the existing disqualification provisions in Rule 262 of Regulation 
A. That rule currently disqualifies offerings based on past 
disqualifying events affecting issuers and other covered persons.\93\
---------------------------------------------------------------------------

    \92\ In Landgraf v. USI Film Products, 511 U.S. 244 (1994), the 
Supreme Court set forth a general framework for determining the 
temporal reach of a statute. The first step in that analysis is 
determining whether Congress has expressed a clear intent on the 
statute's proper reach. See also Fernandez-Vargas v. Gonzales, 548 
U.S. 30, 37 (2006) (in the absence of express language regarding 
retroactive intent, ``we try to draw a comparably firm conclusion 
about the temporal reach specifically intended by applying `our 
normal rules of construction'''). If Congress has done so, that 
intention controls. If Congress has not expressed a clear intention 
on how the statute applies to past events, the second step of the 
Landgraf analysis is to determine whether the statute impairs rights 
a party possessed when he acted, increases liability for past 
conduct or imposes new duties with respect to transactions already 
completed. 511 U.S. at 280. However, the fact that a statute's 
operation draws on antecedent facts or may upset expectations based 
on prior law does not make it impermissibly retroactive. Id. at 269 
and n.24. See also Nat'l Cable & Telecommunications Assn. v. FCC, 
567 F.3d 659, 670 (DC Cir. 2009); Boniface v. U. S. Dept. of 
Homeland Security, 613 F.3d 282 (DC Cir. 2010); Empresa Cubana 
Exportadora de Alimentos y Productos Varios v. U.S. Dept. of the 
Treasury,------ F 3d ------, 2011 WL 1120271 (DC Cir. 2011).
    \93\ Senator Dodd's statement on the Senate floor, when he 
proposed adding this language, provides further support. ``New 
section 926 would disqualify felons and other ``bad actors'' who 
have violated Federal and State securities laws from continuing to 
take advantage of the rule 506 private placement process. This will 
reduce the danger of fraud in private placements.'' Statement of Sen 
Dodd, CR S3813 (May 17, 2010)]. It suggests an intention to prevent 
previous violators from continuing to rely on our exemptions, which 
can only be accomplished if pre-existing disqualifying events are 
taken into account.
---------------------------------------------------------------------------

    In addition, we are mindful that Section 926 replaced a provision 
in an earlier bill that would have eliminated Federal pre-emption of 
Rule 506 offerings, thus subjecting such offerings to state ``blue 
sky'' regulation. Without pre-emption, existing convictions, 
disciplinary orders and other disqualifying events would have operated 
to disqualify offerings in the states that have bad actor 
disqualification rules. Replacing this provision with Section 926 was 
not seen as decreasing investor protection in this regard,\94\ 
suggesting that Section 926 was intended to take into account pre-
existing disqualifying events.
---------------------------------------------------------------------------

    \94\ See NASAA letter, dated April 27, 2010, quoted at CR S3813; 
see also letter of the Angel Capital Association, dated April 21, 
2010, quoted at CR S3813).
---------------------------------------------------------------------------

    Rule 506 is an exemptive rule that establishes a safe harbor from 
statutory registration requirements for securities offerings. It does 
not create rights, so disqualification from participation in that type 
of exempt offering cannot inappropriately prejudice any person. 
Moreover, offerings that would be disqualified from reliance on Rule 
506 under the new provisions could potentially still be effected on a 
registered basis, pursuant to an available statutory exemption such as 
Section 4(2) or Section 4(5) of the Securities Act, or pursuant to 
another exemptive rule. Alternatively, issuers may regain eligibility 
to rely on Rule 506 if they are able to terminate their relationship 
with the bad actor whose involvement triggers disqualification.
    We are therefore not proposing to exempt, ``grandfather,'' or 
otherwise make special provision for events that occurred before 
enactment of the Dodd-Frank Act or the effective date of the proposed 
amendments. We are soliciting comment, however, about whether the new 
disqualification provisions required under the Dodd-Frank Act would 
operate in an unfair manner in particular respects and, if so, how we 
should address that. For example, should the rules provide a different 
treatment for persons who entered into negotiated settlements prior to 
the enactment of the Dodd-Frank Act, the date of this Release or the 
effective date of our rules, on the basis that they might not have 
settled on the same terms (or at all) if they had known it would result 
in disqualification from future Rule 506 offerings? We are soliciting 
comment on whether we should provide grandfathering or other 
accommodation for some or all events that predate enactment of the 
Dodd-Frank Act, this Release or the effective date of our rules, 
provided such grandfathering or other accommodation would be consistent 
with the requirements of Section 926. We are also seeking comment on 
whether we should extend the benefit of waivers previously granted in 
respect of disqualification from Regulation A, Rule 505 of Regulation D 
or Regulation E, so that such waivers would cover the new

[[Page 31531]]

disqualification provisions applicable to Rule 506.
Request for Comment
    (63) Should the Commission provide for grandfathering of pre-
existing disqualifying events, or other phase-in procedures for the new 
disqualification provisions? What would be the effect on issuers, other 
covered persons and investors of implementing the new bad actor 
disqualification provisions without grandfathering, as proposed? Would 
providing for grandfathering be consistent with the requirements of 
Section 926 of the Dodd-Frank Act?
    (64) If we provide for grandfathering, should we grandfather 
disqualifying events that occurred before enactment of the Dodd-Frank 
Act, before the date of this Release or before adoption or 
effectiveness of the amendments to Rule 506? What impact would that 
have on investor protection? Would the impact on investor protection be 
reduced if we required disclosure of grandfathered events?
    (65) Alternatively, should we grandfather only certain 
disqualifying events? For example, we could grandfather orders arising 
out of negotiated settlements agreed to before enactment of the Dodd-
Frank Act, or before the rules were proposed, adopted or became 
effective, in light of the possibility that the party would not have 
agreed to the relevant order if it had known that a collateral 
consequence of the agreement would be disqualification from all Rule 
506 offerings. This would be similar to the approach taken with respect 
to eligibility for being a ``well-known seasoned issuer'' when that 
category was created.\95\ Would providing a different treatment for 
pre-existing negotiated settlements limit the effectiveness of the bad 
actor disqualification rules?
---------------------------------------------------------------------------

    \95\ For purposes of defining ``ineligible issuer'' (i.e., an 
issuer that is not eligible to be a ``well known seasoned issuer''), 
we provided that ineligibility based on settlements would apply only 
to judicial or administrative decrees or orders entered into after 
the effective date of the new rules. See Release No. 33-8591 (Jul. 
19, 2005) [70 FR 44722, 44747]; (available at http://www.sec.gov/rules/final/33-8591.pdf).
---------------------------------------------------------------------------

    (66) Rather than, or in addition to, providing for grandfathering, 
should we extend waivers previously granted with respect to bad actor 
disqualification under Regulation A, Rule 505 or Regulation E to cover 
Rule 506 as well? If we were to consider that approach, are there any 
categories of such waivers that particularly should or should not be so 
extended?
    2. Effect on ongoing offerings. As proposed, our bad actor 
disqualification provisions would apply to each sale of securities made 
in reliance on Rule 506 after the rule amendments go into effect. Sales 
of securities made before the effective date would not be affected by 
any disqualification that arises as a result of the adoption of the 
amendments, even if such sales were part of an offering that was 
intended to continue after the effective date. Only sales made after 
the effective date of the amendments would be subject to 
disqualification.
    Under the proposal, disqualifying events that occur while an 
offering is underway would be analyzed in a similar fashion. Sales made 
before the occurrence of the disqualification would not be affected by 
it, but sales thereafter would be disqualified unless and until the 
disqualification is waived or removed.\96\
---------------------------------------------------------------------------

    \96\ Disqualifying events that exist at the time the offering is 
commenced but are only discovered later would be treated the same 
way if the reasonable care exception applies; otherwise, the sales 
would not be eligible for reliance on Rule 506.
---------------------------------------------------------------------------

    We believe this approach is consistent with our other rules and 
provides appropriate incentives to issuers and other covered persons, 
but are soliciting comment on other possible approaches. If we were to 
provide that disqualification would be measured only at the time of 
commencement of an offering, then disqualifying events that arise after 
commencement would be disregarded. Such an approach could make the 
rules easier to apply, but would be problematic in light of the 
statutory language and may compromise investor protection in the 
context of offerings that continue for extended periods. Conversely, we 
could provide that all sales in a continuous offering lose the benefit 
of the exemption if a disqualification arises during the offering. Such 
an approach could encourage issuers to avoid involving potentially 
problematic parties in their offerings, but may be too unpredictable 
and therefore undermine the benefits of the exemptions.
Request for Comment
    (67) Is it appropriate for disqualification to apply to sales made 
after the effective date of the new rules in offerings that are 
underway at the time the new rules become effective, as proposed?
    (68) Is it appropriate for disqualification requirements to apply 
to each sale of securities, as proposed? Or should we measure 
disqualifying events only at time of the commencement of an offering? 
Conversely, should we disqualify all sales in a continuous offering if 
a disqualification occurs during the offering, including sales that 
have already been made?
    3. Timing of implementation. The proposal does not contemplate any 
phase-in period or delay before issuers would be required to comply 
with the new disqualification rules. However, given that the new rules 
may require issuers to take a number of actions before they could 
confirm that they were not disqualified from relying on Rule 506 (such 
as, for example, undertaking an inquiry of covered persons, modifying 
existing due diligence questionnaires, taking steps to remove any 
existing disqualifications and seeking waivers of disqualification if 
necessary), it may be appropriate to provide additional time after the 
rules are adopted but before compliance is required.
Request for Comment
    (69) Is a relatively shorter implementation period (such as 60 
days) appropriate for the new disqualification rules, or should we 
provide for delayed implementation? If so, how much time would be 
appropriate? (90 days? 120 days? Longer?) Please provide support for 
your views by reference to the actions that issuers would be required 
to take and an estimate of the time periods involved.

G. Amendment to Form D

    We are proposing a conforming amendment to Form D to reflect that, 
under our proposal, bad actor disqualification would apply to Rule 506 
transactions as well as Rule 505 transactions under Regulation D. The 
signature block of the current Form D contains a certification that 
applies only to transactions under Rule 505, confirming that the 
offering is not disqualified from reliance on Rule 505 for one of the 
reasons stated in current Rule 505(b)(2)(iii). Under the proposal, this 
certification would be broadened, so that issuers claiming a Rule 506 
exemption would also confirm that the offering is not disqualified from 
reliance on Rule 506 for one of the reasons stated in Rule 506(c).

III. Possible Amendments To Increase Uniformity

    In addition to the matters on which we solicit comment above, we 
are also soliciting public comment on additional changes to our rules 
that are not explicitly addressed in Section 926 of the Dodd-Frank Act. 
We are seeking input on whether any or all of these would enhance our 
rules by better protecting investors from recidivist bad

[[Page 31532]]

actors in exempt offerings, avoiding potential sources of confusion and 
making the rules easier to administer. Although we have not proposed 
rule text to implement these changes, we are considering them and may 
adopt them as part of this rulemaking.

A. Uniform Application of Bad Actor Disqualification to Regulations A, 
D and E

    We are considering and requesting public comment on whether the new 
bad actor disqualification standards required by the Dodd-Frank Act for 
Rule 506 offerings should be applied on a more uniform basis. Under our 
proposal, Rule 506 of Regulation D would be the only exemption subject 
to the disqualification rules mandated by Section 926 of the Dodd-Frank 
Act. The other Securities Act exemptions that currently provide for 
``bad actor'' disqualification (Regulation A,\97\ Rule 505 of 
Regulation D,\98\ and Regulation E \99\) would continue to follow the 
disqualification schemes that are currently in effect. Offerings under 
Rule 504,\100\ the remaining Regulation D exemption, would be the only 
Regulation D exemption not subject to any Federal disqualification 
requirements. We are concerned that there may be confusion, and that 
compliance costs could be increased, if different disqualification 
standards apply to these exemptions.\101\ We are also concerned that 
new disqualification standards applicable only to Rule 506 offerings 
could negatively affect the market for offerings under our other 
exemptive rules. We are therefore soliciting comment on whether the 
proposed new disqualification provisions of Rule 506 should be extended 
to cover these other exempt offerings.\102\
---------------------------------------------------------------------------

    \97\ See note 17.
    \98\ 17 CFR 230.505. Rule 505 permits offerings of up to $5 
million of securities annually, without general solicitation, to an 
unlimited number of accredited investors and up to 35 non-accredited 
investors. Rule 505 offerings are subject to the same conditions as 
apply to Rule 506 offerings (see note 10 above), except that non-
accredited investors are not required to be sophisticated.
    \99\ 17 CFR 230.601 through 230.610. Regulation E is an 
exemption for offerings up to $5 million by small business 
investment companies (``SBICs'') and business development companies 
(``BDCs''). SBICs are investment funds licensed and regulated by the 
Small Business Administration that use their own capital plus funds 
borrowed with an SBA guarantee to make equity and debt investments 
in qualifying small businesses. See Investment Company Act Sec.  
2(a)(46), 15 U.S.C. 80a-2(46). A BDC is a closed-end investment 
company that has elected to be subject to Sections 55 through 65 of 
the Investment Company Act and that is operated for the purpose of 
investing in and making significant managerial assistance available 
to certain types of companies. See Investment Company Act Sec.  
2(a)(48), 15 U.S.C. 80a-2(48). Regulation E offerings are required 
to have an offering circular containing specific mandatory 
information, which is filed with the Commission and subject to 
review by the staff of the Division of Investment Management.
    \100\ 17 CFR 230.504. Rule 504 permits offerings of up to $1 
million of securities by issuers that are not (i) reporting 
companies under the Securities Exchange Act, (ii) investment 
companies or (iii) development stage companies with no specific 
business plan or purpose, or whose business plan is to engage in a 
merger or acquisition with an unidentified entity or entities. 
Offerings under Rule 504 must generally comply with Regulation D 
requirements regarding limitations on manner of sale (no general 
solicitation) and limitations on resale. The manner of sale and 
resale limitations do not apply, however, to offerings that are 
subject to state-level registration or that rely on state law 
exemptions permitting general solicitation so long as sales are made 
only to accredited investors.
    \101\ Regulation A, Rules 504 and 505 of Regulation D and 
Regulation E are used much less frequently than Rule 506. For the 
year ended September 30, 2010, we received 17,292 initial filings 
for offerings under Regulation D, of which 16,027 claimed a Rule 506 
exemption, 254 claimed a Rule 505 exemption, 713 claimed a Rule 504 
exemption and 151 claimed both Rule 504 and 506 exemptions. 
Transactions relying on Regulation A or Regulation E are rare; for 
the year ended September 30, 2010, seven Regulation A offerings and 
one Regulation E offering were completed. Note that the staff of the 
Division of Corporation Finance does not routinely review Form D 
filings to confirm that claimed exemptions are actually available. 
The figures presented above are based on exemptions claimed in Form 
Ds that were filed during the relevant period.
    \102\ If we were to adopt a uniform approach, the rules applied 
to all exempt transactions would give effect to any changes from our 
proposal that were ultimately adopted (including, for example, the 
possible inclusion of final orders of the Commission and the CFTC as 
disqualifying events, on which we have requested comment in Part 
II.C.3 of this Release).
---------------------------------------------------------------------------

    All bad actor disqualification provisions in our current Securities 
Act exemptive rules are substantially similar: Rule 505 effectively 
incorporates by reference Rule 262, with some changes in defined 
terms,\103\ and Rule 602 is substantially similar in its language and 
effect, although it does not explicitly refer to Rule 262. We are 
considering whether to preserve this basic uniformity by conforming all 
existing bad actor disqualification requirements for exempt offerings 
to the standards proposed to be applied to Rule 506 offerings, and are 
requesting public comment on that approach.
---------------------------------------------------------------------------

    \103\ See 17 CFR 230.505(b)(2)(iii).
---------------------------------------------------------------------------

    In the 2007 Proposal, the Commission suggested a uniform approach 
to disqualification for all offerings under Regulation D.\104\ Both in 
response to the 2007 Proposal \105\ and in advance comments on this 
rulemaking,\106\ NASAA voiced support for such a uniform approach. Most 
comment letters did not support the 2007 Proposal to subject all 
Regulation D offerings to bad actor disqualification, and particularly 
objected to applying bad actor disqualification requirements to Rule 
506.\107\ Given that the Dodd-Frank Act now requires bad actor 
disqualification for Rule 506 offerings, and that these constitute a 
significant majority of transactions under Regulation D, we are 
considering whether many of the same policy reasons for disqualifying 
bad actors could be applicable to each of the Regulation D exemptions, 
as well as to the exemptions under Regulation A and Regulation E, and 
that uniform disqualification may further investor protection. We are 
also considering whether imposing uniform disqualification standards 
across the remainder of Regulation D might promote clarity and 
simplicity in applying our exemptive rules, and reduce costs imposed by 
an inconsistent regulatory structure. We also have a concern that 
adding new disqualification provisions that apply only to offerings 
under Rule 506 may negatively affect the market for offerings under our 
other exemptive rules. Bad actors may be encouraged to migrate to 
offerings under these other exemptions, which would raise investor 
protection concerns. In addition, investors may perceive a higher risk 
of fraud in such offerings, which would potentially affect the 
marketability and issuance costs of all offerings under the exemptions 
without the new standards, whether or not bad actors are involved.
---------------------------------------------------------------------------

    \104\ See note 13.
    \105\ See NASAA Comment Letter, note 40.
    \106\ See NASAA Advance Comment Letter, note 41.
    \107\ See, e.g., Comment Letters of the American Bar Association 
(Oct. 12, 2007) (available at http://www.sec.gov/comments/s7-18-07/s71807-52.pdf); Tenant-in-Common Association (Oct. 17, 2007) 
(available at http://www.sec.gov/comments/s7-18-07/s71807-55.pdf); 
and Davis, Polk & Wardwell (Oct. 9, 2007) (available at http://www.sec.gov/comments/s7-18-07/s71807-39.pdf).
---------------------------------------------------------------------------

    In order to adopt such a uniform approach, we would have to amend 
our rules and our proposal in a number of ways, including the 
following:
     If we applied bad actor disqualification to all Regulation 
D offerings, we would need to codify the provision as a new paragraph 
(e) of Rule 502 (the ``General Conditions to be Met'' for Regulation D 
offerings) rather than in Rule 506, and would need to delete the 
current disqualification provisions of Rule 505(b)(2)(iii). The 
disqualification provisions of Rule 262 of Regulation A and Rule 602 of 
Regulation E would need to be amended to conform to new Rule 502(e).
     We would add underwriters and their directors, officers, 
general partners and managing members to the categories of covered 
persons described in the proposal. This would generally

[[Page 31533]]

harmonize with Rule 262.\108\ Underwriters may participate in offerings 
under Regulation A and Regulation E and in certain transactions under 
Rule 504 of Regulation D, and so would have to be included if our 
disqualification rules were to cover such transactions.
---------------------------------------------------------------------------

    \108\ All of these are covered persons under current Rule 262 
except for the managing members of underwriters.
---------------------------------------------------------------------------

     We would need to make a number of changes to harmonize 
with existing Rule 602 of Regulation E. For example, we would need to 
add as covered persons, for issuers that are registered investment 
companies, ``private funds'' as defined in Section 202(a)(29) of the 
Investment Advisers Act of 1940 or that elect to be regulated as 
``business development companies,'' \109\ their investment advisers and 
the general partners, managing members, directors and officers of such 
investment advisers.\110\ We would need to add a reference in the 
paragraph addressing Commission disciplinary orders to orders 
suspending or revoking registration as an investment company issued 
under Section 8(e) of the Investment Company Act of 1940, and we would 
need to add references, in the paragraph addressing stop orders and 
orders denying an exemption, to similar proceedings and orders in 
relation to Regulation E offering circulars.\111\
---------------------------------------------------------------------------

    \109\ See note 99.
    \110\ This is one area where the approach under Regulation D, 
Regulation A and Regulation E would not be completely uniform 
because of differences in the types of issuers eligible to rely on 
those regulations. As applied to Regulation D offerings, the rule 
would cover investment advisers of all entities that describe 
themselves as ``pooled investment funds'' on Form D, or that are 
registered investment company, private fund or BDC issuers, as 
described in the request for comment in Part II.B above. Regulation 
A Rule 262 would cover investment advisers of private fund issuers 
only, because registered investment companies and BDCs are not 
eligible to rely on Regulation A. Regulation E Rule 602 would cover 
every issuer's investment advisers; only BDCs and SBICs are eligible 
to rely on Regulation E (this is also consistent with the approach 
under current Regulation E Rule 602).
    \111\ To the extent that current bad actor disqualification 
rules in Rule 602 of Regulation E differ from those in Rule 262 of 
Regulation A, the uniform approach would result in changes to Rule 
602 in addition to those described in Part II of this Release. These 
would include changes in covered persons (referring to ``any 
beneficial owner of 10% or more of any class of the issuer's equity 
securities'' rather than to any ``principal securities holders'' and 
referring to issuer predecessors, affiliated issuers rather than any 
``affiliate'' of the issuer) and the addition of a provision similar 
to proposed Rule 506(c)(3) with regard to events that predate an 
affiliate relationship.
---------------------------------------------------------------------------

     A uniform approach would result in a slightly broader 
universe of disqualifying events, in that events that are disqualifying 
under only one or two current exemptive rules would apply across the 
board to Regulation A, Regulation D and Regulation E transactions. 
Because the existing rules are so similar, the impact of this would be 
limited to a few matters.\112\
---------------------------------------------------------------------------

    \112\ Specifically, under current rules, an issuer that is 
disqualified from doing a Regulation E offering because it was the 
subject of a proceeding to revoke its registered investment company 
status, or had filed a Regulation E offering circular that was 
subject to an order suspending the Regulation E exemption, is not 
disqualified from doing an offering in reliance on Regulation A or 
D. Similarly, an issuer that is disqualified from doing a Regulation 
A or Rule 505 offering because it had filed a Regulation A offering 
circular that was subject to an order suspending the Regulation A 
exemption, is not disqualified from doing an offering in reliance on 
Regulation E. Finally, certain convictions and disciplinary orders 
against covered persons that are municipal securities dealers are 
currently disqualifying under Regulation A and Rule 505, but not 
Regulation E. If we were to adopt a uniform approach, any 
disqualifying event in relation to any covered person would 
disqualify an issuer from using any of these exemptions.
---------------------------------------------------------------------------

     Under a uniform approach, for the events that are subject 
to an express look-back period we are considering whether to use the 
date of the relevant sale, as proposed for Rule 506, rather than to the 
date of filing of an offering circular, as provided currently under 
Regulation A and Regulation E, as the measurement date.
     The certification in the signature line of Form D would 
need to be amended to apply to all Regulation D offerings, not only 
those under Rule 505 and Rule 506; every issuer claiming a Regulation D 
exemption would be required to confirm that the offering was not 
disqualified for any of the reasons stated in the bad actor 
disqualification rules applicable to Regulation D.
    We seek comment on whether incremental changes such as these would 
unduly restrict reliance upon the exemptions under Regulation A, Rule 
505 of Regulation D, and Regulation E, and whether uniform rules would 
provide clarity and simplicity that may be an overall benefit to 
investors and other market participants.
    We are soliciting comment on a variety of possible approaches to 
uniformity. For example, we could choose not to pursue a uniform 
approach, and add new disqualification provisions applicable to Rule 
506 transactions only, as proposed. This would leave the existing bad 
actor provisions applicable to other exemptive rules as they are, and 
would not subject Rule 504 transactions to bad actor disqualification. 
We could adopt rules that differentiate between offerings under 
Regulation A, Rules 505 and 506 of Regulation D and Regulation E, on 
the one hand (all of which would be subject to the same bad actor 
disqualification provisions), and Rule 504 offerings on the other hand 
(which could continue to be conducted without bad actor provisions, or 
could be subject to some alternative to disqualification, such as 
mandatory disclosure of the events and circumstances that give rise to 
disqualification under other exemptive rules). Alternatively, for 
purposes of Regulation A, Rules 504 and 505 of Regulation D, and 
Regulation E, we could require disclosure of events that would be 
disqualifying under Rule 506, without imposing a new disqualification 
regime.
    We are also soliciting comment on whether broadening the impact of 
the rule changes by uniform application should affect our proposal to 
not provide for grandfathering of existing disqualifying events. For 
example, it may be appropriate in that context to differentiate between 
disqualification provisions that are explicitly addressed in Section 
926 of the Dodd-Frank Act and those that are not.
    Finally, in considering whether to adopt uniform rules we would 
also have to consider the relative costs and benefits of such rules and 
their impact on competition, efficiency and capital formation. We would 
give particular consideration to their impact on issuers and other 
market participants (such as placement agents) that are small 
businesses. Because Regulation A, Rule 505 of Regulation D and 
Regulation E are relatively little-used, we do not expect the impact in 
those areas to be significant.
    Preliminarily, we believe that uniform application of 
disqualification standards could have the following effects:
     It may improve investor protection by more effectively 
excluding bad actors from the private placement and small offering 
markets.
     It may avoid any confusion that might otherwise arise in 
applying different disqualification standards to different exemptions 
and simplify implementation of the new rules.
     It would avoid the creation of actual or perceived 
loopholes in our rules, which might encourage felons and bad actors 
disqualified from Rule 506 offerings to migrate to less-regulated kinds 
of transactions, or create a perception that investors in Rule 506 
offerings are more deserving of protection than other investors.
     It may increase investor trust in the integrity of the 
private placement and small offering markets (which could contribute to 
a lower cost of capital for issuers).
     On the other hand, it may result in increased costs for 
issuers, including costs associated with registration if exemptive 
rules are no longer available,

[[Page 31534]]

costs associated with terminating relationships with covered persons, 
or costs associated with executing exempt transactions that are outside 
the safe harbors and exemptions provided by our rules. It may also 
increase compliance costs for issuers, particularly in Rule 504 
offerings, which are not currently subject to bad actor 
disqualification; such issuers could be required to bear additional 
costs associated with, for example, circulating questionnaires to 
covered persons, revising questionnaires based on state 
disqualification rules to cover the new Federal disqualification rules, 
checking publicly available databases and undertaking other factual 
inquiries.
     Uniform bad actor disqualification rules may increase 
investor protections and investor trust in the integrity of the private 
placement and limited offering markets generally, thereby increasing 
efficiency, potentially decreasing costs for issuers in those markets 
and providing other benefits to the public. On the other hand, they 
could impair efficiency if our rules are considered overbroad, or if 
increased compliance costs are not justified by the direct and indirect 
benefits of screening a larger universe of disqualified persons out of 
the market.
     We do not expect that uniform rules would have significant 
effects on competition, due to the ability of many issuers to avoid 
disqualification by eliminating bad actors, the availability of other 
statutory exemptions such as Section 4(2) and Section 4(5) of the 
Securities Act, and the ability to register offerings for which an 
exemption is no longer available. For the same reasons, we do not 
expect that such expanded rules would have a significant impact on 
costs of capital raising (although, as discussed above, we expect that 
issuers will incur some incremental costs).
     We expect that the impact on small businesses of uniform 
rules would be substantially the same as the impact of the amendments 
we are proposing. See Part IX of this Release for our preliminary 
analysis of such effects.
Request for Comment
    (70) Would it be appropriate to apply the proposed disqualification 
standards uniformly to offerings under Regulation A, Regulation D and 
Regulation E? Or should we limit the disqualification provisions in the 
new rule only to those expressly required by the Dodd-Frank Act (i.e., 
only to Rule 506 transactions), as proposed?
    (71) If we were to expand the application of the rules beyond Rule 
506 transactions, should we distinguish between conforming the 
provisions of the exemptive rules that currently have bad actor 
disqualification requirements (i.e., Regulation A, Rule 505 of 
Regulation D and Regulation E), on the one hand, and imposing the same 
requirement on Rule 504 offerings, on the other, given that they are 
currently not subject to bad actor disqualification at the Federal 
level? Should we adopt disclosure or other rules for Rule 504 offerings 
as an alternative means of addressing investor protection concerns 
regarding bad actors in these offerings? What would be the costs and 
benefits of such a disclosure alternative?
    (72) Should we conform the disqualification provisions of 
Regulation A and Regulation E to the standards proposed in Rule 506(c), 
or should these provisions continue to reflect current regulatory 
standards? Since offering documents for both Regulation A and 
Regulation E offerings are subject to both Commission and state ``Blue 
Sky'' review and regulation, would it be appropriate to subject them 
also to the new Federal disqualification provisions required by the 
Dodd-Frank Act for Rule 506 offerings?
    (73) Should we make any additional changes to the proposed covered 
persons or disqualification events that are specific to Regulation A or 
Regulation E, reflecting the particular nature of those offerings?
    (74) If we were to include investment advisers as covered persons, 
is it appropriate to limit coverage to the investment advisers of 
private fund issuers and BDCs? Or should investment advisers to other 
issuers also be covered?
    (75) If we conformed the bad actor disqualification rules of 
Regulation A and Regulation E to the new rule we are proposing, should 
we nevertheless continue to measure look-back periods under Rule 262 of 
Regulation A and Rule 602 of Regulation E based on the date of filing 
of the relevant offering circular? Or should we consider a uniform 
measurement date based on the date of the relevant sale of a security?
    (76) If we were to pursue a uniform approach to bad actor 
disqualification, should this affect our proposal to not provide for 
grandfathering of disqualifying events that predate adoption of the 
Dodd-Frank Act or the proposal or adoption of new rules? Would any of 
the possible changes to each of the current disqualifications have 
particular effects on those offerings or participants in those 
offerings that we should take into account? If so, how could we address 
those effects? Should grandfathering, if any, be limited to 
disqualification provisions other than those imposed on Rule 506 
offerings?
    (77) What would the costs and benefits of uniform rules be? Would 
the benefits justify the costs? How would uniform rules affect 
competition, efficiency and capital formation?
    (78) What would the impact on small businesses be if we imposed 
uniform rules? Would that be different from the impact of the rule 
amendments we are proposing, which are limited to Rule 506 offerings? 
If so, how?

B. Uniform Look-Back Periods

    We are also considering making uniform all of the look-back periods 
that apply to disqualifying events that have an express look-back 
period. Rather than using a ten-year period for the final orders of 
certain state and Federal regulators (as required under the Dodd-Frank 
Act), and for criminal convictions of covered persons other than the 
issuer, its predecessors and affiliated issuers (as provided under 
current Rule 262), and a five-year period for all other events subject 
to an express look-back period, we are considering applying a uniform 
ten-year look-back to all such events. We request public comment on 
whether a uniform look-back period would make the rules clearer and 
easier to apply or would otherwise better promote our regulatory 
objectives.
    (79) Would it be appropriate for us to apply a uniform ten-year 
period to all disqualifying events that are subject to an express look-
back period? Are there any disqualifying events for which the look-back 
period should be shorter (e.g., five years)? Are there any events for 
which the look-back period should be longer than ten years? Are there 
events that should be permanently disqualifying?
    (80) If look-back periods were extended, should events that are no 
longer disqualifying under current rules become disqualifying again? 
For example, under current rules a court order that is more than five 
years old is no longer disqualifying under Rule 262. If we extended the 
look-back period to ten years, a court order issued six years prior, 
which is no longer disqualifying, would again create a basis for 
disqualification. Is that appropriate?
    (81) What would the costs and benefits be of applying a uniform 
ten-year look-back period? Would the benefits justify the costs? How 
would a uniform look-back period affect competition, efficiency and 
capital formation? Would small businesses be affected differently than 
they would be under the rules as proposed and, if so, how?

[[Page 31535]]

IV. General Request for Comment

    We request comment, both specific and general, on each component of 
the proposals. We request and encourage any interested person to submit 
comments regarding the proposals that are the subject of this release 
and other matters that may have an effect on the proposals contained in 
this release.
    Comment is solicited from the point of view of both investors and 
issuers, as well as of capital formation facilitators, such as 
investment banks, and other regulatory bodies, such as state securities 
regulators. Any interested person wishing to submit written comments on 
any aspect of the proposal is requested to do so.

V. Chart--Comparison of Felon and Other Bad Actor Disqualification 
Under Current Rule 262, Dodd-Frank Act Section 926 and Proposed Rule 
506(c)

    The following chart compares the terms of current Rule 262 (the bad 
actor disqualification provisions of Regulation A), Section 926 of the 
Dodd-Frank Act and proposed Rule 506(c). The chart is a convenience 
summary only and should be read together with (and is qualified in its 
entirety by) the current rules, any applicable interpretations and the 
full text of the proposed rules included in this release.

A. Covered Persons

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(a):                  926(1):
    Issuer               Regulations that are     Issuer.
    Issuer predecessors   ``substantially         Issuer predecessors.
    Affiliated issuers    similar to the          Affiliated issuers.
                          provisions of'' Rule
                          262
262(b):
    Directors            .......................  Directors.
    Officers             .......................  Officers.
    General partners     .......................  General partners.
    10% beneficial       .......................  Managing members.
     owners
    Promoters presently  .......................  10% beneficial owners.
     connected with the                           Promoters connected
     issuer                                        with the issuer at
                                                   the time of such
                                                   sale.
262(c):
    Underwriters         .......................  Persons compensated
    Partners, directors                            for soliciting
     and officers of                               purchasers.\113\
     underwriters                                 General partners,
                                                   directors, officers
                                                   and managing members
                                                   of compensated
                                                   solicitors.
------------------------------------------------------------------------

B. Disqualifying Events

1. Criminal Convictions
---------------------------------------------------------------------------

    \113\ As used in Regulation D Rule 505, the term ``underwriter'' 
is defined to mean ``a person that has been or will be paid directly 
or indirectly remuneration for solicitation of purchasers in 
connection with sales of securities'' under the rule. 17 CFR 
230.505(b)(2)(iii)(B)..

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(a)(3):               926(2)(B):
 The issuer, any of its  Rules must disqualify    Any covered person:
 predecessors or any      any offering or sale    ``has been convicted,
 affiliated issuer:       of securities by a       within ten years
 ``has been convicted     person that:             before such sale (or
 within 5 years * * *    ``has been convicted of   five years, in the
 of any felony or         any felony or            case of issuers,
 misdemeanor in           misdemeanor in           their predecessors
 connection with the      connection with the      and affiliated
 purchase or sale of      purchase or sale of      issuers), of any
 any security or          any security or          felony or
 involving the making     involving the making     misdemeanor:
 of any false filing      of any false filing     (A) in connection with
 with the Commission''    with the Commission''    the purchase or sale
262(b)(1):                                         of any security;
 Any other covered                                (B) involving the
 person:                                           making of any false
 ``has been convicted                              filing with the
 within 10 years * * *                             Commission; or
 of any felony or                                 (C) arising out of the
 misdemeanor in                                    conduct of the
 connection with the                               business of an
 purchase or sale of                               underwriter, broker,
 any security,                                     dealer, municipal
 involving the making                              securities dealer,
 of any false filing                               investment adviser or
 with the Commission,                              paid solicitor of
 or arising out of the                             purchasers of
 conduct of the                                    securities;''
 business of an
 underwriter, broker,
 dealer, municipal
 securities dealer, or
 investment adviser''
------------------------------------------------------------------------

2. Injunctions and Court Orders

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(a)(4):

[[Page 31536]]

 
    The issuer, any of   No specific provision;   Any covered person:
     its predecessors     regulations must be     is subject to any
     or any affiliated    ``substantially          order, judgment, or
     issuer:              similar to the           decree of any court
    is subject to any     provisions of'' Rule     of competent
     order, judgment,     262                      jurisdiction, entered
     or decree of any                              within five years
     court of competent                            before such sale,
     jurisdiction                                  that, at the time of
     temporarily or                                such sale, restrains
     preliminarily                                 or enjoins such
     restraining or                                person from engaging
     enjoining, or is                              or continuing to
     subject to any                                engage in any conduct
     order, judgment or                            or practice:
     decree of any                                (A) in connection with
     court of competent                            the purchase or sale
     jurisdiction,                                 of any security;
     entered within 5                             (B) involving the
     years prior to                                making of any false
     filing,                                       filing with the
     permanently                                   Commission; or
     restraining or                               (C) arising out of the
     enjoining, such                               conduct of the
     person from                                   business of an
     engaging in or                                underwriter, broker,
     continuing any                                dealer, municipal
     conduct or                                    securities dealer,
     practice in                                   investment adviser or
     connection with                               paid solicitor of
     the purchase or                               purchasers of
     sale of any                                   securities''
     security or
     involving the
     making of any
     false filing with
     the Commission''
262(b)(2):
Any other covered
 person:
Identical to (a)(4),
 but adds ``or arising
 out of the conduct of
 the business of an
 underwriter, broker,
 dealer, municipal
 securities dealer or
 investment adviser.''
------------------------------------------------------------------------

3. Final Orders of Certain Regulators

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
No general provision on  Rules must disqualify    Any covered person:
 administrative           any offering or sale    ``is subject to a
 enforcement actions      of securities by a       final order of a
                          person that:             State securities
                         ``is subject to a final   commission (or an
                          order of a State         agency or officer of
                          securities commission    a State performing
                          (or an agency or         like functions); a
                          officer of a State       State authority that
                          performing like          supervises or
                          functions), a State      examines banks,
                          authority that           savings associations,
                          supervises or examines   or credit unions; a
                          banks, savings           State insurance
                          associations, or         commission (or an
                          credit unions, a State   agency or officer of
                          insurance commission     a State performing
                          (or an agency or         like functions); an
                          officer of a State       appropriate Federal
                          performing like          banking agency; or
                          functions), an           the National Credit
                          appropriate Federal      Union Administration,
                          banking agency, or the   that--
                          National Credit Union   (2) engaging in the
                          Administration, that--   business of
                         (i) bars the person       securities, insurance
                          from--                   or banking; or
                         (I) association with an  (A) at the time of
                          entity regulated by      such sale, bars the
                          such commission,         person from:
                          authority, agency or    (1) association with
                          officer;                 an entity regulated
                         (II) engaging in the      by such commission,
                          business of              authority, agency or
                          securities, insurance    officer;
                          or banking; or          (2) engaging in the
                         (III) engaging in         business of
                          savings association or   securities, insurance
                          credit union             or banking; or
                          activities; or          (3) engaging in
                         (ii) constitutes a        savings association
                          final order based on a   or credit union
                          violation of any law     activities; or
                          or regulation that      (B) constitutes a
                          prohibits fraudulent,    final order based on
                          manipulative, or         a violation of any
                          deceptive conduct        law or regulation
                          within the ten-year      that prohibits
                          period ending on the     fraudulent,
                          date of the filing of    manipulative, or
                          the offer or sale.''     deceptive conduct
                                                   entered within ten
                                                   years before such
                                                   sale.''
------------------------------------------------------------------------


[[Page 31537]]

4. Commission Disciplinary Orders
---------------------------------------------------------------------------

    \114\ The cited sections cover suspension or revocation of 
registration and certain other sanctions against brokers, dealers 
and municipal securities dealers.
    \115\ The cited sections cover suspension or revocation of 
registration and other sanctions against investment advisers.

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(b)(3):
    Any covered person   No specific provision;   Any covered person:
     other than the       regulations must be     ``is subject to an
     issuer, its          ``substantially          order of the
     predecessors and     similar to the           Commission entered
     affiliated           provisions of'' Rule     pursuant to section
     issuers:             262                      15(b) or 15B(c) of
    ``is subject to an                             the Exchange Act * *
     order of the                                  * or section 203(e)
     Commission entered                            or (f) of the
     pursuant to                                   Investment Advisers
     section 15(b),                                Act of 1940 * * *
     15B(a) or 15B(c)                              that, at the time of
     of the Exchange                               such sale:
     Act,\114\ or                                 (A) suspends or
     section 203(e) or                             revokes such person's
     (f) of the                                    registration as a
     Investment                                    broker, dealer,
     Advisers Act''                                municipal securities
     \115\                                         dealer or investment
                                                   adviser;
                                                  (B) places limitations
                                                   on the activities,
                                                   functions or
                                                   operations of such
                                                   person; or
                                                  (C) bars such person
                                                   from being associated
                                                   with any entity or
                                                   from participating in
                                                   the offering of any
                                                   penny stock;
------------------------------------------------------------------------

5. Suspension or Expulsion From SRO Membership or Association With an 
SRO Member

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(b)(4):
    Any covered person   No specific provision;   Any covered person:
     other than the       regulations must be     ``is suspended or
     issuer, its          ``substantially          expelled from
     predecessors and     similar to the           membership in, or
     affiliated           provisions of'' Rule     suspended or barred
     issuers:             262                      from association with
    ``is suspended or                              a member of, a
     expelled from                                 registered national
     membership in, or                             securities exchange
     suspended or                                  or a registered
     barred from                                   national or
     association with a                            affiliated securities
     member of, a                                  association for any
     national                                      act or omission to
     securities                                    act constituting
     exchange                                      conduct inconsistent
     registered under                              with just and
     section 6 of the                              equitable principles
     Exchange Act or a                             of trade;
     national
     securities
     association
     registered under
     section 15A of the
     Exchange Act for
     any act or
     omission to act
     constituting
     conduct
     inconsistent with
     just and equitable
     principles of
     trade.''
------------------------------------------------------------------------

6. Stop Orders and Orders Suspending Exemptions
---------------------------------------------------------------------------

    \116\ The provision under which stop orders are issued for 
Securities Act registration statements.X

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(a)(1):               No specific provision;   Any covered person:
The issuer, any of its    regulations must be     ``has filed (as a
 predecessors or any      ``substantially          registrant or
 affiliated issuer:       similar to the           issuer), or was or
``has filed a             provisions of'' Rule     was named as an
 registration statement   262                      underwriter in, any
 which is the subject                              registration
 of any pending                                    statement or
 proceeding or                                     Regulation A offering
 examination under                                 statement filed with
 Section 8 of the                                  the Commission that,
 Act,\116\ or has been                             within five years
 the subject of any                                before such sale, was
 refusal order or stop                             the subject of a
 order thereunder                                  refusal order, stop
 within 5 years prior                              order, or order
 to the filing of the                              suspending the
 offering statement                                Regulation A
 required by Sec.                                  exemption, or is at
 230.252.''                                        the time of such sale
                                                   the subject of an
                                                   investigation or
                                                   proceeding to
                                                   determine whether a
                                                   stop order or
                                                   suspension order
                                                   should be issued.''
262(c)(1):
    Any underwriter was
     or was named as an
     underwriter of any
     securities:

[[Page 31538]]

 
    ``covered by a
     registration
     statement which is
     the subject of any
     pending proceeding
     or examination
     under Section 8 of
     the Act, or has
     been the subject
     of any refusal
     order or stop
     order thereunder
     within 5 years
     prior to the
     filing of the
     offering statement
     required by Sec.
     230.252.''
262(a)(2):
    The issuer, any of   No specific provision;   See above (one
     its predecessors     regulations must be      paragraph of 506(c)
     or any affiliated    ``substantially          covers the substance
     issuer:              similar to the           of 262(a)(1), (a)(2),
    ``is subject to a     provisions of'' Rule     (c)(1) and (c)(2))
     pending proceeding   262
     under Sec.
     230.258\117\ or
     any similar rule
     adopted under
     section 3(b) of
     the Securities
     Act, or to any
     order entered
     thereunder within
     5 years prior to
     the filing of such
     offering
     statement.''
262(c)(2):
    Any underwriter was
     or was named as an
     underwriter of any
     securities:
    ``covered by any
     filing which is
     subject to any
     pending proceeding
     under Sec.
     230.258 or any
     similar rule
     adopted under
     section 3(b) of
     the Securities
     Act, or to any
     order entered
     thereunder within
     5 years prior to
     the filing of such
     offering
     statement.''
------------------------------------------------------------------------

7. U.S. Postal Service False Representation Orders
---------------------------------------------------------------------------

    \117\ The provision under which the Regulation A exemption would 
be suspended.

------------------------------------------------------------------------
        Rule 262          Dodd-Frank Section 926   Proposed Rule 506(c)
------------------------------------------------------------------------
262(a)(5) and (b)(5):
    Any covered person:  No specific provision;   Any covered person:
    ``is subject to a     regulations must be     ``is subject to a
     United States        ``substantially          United States Postal
     Postal Service       similar to the           Service false
     false                provisions of'' Rule     representation order
     representation       262                      entered within 5
     order entered                                 years before such
     under 39 U.S.C.                               sales or is at the
     Sec.   3005 within                            time of such sale
     5 years prior to                              subject to a
     filing, or is                                 temporary restraining
     subject to a                                  order or preliminary
     temporary                                     injunction with
     restraining order                             respect to conduct
     or preliminary                                alleged by the United
     injunction entered                            States Postal Service
     under 39 U.S.C.                               to constitute a
     Sec.   3007 with                              scheme or device for
     respect to conduct                            obtaining money or
     alleged to have                               property through the
     violated 39 U.S.C.                            mail by means of
     Sec.   3005.''                                false
                                                   representations.''
------------------------------------------------------------------------

C. Waivers/Exclusions

------------------------------------------------------------------------
                                  Dodd-Frank Section     Proposed Rule
            Rule 262                      926               506(c)
------------------------------------------------------------------------
                                 Waivers
------------------------------------------------------------------------
262 (first unnumbered             No specific         Paragraph (c)(1)
 paragraph):                       provision;          of this section
Waiver by the Commission           regulations must    shall not apply:
``upon showing of good cause and   be                 (i) upon a showing
 without prejudice to any other    ``substantially     of good cause and
 action by the Commission, [if]    similar to the      without prejudice
 the Commission determines that    provisions of''     to any other
 it is not necessary under the     Rule 262.           action by the
 circumstances that the                                Commission, if
 exemption provided by this                            the Commission
 Regulation A be denied.''                             determines that
                                                       it is not
                                                       necessary under
                                                       the circumstances
                                                       that the
                                                       exemption be
                                                       denied.
------------------------------------------------------------------------

[[Page 31539]]

 
                        Reasonable Care Exception
------------------------------------------------------------------------
                                                      (ii) if the issuer
                                                       establishes that
                                                       it did not know,
                                                       and in the
                                                       exercise of
                                                       reasonable care
                                                       could not have
                                                       known, that a
                                                       disqualification
                                                       existed under
                                                       paragraph (c)(1)
                                                       of this section.
                                                      Instruction to
                                                       paragraph
                                                       (c)(2)(ii). An
                                                       issuer will not
                                                       be able to
                                                       establish that it
                                                       has exercised
                                                       reasonable care
                                                       unless it has
                                                       made factual
                                                       inquiry into
                                                       whether any
                                                       disqualifications
                                                       exist. The nature
                                                       and scope of the
                                                       requisite inquiry
                                                       will vary based
                                                       on the
                                                       circumstances of
                                                       the issuer and
                                                       the other
                                                       offering
                                                       participants.
------------------------------------------------------------------------
                      Events Pre-dating Affiliation
------------------------------------------------------------------------
262(a)(5):
    ``The entry of an order,      No specific         For purposes of
     judgment or decree against    provision;          paragraph (c)(1)
     any affiliated entity         regulations must    of this section,
     before the affiliation        be                  events relating
     arose, if the affiliate is    ``substantially     to any affiliated
     not in control of the         similar to the      issuer that
     issuer and if the             provisions of''     occurred before
     affiliated entity and the     Rule 262.           the affiliation
     issuer are not under the                          arose will be not
     common control of a third                         considered
     party who was in control of                       disqualifying if
     the affiliated entity at                          the affiliated
     the time of such entry does                       entity is not:
     not come within the purview                      (i) in control of
     of this paragraph (a) of                          the issuer or
     this section.''.                                  (ii) under common
                                                       control with the
                                                       issuer by a third
                                                       party that was in
                                                       control of the
                                                       affiliated entity
                                                       at the time of
                                                       such events;
------------------------------------------------------------------------

VI. Paperwork Reduction Act

    The proposed amendments do not contain a ``collection of 
information'' requirement within the meaning of the Paperwork Reduction 
Act of 1995.\118\ Accordingly, the Paperwork Reduction Act is not 
applicable and no Paperwork Reduction Act analysis is required.
---------------------------------------------------------------------------

    \118\ 44 U.S.C. 3501 through 3521.
---------------------------------------------------------------------------

VII. Cost-Benefit Analysis

A. Background and Summary of Proposals

    As discussed above, we are proposing amendments to implement the 
requirements of Section 926 of the Dodd-Frank Act, relating to the 
disqualification of ``felons and other `bad actors''' from 
participation in Rule 506 offerings.
    Section 926 of the Dodd-Frank Act requires the Commission to issue 
rules that disqualify securities offerings involving felons and other 
bad actors from reliance on the safe harbor provided by Rule 506 of 
Regulation D. These rules are required to be ``substantially similar'' 
to the disqualification rules in Rule 262 (which apply to Regulation A 
offerings as well as offerings under Rule 505 of Regulation D) and also 
to cover the matters enumerated in Section 926 (including certain state 
law orders and bars). The proposal includes a ``reasonable care'' 
exception that is not mandated by Section 926. This ``reasonable care'' 
exception would prevent an exemption from being lost, despite the 
existence of a disqualification with respect to a covered person, if 
the issuer can show that it did not know and, in the exercise of 
reasonable care, could not have known that the disqualification 
existed. The proposal also provides the Commission with authority to 
waive disqualification for good cause shown, similar to its waiver 
authority under Regulation A.
    Section 926 of the Dodd-Frank Act is intended to exclude felons and 
bad actors from participating in Rule 506 offerings, thereby protecting 
investors in those offerings.\119\ Our rules implementing Section 926 
are designed to secure the benefits Congress intended. Our analysis 
focuses on the costs and benefits of the additional matters that we are 
proposing that are not specifically mandated by Section 926. 
Specifically, we have identified certain costs and benefits that may 
result from the proposal to include a ``reasonable care'' exception and 
to provide waiver authority for the Commission. These costs and 
benefits are analyzed below. We encourage the public to identify, 
discuss, analyze and supply relevant data regarding these or any 
additional costs and benefits in comment letters on these proposed 
rules.
---------------------------------------------------------------------------

    \119\ See Statement of Senator Dodd, note 93.
---------------------------------------------------------------------------

B. Benefits

    We anticipate that the ``reasonable care'' exception for issuers 
would provide a benefit by assuring that issuers would not lose the 
Rule 506 safe harbor from Securities Act registration because of a 
disqualification relating to another covered person, so long as they 
can show that they did not know and in the exercise of reasonable care 
could not have known of the disqualification. If we did not adopt such 
an exception, issuers would be at risk of liability for a violation of 
Section 5 of the Securities Act or of applicable state ``blue sky'' law 
if they conducted an offering in reliance on Rule 506 and later learned 
that a disqualification existed, even if they had exercised reasonable 
care in determining that there was no disqualification. Without a 
reasonable care exception, issuers might therefore choose not to 
undertake offerings in reliance on Rule 506, because the downside (a 
potential Section 5 or blue sky law violation under circumstances that 
the issuer cannot reasonably predict or control) may outweigh the 
intended upside (a relatively speedy and cost-effective means of 
raising capital). In that scenario, alternative approaches to capital 
raising may be more costly to the issuer or not available at all. 
Because Rule 506 is our most frequently relied-upon Securities Act 
exemptive rule, the

[[Page 31540]]

impact of issuers shifting away from it could be significant. We 
believe that the proposed reasonable care exception would help to 
preserve the intended benefits of Rule 506, which might otherwise be 
impaired because of issuer concerns about strict liability for unknown 
disqualifications.
    Similarly, we believe that providing waiver authority for the 
Commission would provide a benefit to issuers and other covered persons 
by giving them the opportunity to explain why disqualification should 
not arise as a consequence of a particular event or the participation 
of a particular covered person. The Commission's ability to grant 
waivers could allow more offerings to remain within the Rule 506 safe 
harbor than would otherwise be the case, which could result in cost 
savings for issuers relative to the cost of raising capital in a 
registered offering or in reliance on other exemptions.

C. Costs

    The inclusion of a reasonable care exception for issuers may impose 
costs by increasing the likelihood that recidivists will participate in 
Rule 506 offerings and decreasing the deterrent effect of the bad actor 
disqualification rules mandated by Section 926 of the Dodd-Frank Act. 
Participation in Rule 506 offerings by bad actors could result in 
substantial harm. To the extent that inclusion of a reasonable care 
exception results in greater involvement of recidivist bad actors in 
Rule 506 offerings than would otherwise be the case, it would also 
reduce or eliminate benefits associated with increased investor trust 
and market integrity.
    Issuers may also incur costs associated with conducting and 
documenting their factual inquiry into possible disqualifications, so 
they can demonstrate the exercise of reasonable care.
    Providing for waiver authority may impose costs by decreasing the 
deterrent effect of the bad actor disqualification rules, and (to the 
extent the Commission may grant waivers) by enabling offerings 
involving bad actors to be conducted under Rule 506 that would 
otherwise be disqualified. In addition, persons seeking waivers would 
incur costs in doing so.
    Our rules may impose costs on issuers and other market participants 
in terms of transactions foregone or effected by other means at higher 
cost. For example, imposing a new disqualification standard only on 
offerings under Rule 506 may result in higher costs for issuers relying 
on other exemptive rules, if investors lose trust in offerings under 
such other rules. We seek comment on any changes that could be made to 
the proposal, such as modifying the list of covered persons, the nature 
of disqualifying events, the time periods applicable to disqualifying 
events or the process for obtaining waivers of disqualification, that 
could reduce the burden on capital-raising activities without 
compromising investor protection.
Request for Comment
    We solicit comments on the costs and benefits of the proposed 
amendment and on all aspects of this cost-benefit analysis. We request 
your views on the costs and benefits described above, as well as on any 
other costs and benefits not already identified that could result from 
the adoption of our proposal. We encourage the public to identify, 
discuss, and analyze these or any additional costs and benefits in 
comment letters. We request that comment letters responding to these 
requests provide empirical data and other factual support to the extent 
possible.

VIII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition and Capital Formation

    Section 2(b) of the Securities Act \120\ requires us, when engaging 
in rulemaking where we are required to consider or determine whether an 
action is necessary or appropriate in the public interest, to consider, 
in addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

    Section 926 of the Dodd-Frank Act requires the Commission to adopt 
provisions to disqualify certain offerings from reliance on the Rule 
506 exemption of Regulation D. To the extent our proposed amendments 
may go beyond the statutory mandate of Section 926 by providing a 
``reasonable care'' exception for issuers and providing waiver 
authority for the Commission, we believe this would enable issuers to 
use Rule 506 more effectively and therefore would benefit efficiency 
and promote capital formation. In particular, the proposed rules are 
expected to reduce the risk of fraud and other potential securities law 
violations and increase investor trust in Rule 506 offerings, thereby 
lowering costs for issuers. We do not anticipate any significant effect 
on competition.
    We request comment on whether the proposal, if adopted, would 
promote or burden efficiency, competition and capital formation. 
Finally, we request those who submit comment letters to provide 
empirical data and other factual support for their views, if possible.

IX. Initial Regulatory Flexibility Act Analysis

    This initial regulatory flexibility analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to proposed amendments to Rule 
506 of Regulation D under the Securities Act which would disqualify 
certain offerings where ``felons and other `bad actors' '' are 
participating or present from the safe harbor from Securities Act 
registration provided by Rule 506.

A. Reasons for the Proposed Action

    The primary reason for the proposed amendments is to implement the 
requirements of Section 926 of the Dodd-Frank Act. Section 926 requires 
the Commission to issue rules under which certain offerings where 
``felons and other `bad actors' '' are participating or present will be 
disqualified from reliance on the safe harbor from registration 
provided by Rule 506 of Regulation D.

B. Objectives

    Our primary objective is to implement the requirements of Section 
926 of the Dodd-Frank Act. In general the rule we are proposing is a 
straightforward implementation of the statutory requirements. We have 
included a ``reasonable care'' exception in the proposed rule, which we 
believe will make the rule more useful to issuers and should encourage 
continued use of Rule 506 over exempt transactions outside the Rule 506 
safe harbor.

C. Legal Basis

    The amendment is being proposed under the authority set forth in 
Sections 4(2), 19, and 28 of the Securities Act and in Section 926 of 
the Dodd-Frank Act.

D. Small Entities Subject to the Proposed Rules

    The proposal would affect issuers (including both operating 
businesses and investment funds that raise capital under Rule 506) and 
other covered persons, such as financial intermediaries, that are small 
entities. For purposes of the Regulatory Flexibility Act under our 
rules, an entity is a ``small business'' or ``small organization'' if 
it has total assets of $5 million or less as of the end of its most 
recent fiscal year.\121\ For purposes of the Regulatory Flexibility 
Act, an investment company is a small entity if

[[Page 31541]]

it, together with other investment companies in the same group of 
related investment companies, has net assets of $50 million or less as 
of the end of its most recent fiscal year.
---------------------------------------------------------------------------

    \121\ 17 CFR 230.157.
---------------------------------------------------------------------------

    The proposed amendment would apply to small issuers relying on Rule 
506 of Regulation D to qualify for a safe harbor from Securities Act 
registration. All issuers that sell securities in reliance on 
Regulation D are required to file a Form D with the Commission 
reporting the transaction. For the fiscal year ended September 30, 
2010, 17,292 issuers filed an initial notice on Form D. The vast 
majority of companies and funds filing notices on Form D are not 
required to provide information to the Commission that would enable us 
to establish their size. However, a significant portion of Rule 506 
offerings (approximately 40% for the twelve month period ended 
September 30, 2010), were for amounts of $5,000,000 or less. We believe 
that many of the issuers in these offerings are small entities, but we 
currently do not collect information on total assets of companies and 
net assets of funds to determine if they are small entities for 
purposes of this analysis.

E. Reporting, Recordkeeping and Other Compliance Requirements

    The proposed rule would not impose any reporting, recordkeeping or 
disclosure requirements.\122\ We anticipate, however, that issuers 
would generally exercise reasonable care to ascertain whether a 
disqualification exists with respect to any covered person, and may 
document their exercise of reasonable care. The steps required would 
vary with the circumstances, but we anticipate may include such steps 
as making appropriate inquiry of covered persons and reviewing 
information on publicly available databases. We expect that the costs 
of compliance would generally be lower for small entities than for 
larger ones because of the relative simplicity of their organizational 
structures and securities offerings and the generally smaller numbers 
of individuals and entities involved.
---------------------------------------------------------------------------

    \122\ As discussed in Part II.G of this Release, we are 
proposing to change the form of the signature block of Form D.
---------------------------------------------------------------------------

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe there are no Federal rules that conflict with or 
duplicate the proposed amendments.

G. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objectives of our 
proposals, while minimizing any significant adverse impact on small 
entities. In connection with the proposed amendments, we considered the 
following alternatives:
     The establishment of different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     The clarification, consolidation, or simplification of the 
rule's compliance and reporting requirements for small entities;
     The use of performance rather than design standards; and
     An exemption from coverage of the proposed amendments, or 
any part thereof, for small entities.
    With respect to the establishment of different compliance 
requirements or timetables under our proposed amendment for small 
entities, we do not think this is feasible or appropriate. Moreover, 
the proposal is designed to exclude ``felons and other `bad actors' '' 
from involvement in Rule 506 securities offerings, which could benefit 
small issuers by protecting them and their investors from bad actors 
and increasing investor trust in such offerings. Increased investor 
trust could reduce the cost of capital and create greater opportunities 
for small businesses to raise capital. Nevertheless, we request comment 
on the feasibility and appropriateness for small entities to have 
different compliance requirements or timetables for compliance with our 
proposal.
    Likewise, with respect to potentially clarifying, consolidating, or 
simplifying compliance and reporting requirements, the proposed rule 
does not impose any new reporting requirements. To the extent it may be 
considered to create a new compliance requirement to exercise 
reasonable care to ascertain whether a disqualification exists with 
respect to any offering, the precise steps necessary to meet that 
requirement will vary according to the circumstances. In general, we 
believe the requirement will more easily be met by small entities than 
by larger ones because we believe that their structures and securities 
offerings are generally less complex and involve fewer participants. We 
request comment on whether there are ways to clarify, consolidate, or 
simplify this requirement for small entities.
    With respect to using performance rather than design standards, we 
note that the ``reasonable care'' exception is a performance standard.
    With respect to exempting small entities from coverage of these 
proposed amendments, we believe such a proposal would be impracticable 
and contrary to the legislative intent of Section 926. Regulation D was 
largely designed to provide exemptive relief for small entities. 
Exempting small entities from bad actor provisions could result in a 
decrease in investor protection and trust in the private placement and 
small offerings markets, which would be contrary to the legislative 
intent of Section 926. We have endeavored to minimize the regulatory 
burden on all issuers, including small entities, while meeting our 
regulatory objectives and have included a ``reasonable care'' exception 
and waiver authority for the Commission, to give issuers and other 
covered persons additional flexibility with respect to the application 
of these proposed amendments. Nevertheless, we request comment on ways 
in which we could exempt small entities from coverage of any unduly 
onerous aspects of the proposed amendments.

H. Request for Comment

    We encourage comments with respect to any aspect of this initial 
regulatory flexibility analysis. In particular, we request comments 
regarding:
     The number of small entities that may be affected by the 
proposal or the uniformity and updating alternatives;
     The existence or nature of the potential impact of the 
proposal and the alternatives on small entities discussed in this 
analysis; and
     How to quantify the impact of the proposed amendments, or 
amendments that would implement the alternatives.
    We request members of the public to submit comments and ask them to 
describe the nature of any impact on small entities they identify and 
provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the final regulatory 
flexibility analysis, if the proposals are adopted, and will be placed 
in the same public file as comments on the proposed amendments 
themselves.

X. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\123\ a rule is ``major'' if it has resulted, 
or is likely to result in:
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    \123\ Public Law 104-121, Tit. II, 110 Stat. 857.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for

[[Page 31542]]

purposes of SBREFA. We solicit comment and empirical data on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment or 
innovation.
    We request those submitting comments to provide empirical data and 
other factual support for their views if possible.

XI. Statutory Authority and Text of Proposed Amendments

    We are proposing the amendments contained in this document under 
the authority set forth in Sections 4(2), 19 and 28 of the Securities 
Act, as amended,\124\ and Section 926 of the Dodd-Frank Act.\125\
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    \124\ 15 U.S.C. 77c(b), 77c(c), 77d(2), 77r, 77s and 77z-3.
    \125\ Public Law 111-203, Sec.  926, 124 Stat. 1376 (July 21, 
2010)(to be codified at 15 USC 77d note).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 230 and 239

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out above, Title 17, Chapter II of the Code of 
Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The general authority citation for Part 230 is revised to read 
as follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
and Pub. L. 111-203, Sec.  413(a) and Sec.  926, 124 Stat. 1577 
(2010)(15 U.S.C. 77d note), unless otherwise noted.
* * * * *
    2. Amend Sec.  230.501 by redesignating paragraphs (g) and (h) as 
paragraphs (h) and (i), respectively, and adding new paragraph (g) to 
read as follows:


Sec.  230.501  Definitions and terms used in Regulation D.

* * * * *
    (g) Final order. Final order shall mean a written directive or 
declaratory statement issued pursuant to applicable statutory authority 
and procedures by a Federal or state agency described in Sec.  
230.506(c)(1)(iii), which constitutes a final disposition or action by 
that Federal or state agency.
* * * * *
    3. Amend Sec.  230.506 by redesignating the Note following 
paragraph (b)(2)(i) as ``Note to paragraph (b)(2)(i)'' and adding 
paragraph (c) to read as follows:


Sec.  230.506  Exemption for limited offers and sales without regard to 
dollar amount of offering.

* * * * *
    (c) ``Bad Actor''disqualification. (1) No exemption under this 
section shall be available for a sale of securities if the issuer; any 
predecessor of the issuer; any affiliated issuer; any director, 
officer, general partner or managing member of the issuer; any 
beneficial owner of 10% or more of any class of the issuer's equity 
securities; any promoter connected with the issuer in any capacity at 
the time of such sale; any person that has been or will be paid 
(directly or indirectly) remuneration for solicitation of purchasers in 
connection with such sale of securities; or any general partner, 
director, officer or managing member of any such solicitor:
    (i) Has been convicted, within ten years before such sale (or five 
years, in the case of issuers, their predecessors and affiliated 
issuers), of any felony or misdemeanor:
    (A) In connection with the purchase or sale of any security;
    (B) Involving the making of any false filing with the Commission; 
or
    (C) Arising out of the conduct of the business of an underwriter, 
broker, dealer, municipal securities dealer, investment adviser or paid 
solicitor of purchasers of securities;
    (ii) Is subject to any order, judgment or decree of any court of 
competent jurisdiction, entered within five years before such sale, 
that, at the time of such sale, restrains or enjoins such person from 
engaging or continuing to engage in any conduct or practice:
    (A) In connection with the purchase or sale of any security;
    (B) Involving the making of any false filing with the Commission; 
or
    (C) Arising out of the conduct of the business of an underwriter, 
broker, dealer, municipal securities dealer, investment adviser or paid 
solicitor of purchasers of securities;
    (iii) Is subject to a final order of a state securities commission 
(or an agency or officer of a state performing like functions); a state 
authority that supervises or examines banks, savings associations, or 
credit unions; a state insurance commission (or an agency or officer of 
a state performing like functions); an appropriate Federal banking 
agency; or the National Credit Union Administration that:
    (A) At the time of such sale, bars the person from:
    (1) Association with an entity regulated by such commission, 
authority, agency, or officer;
    (2) Engaging in the business of securities, insurance or banking; 
or
    (3) Engaging in savings association or credit union activities; or
    (B) Constitutes a final order based on a violation of any law or 
regulation that prohibits fraudulent, manipulative, or deceptive 
conduct entered within ten years before such sale;
    (iv) Is subject to an order of the Commission entered pursuant to 
section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15 
U.S.C. 78o(b) or 78o-4(c)) or section 203(e) or (f) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at the time of 
such sale:
    (A) Suspends or revokes such person's registration as a broker, 
dealer, municipal securities dealer or investment adviser;
    (B) Places limitations on the activities, functions or operations 
of such person; or
    (C) Bars such person from being associated with any entity or from 
participating in the offering of any penny stock;
    (v) Is suspended or expelled from membership in, or suspended or 
barred from association with a member of, a registered national 
securities exchange or a registered national or affiliated securities 
association for any act or omission to act constituting conduct 
inconsistent with just and equitable principles of trade;
    (vi) Has filed (as a registrant or issuer), or was or was named as 
an underwriter in, any registration statement or Regulation A offering 
statement filed with the Commission that, within five years before such 
sale, was the subject of a refusal order, stop order, or order 
suspending the Regulation A exemption, or is, at the time of such sale, 
the subject of an investigation or proceeding to determine whether a 
stop order or suspension order should be issued; or
    (vii) Is subject to a United States Postal Service false 
representation order entered within five years before such sale, or is, 
at the time of such sale, subject to a temporary restraining order or 
preliminary injunction with respect to conduct alleged by the United 
States Postal Service to constitute a scheme or device for obtaining 
money or property through the mail by means of false representations.
    (2) Paragraph (c)(1) of this section shall not apply:
    (i) Upon a showing of good cause and without prejudice to any other 
action by the Commission, if the Commission determines that it is not 
necessary under the circumstances that an exemption be denied; or

[[Page 31543]]

    (ii) If the issuer establishes that it did not know, and in the 
exercise of reasonable care could not have known, that a 
disqualification existed under paragraph (c)(1) of this section.
    Instruction to paragraph (c)(2)(ii). An issuer will not be able to 
establish that it has exercised reasonable care unless it has made 
factual inquiry into whether any disqualifications exist. The nature 
and scope of the requisite inquiry will vary based on the circumstances 
of the issuer and the other offering participants.
    (3) For purposes of paragraph (c)(1) of this section, events 
relating to any affiliated issuer that occurred before the affiliation 
arose will be not considered disqualifying if the affiliated entity is 
not:
    (i) In control of the issuer; or
    (ii) Under common control with the issuer by a third party that was 
in control of the affiliated entity at the time of such events.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    4. The general authority citation for Part 239 continues to read in 
part as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll, 78mm, 80a-
2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29, 
80a-30, and 80a-37, unless otherwise noted.
* * * * *
    5. Amend Form D (referenced in Sec.  239.500) by revising the third 
paragraph under the heading ``Terms of Submission'' in the ``Signature 
and Submission'' section following Item 16 to read as follows:

    Note: The text of Form D does not, and the amendments will not, 
appear in the Code of Federal Regulations.

Form D

* * * * *
     Certifying that, if the issuer is claiming an exemption 
under Rule 505 or Rule 506, the issuer is not disqualified from relying 
on such rule for one of the reasons stated in paragraph (b)(2)(iii) of 
Rule 505 or paragraph (c)(1) of Rule 506 (as the case may be).
* * * * *

    By the Commission.

    Dated: May 25, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-13370 Filed 5-31-11; 8:45 am]
BILLING CODE 8011-01-P


