Saturday, December 06, 2014

Virginia Adds Prefatory Language to BD Unethical Rule to Avoid Federal Preemption

[This story previously appeared in Securities Regulation Daily.]

By Jay Fishman, J.D.

The Virginia Division of Securities and Retail Franchising within the State Corporation Commission added prefatory language to a broker-dealer/agent unethical practice rule provision to avoid having the provision become federally preempted by the National Securities Markets Improvement Act of 1996 (NSMIA).

Compensation disclosure provision. The provision pertains to Virginia Securities Act rule Sec. 21 VAC 5-20-280 A (32), which deems unethical a Virginia-registered (or required to be registered) broker-dealer’s “failure to advise a customer, both at the time of solicitation and confirmation of sale, of any and all compensation related to a specific securities transaction to be paid to the agent including, commissions, sales charges, or concessions…”

The Division’s concern was that this provision, by requiring compensation disclosures both at the time of solicitation and on confirmation of sale, creates a writing and record requirement specifically at the point of confirmation of sale that may conflict with, or exceed, federal securities law and SEC rule requirements. The Division was particularly concerned that the provision would conflict with NSMIA 15 U.S.C. § 78o(i)(1), which declares that no state law, rule, regulation, or order on broker-dealer bond, capital, custody, margin, financial responsibility, recordkeeping, or reporting requirements may differ or exceed federal requirements.

To avoid possible preemption, the Division added prefatory language limiting application of the compensation disclosure provision to “solicitation of a purchase or sale of over-the-counter unlisted non-NASDAQ equity securities.” The Division, however, reiterated from a December 16, 2013 policy statement that: (1) broker-dealers and broker-dealer agents are not relieved from an obligation to make adequate material disclosures of agent compensation in a securities transaction at the point of sale; and (2) the Division may investigate and bring enforcement against any broker-dealer or broker-dealer agent for failing to make adequate material disclosures about agent compensation at the point of sale.

No comments: