[Federal Register Volume 78, Number 142 (Wednesday, July 24, 2013)]
[Rules and Regulations]
[Pages 44729-44771]
[FR Doc No: 2013-16983]

Vol. 78

Wednesday,

No. 142

July 24, 2013

Part IV

Securities and Exchange Commission

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17 CFR Parts 200, 230, 239, et al.

Disqualification of Felons and Other ``Bad Actors'' from Rule 506
Offerings; Eliminating the Prohibition Against General Solicitation and
General Advertising in Rule 506 and Rule 144A Offerings; Amendments to
Regulation D, Form D and Rule 156; Final Rules and Proposed Rule

Federal Register / Vol. 78 , No. 142 / Wednesday, July 24, 2013 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, and 239

[Release No. 33-9414; 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: Final rule.

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SUMMARY: We are adopting 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 Rule 506 of Regulation D. The rules must be ``substantially
similar'' to Rule 262 under the Securities Act, which contains the
disqualification provisions of Regulation A under the Securities Act,
and must also cover matters enumerated in Section 926 of the Dodd-Frank
Act (including certain state regulatory orders and bars).

DATES: Effective Date: September 23, 2013.
    Comment Date: Comments regarding the collection of information
requirements within the meaning of the Paperwork Reduction Act of 1995
should be received on or before August 23, 2013.

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/final.shtml);
     Send an email to<EMAIL_ADDRESS>     Please include File Number S7-21-11 on the subject line;
or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the
    instructions for submitting comments.

Paper Comments

     Send paper comments on the Paperwork Reduction Act
analysis 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. This file number
should be included on the subject line if email is used. 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
Internet Web site (http://www.sec.gov/rules/final.shtml). Comments will
also be available for Web site viewing and printing in the Commission's
Public Reference Room, 100 F Street NE., Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 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, Division of Corporation
Finance, at<PHONE_NUMBER>, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rules 145,\1\
147,\2\ 152 \3\ and 155; \4\ Rules 501 \5\ and 506 \6\ of Regulation
D;\7\ and Form D \8\ under the Securities Act of 1933 \9\ and to Rule
30-1 \10\ of our Rules of Organization and Program Management.
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    \1\ 17 CFR 230.145.
    \2\ 17 CFR 230.147.
    \3\ 17 CFR 230.152.
    \4\ 17 CFR 230.155.
    \5\ 17 CFR 230.501.
    \6\ 17 CFR 230.506.
    \7\ 17 CFR 230.500 through 230.508.
    \8\ 17 CFR 239.500.
    \9\ 15 U.S.C. 77a et seq.
    \10\ 17 CFR 200.30-1.
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Table of Contents

I. Background And Summary
II. Discussion of the Final 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. Certain Commission Cease-and-Desist Orders
    6. Suspension or Expulsion from SRO Membership or Association
with an SRO Member
    7. Stop Orders and Orders Suspending the Regulation A Exemption
    8. U.S. Postal Service False Representation Orders
    D. Reasonable Care Exception
    1. Reasonable Care Standard
    2. Continuous and Long-Lived Offerings
    E. Waivers
    1. Waiver for Good Cause Shown
    2. Waiver Based on Determination of Issuing Authority
    F. Transition Issues
    1. Disqualification Applies Only to Triggering Events That Occur
After Effectiveness of the Rule Amendments
    2. Mandatory Disclosure of Triggering Events That Pre-Date
Effectiveness of the Rule
    3. Timing of Implementation
    G. Amendment to Form D
III. Paperwork Reduction Act
    A. Background
    B. Burden and Cost Estimates Related to the Adopted Amendments
IV. Economic Analysis
    A. Background and Summary of the Rule Amendments
    B. Economic Baseline
    1. Capital Raising Activity Using Rule 506
    2. Affected Market Participants
    A. Issuers
    B. Investors
    C. Investment Managers
    D. Broker-Dealers
    3. Estimated Incidence of ``Bad Actors'' in Securities Markets
Generally
    C. Analysis of Final Rules
    1. Effects of the Statutory Mandate
    2. Discretionary Amendments
V. Final Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Action
    B. Significant Issues Raised By Public Comments
    C. Small Entities Subject to the Rule Amendments
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
VI. Statutory Authority and Text of Amendments

I. Background and Summary

    Section 926 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act''), 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 Rule 506 of Regulation D.\11\ The Commission
proposed rule amendments to implement Section 926 of the Dodd-Frank Act
on May 25, 2011.\12\ Today we are adopting amendments to Rules 501 and
506 and to Form D to implement Section 926. The disqualification
provisions we are adopting, to be codified as new paragraph (d) of Rule
506,\13\ are generally consistent with the proposal, but will apply
only to triggering events occurring after effectiveness of the rule
amendments (with pre-existing events

subject to mandatory disclosure) and also reflect some changes in
response to comments.
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    \11\ Public Law 111-203, sec. 926, 124 Stat. 1376, 1851 (July
21, 2010) (codified at 15 U.S.C. 77d note).
    \12\ See Disqualification of Felons and Other ``Bad Actors''
from Rule 506 Offerings, Release No. 33-9211 (May 25, 2011) [76 FR
31518 (June 1, 2011)].
    \13\ Because of the adoption of new Rule 506(c), the
disqualification provisions we adopt today, which were proposed as
Rule 506(c), will be adopted and codified as Rule 506(d).
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    Rule 506 is one of three exemptive rules for limited offerings
under Regulation D.\14\ It is by far the most widely used Regulation D
exemption, accounting for an estimated 90% to 95% of all Regulation D
offerings \15\ and the overwhelming majority of capital raised in
transactions under Regulation D.\16\ Rule 506 permits sales of an
unlimited dollar amount of securities to be made without Securities Act
registration, provided that the requirements of the rule are satisfied.
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    \14\ The others are Rule 504 and Rule 505, 17 CFR 230.504 and
230.505. Rule 504 permits offerings of up to $1 million of
securities by issuers that are not (i) reporting companies under the
Securities Exchange Act of 1934, (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.
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, which are described elsewhere, except that non-accredited
investors are not required to be sophisticated and such offerings
are subject to bad actor disqualification provisions.
    \15\ In 2012, the Commission received 18,187 initial filings for
offerings under Regulation D, of which 17,203 (approximately 95%)
claimed a Rule 506 exemption.
    \16\ Staff of the Commission's Division of Economic and Risk
Analysis estimates that, for 2009, 2010, 2011 and 2012,
approximately $607 billion, $1.003 trillion, $850 billion and $899
billion, respectively, was raised in transactions claiming the Rule
506 exemption, in each case representing more than 99% of funds
raised under Regulation D for the period, based on Form D filings
with the Commission. The amount of capital raised through offerings
under Regulation D and the number of Regulation D offerings may be
considerably larger than what is disclosed in Form D filings because
the filing of a Form D notice is a requirement of Rule 503(a) of
Regulation D [17 CFR 230.503(a)], but is not a condition to the
availability of the exemptions of Regulation D. We understand that
some issuers, therefore, may not make Form D filings for offerings
made in reliance on Regulation D. Further, once a Form D filing is
made, the issuer is not required to file an amendment to reflect a
change that occurs after the offering terminates or a change that
occurs solely with respect to certain information, such as the
amount sold in the offering. For example, if the amount sold does
not exceed the offering size by more than 10% or the offering closes
before a year has passed, the filing of an amendment to Form D would
not necessarily be required. Therefore, the Form D filings for an
offering may not reflect the total amount of securities sold in the
offering in reliance on the exemption.
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    Rule 506 historically has permitted sales to an unlimited number of
accredited investors \17\ and up to 35 non-accredited investors, so
long as there was no general solicitation, appropriate resale
limitations were imposed, any applicable information requirements were
satisfied, and the other conditions of the rule were met.\18\ Section
201(a) of the Jumpstart Our Business Startups Act (``JOBS Act'')
required the Commission to eliminate the prohibition against general
solicitation and general advertising for offers and sales of securities
made pursuant to Rule 506, provided that all purchasers of the
securities are accredited investors and the issuer takes reasonable
steps to verify their accredited investor status.\19\ In a separate
release today, we are adopting amendments to Rule 506 and Form D,
including adding new paragraph (c) to Rule 506 to implement JOBS Act
Section 201(a).\20\ As a result, offers and sales of securities
involving the use of general solicitation will be permitted under Rule
506, provided that the requirements of new Rule 506(c) are satisfied.
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    \17\ 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.
    \18\ Except as provided under new Rule 506(c), offerings under
Rule 506 are subject to all the terms and conditions of Rules 501
and 502, including applicable limitations on the manner of offering,
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.
    \19\ See Public Law 112-106, sec. 201(a), 126 Stat. 306, 313
(Apr. 5, 2012).
    \20\ Eliminating the Prohibition Against General Solicitation
and General Advertising in Rule 506 and Rule 144A Offerings, Release
No. 33-9415 (July 10, 2013).
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    ``Bad actor'' disqualification requirements, sometimes called ``bad
boy'' provisions, disqualify securities offerings from reliance on
exemptions if the issuer or other relevant persons (such as
underwriters, placement agents and the directors, officers and
significant shareholders of the issuer) 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.\21\ 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.\22\
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    \21\ 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 amending Rule 507 at this time but,
in a separate release the Commission is issuing today, we are
proposing amendments to Rule 507 that would disqualify an issuer
from reliance on Rule 506 if the issuer or its predecessor or
affiliates had conducted a previous securities offering in reliance
on Rule 506 without complying with the Form D filing requirements of
Rule 503. See Amendments to Regulation D, Form D, and Rule 156,
Release No. 33-9416 (July 10, 2013).
    \22\ 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, Pub. L. No. 104-290,110 Stat. 3416 (Oct.
11, 1996) (``NSMIA''). NSMIA preempts state registration and review
requirements for transactions involving ``covered securities,''
which include securities offered or sold in transactions that are
exempt from registration under Commission rules or regulations
issued under Securities Act Section 4(a)(2) (formerly Section 4(2)).
Rule 506 was originally adopted as a safe harbor under Section
4(a)(2). Section 201(a) of the JOBS Act provides that Rule 506, as
amended in accordance with the mandate of that provision, ``shall
continue to be treated as a regulation issued under'' Section
4(a)(2) of the Securities 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 the bad actor disqualification provisions contained in
Rule 262 of Regulation A,\23\ and also provides an expanded list of
disqualifying events, including certain actions by state regulators,
enumerated in Section 926. The disqualifying events listed in Rule 262
cover the issuer and certain other persons associated with the issuer
or the offering, including: issuer predecessors and affiliated issuers;
directors, officers and general partners of the issuer; beneficial
owners of 10% or more of any class of the issuer's equity securities;
promoters connected with the issuer; and underwriters and their
directors, officers and partners. Rule 262 disqualifying events
include:
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    \23\ 17 CFR 230.262. Regulation A (17 CFR 230.251 through
230.263) 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 specified 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;
     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 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:
    [ssquf] revoking or suspending their registration as a broker,
dealer, municipal securities dealer, or investment adviser;
    [ssquf] placing limitations on their activities as such;
    [ssquf] barring them from association with any entity; or
    [ssquf] 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.
    On May 25, 2011, we proposed amendments to Rules 501 and 506 of
Regulation D and Form D to implement Section 926.\24\ We received 44
comment letters in response to our proposal.\25\ In addition, we
received three advance comment letters commenting on Section 926 before
the publication of the proposing release.\26\ These comment letters and
advance comment letters came from a variety of individuals, groups and
constituencies, including state securities regulators, professional and
trade associations, lawyers, academics and individual investors. Most
commenters expressed general support for the proposed amendments and
the objectives that we articulated in the proposing release, but many
suggested modifications to the proposals.
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    \24\ See Disqualification of Felons and Other ``Bad Actors''
from Rule 506 Offerings, Release No. 33-9211 (May 25, 2011) [76 FR
31518 (June 1, 2011)].
    \25\ The comment letters we received on the proposal are
available on our Web site at http://www.sec.gov/comments/s7-21-11/s72111.shtml. In this release, we refer to these letters as the
``comment letters'' to differentiate them from the ``advance comment
letters'' described in note 26.
    \26\ To facilitate public input on its Dodd-Frank Act rulemaking
before issuance of rule proposals, the Commission provided a series
of email 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.'' These
advance comment letters appear on the Commission's Web site 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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    Today we are adopting amendments to Rules 501 and 506 of Regulation
D and to Form D to implement Section 926 of the Dodd-Frank Act.\27\ The
amendments we are adopting are generally consistent with the proposal,
with the following principal differences:
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    \27\ We are also adopting technical amendments to Rules 145,
147, 152 and 155 to update references to Section 4(2) of the
Securities Act, which was renumbered as Section 4(a)(2) by Section
201(c) of the JOBS Act, Public Law 112-106, sec. 201(c), 126 Stat.
306, 314 (Apr. 5, 2012).
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     Disqualification will apply only for triggering events
that occur after the effective date of the amendments; however, pre-
existing matters will be subject to mandatory disclosure;
     The rule includes additional disqualifying events for
certain orders of the Commodity Futures Trading Commission (``CFTC'')
and for Commission cease-and-desist orders arising out of scienter-
based anti-fraud violations and violations of Section 5 of the
Securities Act;
     Instead of covering all officers of the issuer and of any
compensated solicitors of purchasers of securities, the rule is limited
to executive officers and officers who participate in the offering;
     Rather than covering beneficial owners of 10% or more of
any class of the issuer's securities, the rule covers beneficial owners
of 20% or more of the issuer's outstanding voting equity securities,
calculated on the basis of voting power;
     For issuers that are pooled investment funds, the rule
covers the funds' investment managers and their principals; and
     Disqualification will not apply if the authority issuing
the relevant judgment, order or other triggering directive or statement
determines and advises the Commission that disqualification from
reliance on Rule 506 should not arise as a result.
    Part III of the proposing release requested comment on a number of
potential further rule amendments that would result in more uniform bad
actor disqualification rules, including the application of the new bad
actor disqualification standards to offerings under Regulation A,
Regulation E and Rules 504 and 505 of Regulation D. Commenters were
divided in their views with respect to uniform bad actor standards.
Some commenters supported uniformity on the basis that it would enhance
investor protection, increase clarity and consistency in our
regulations and avoid the creation of opportunities for regulatory
arbitrage.\28\ Others opposed it, generally arguing that attempts to
impose uniformity would be premature or inappropriate given the limits
of the Dodd-Frank Act mandate, and that uniformity should be
considered, if at all, in a separate rulemaking.\29\
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    \28\ See comment letters from the Federal Regulation of
Securities Committee, Business Law Section of the American Bar
Association (Oct. 4, 2011) (``ABA Fed. Reg. Comm.''); Chris Barnard
(June 1, 2011) (``C. Barnard''); North American Securities
Administrators Association, Inc. (July 25, 2011) (``NASAA''); SNR
Denton LLC on behalf of The Depository Trust & Clearing Corporation
(July 14, 2011) (``DTC''); Better Markets, Inc. (July 14, 2011)
(``Better Markets''); Whitaker Chalk Swindle & Schwartz, PLLC (July
30, 2011 (``Whitaker Chalk''); and Professor J. Robert Brown, Jr.
(Feb. 1, 2012).
    \29\ See comment letters from the Committee on Securities
Regulation of the New York City Bar Association (July 14, 2011)
(``NYCBA''); Cravath, Swaine & Moore LLP, Davis Polk & Wardwell LLP,
Gibson, Dunn & Crutcher LLP, Skadden, Arps, Slate, Meagher & Flom
LLP and Wilmer Cutler Pickering Hale and Dorr LLP (July 14, 2011)
(``Five Firms''); SW. Coy Capital, Inc. (July 13, 2011) (``Coy
Capital'').
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    We note that the JOBS Act requires us to adopt rules for two new
exemptions from the Securities Act--one for ``crowdfunding'' offerings,
contained in Title III of the JOBS Act, and one for offerings of up to
$50 million in a 12-month period under Section 3(b) of the Securities
Act, contained in Title IV of the JOBS Act. The statutory requirements
for these exemptions contemplate bad actor disqualifications with
language similar to that in Section 926 of the Dodd-Frank Act.\30\ We
are

working on separate rulemakings for these new exemptions. In light of
these additional rulemakings, we have decided to limit the
disqualification provisions adopted today to Rule 506 offerings. At the
time of those rulemakings, we will have an opportunity to consider to
what extent any bad actor disqualification provisions to be adopted in
connection with those rules should differ from those applicable to Rule
506 offerings. At a later time, we will also have an opportunity to
consider to what extent bad actor disqualifications currently
applicable to Regulation A and Rule 505 offerings should be more
uniform or similar to those applicable to Rule 506 offerings.
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    \30\ For crowdfunding, the Commission is directed to adopt rules
establishing disqualification provisions for issuers, brokers and
funding portals seeking to participate in crowdfunding transactions.
The requirement in Section 302(d) of the JOBS Act is identical to
the language of Section 926 of the Dodd-Frank Act. For the new $50
million offering exemption, Section 401(b)(2) of the JOBS Act states
that the Commission may require the issuer to meet certain
conditions including disqualification provisions that are
substantially similar to the disqualification provisions contained
in regulations adopted in accordance with Section 926 of the Dodd-
Frank Act, which we are adopting today.
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II. Discussion of the Final 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. In general, we understand this mandate to mean that the
provisions we adopt to implement Section 926 should have similar
effects as Rule 262, except to the extent that circumstances, such as
the different context for the use of Rule 506 compared to Regulation A
and the need to update or otherwise revise the provisions of Regulation
A, dictate a different approach.

B. Covered Persons

    We proposed amendments to Rule 506 of Regulation D to apply the
disqualification provisions required under Section 926 to the following
categories of persons:
     The issuer and any predecessor of the issuer or affiliated
issuer;
     Any director, officer,\31\ general partner or managing
member of the issuer;
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    \31\ Under Rule 405, the term ``officer'' is defined as ``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.'' 17 CFR 230.405. This definition is applicable
to Rule 262 by virtue of Rule 261, 17 CFR 230.261.
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     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.\32\
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    \32\ See Release No. 33-9211, Part II.B (May 25, 2011).

The proposal reflected the categories currently covered by Rule 262 of
Regulation A, with two modifications. First, because Rule 506
transactions may involve the use of persons paid for solicitation of
purchasers, such as placement agents and finders, rather than
traditional underwriters, we added compensated solicitors as a category
of covered persons.\33\ In addition, we proposed to add managing
members to the list of directors, officers and general partners of the
issuer and any underwriter or compensated solicitor to standardize the
treatment of controlling persons of limited liability companies for
disqualification purposes.
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    \33\ This is modeled on the disqualification provisions for
offerings under Rule 505 which, like Rule 506 offerings, may involve
the use of placement agents and finders, rather than traditional
underwriters. See 17 CFR 230.505(b)(2)(iii)(B).
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    In the proposing release, we solicited comment on whether the rules
should cover a broader or narrower group of persons. We specifically
requested comment on whether the new disqualification provisions should
cover all officers of issuers and covered financial intermediaries, as
Rule 262 currently does, or only some officers (such as executive
officers \34\ and/or officers actually participating in the offering).
We also requested comment on a variety of possible modifications to the
scope of the coverage of shareholders and the possible inclusion of
investment advisers of pooled investment funds.
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    \34\ 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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    Officers. Commenters generally supported limiting the coverage of
the disqualification provisions to executive officers rather than all
officers, citing such issues as the policy benefits of focusing on role
rather than title; \35\ the fact that executive officers of an issuer
are recognized within Regulation D as ``accredited investors'' by
virtue of their participation in the policy-making functions of the
issuer; \36\ the fact that certain entities have a large number of
titular officers who do not have a policy or decision-making role or
any involvement in the relevant offerings; \37\ the potentially heavy
compliance burden associated with broad application, which may make it
difficult for issuers to meet a ``reasonable care'' standard; \38\ and
the obligation it would create for compensated solicitors to disclose
the identities of their employees to issuers.\39\ Some commenters
argued for limiting the rule further as it applies to executive
officers of compensated solicitors, and covering only executive
officers that are engaged in the relevant private placement activities
\40\ or that are responsible for the approval or supervision of Rule
506 offerings.\41\
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    \35\ See comment letters from DTC; NYCBA; Sullivan & Cromwell
LLP (July 14, 2011) (``S&C'').
    \36\ See comment letter from ABA Fed. Reg. Comm.
    \37\ See comment letters from ABA Fed. Reg. Comm.; S&C Cleary
Gottlieb Steen & Hamilton LLP (July 14, 2011) (``Cleary Gottlieb'');
Lehman & Eilen LLP (July 14, 2011) (``Lehman & Eilen'').
    \38\ See comment letters from ABA Fed. Reg. Comm.; Cleary
Gottlieb; Five Firms; S&C see also comment letter from Kutak Rock
LLP (July 8, 2011) (``Kutak Rock'') (noting that a narrower rule
would be more workable).
    \39\ See comment letter from Cleary Gottlieb.
    \40\ See comment letters from ABA Fed. Reg. Comm.; NYCBA.
    \41\ See comment letter from Lehman & Eilen.
---------------------------------------------------------------------------

    Two commenters advocated that the new rules mirror Rule 262's
coverage of ``officers,'' as proposed.\42\ These commenters argued both
that a rule ``substantially similar'' to Rule 262 must include officers
and that, based on the presumption of control that attaches to
officers, the ability of officers to set the tone of an organization
and the risk that any officer may be involved with any given offering,
coverage of ``officers'' is needed for the protection of investors.
---------------------------------------------------------------------------

    \42\ See comment letters from Better Markets; NASAA.
---------------------------------------------------------------------------

    We also requested comment on whether the coverage of ``officers''
should be limited to officers who participate in or are involved with
the offering. Two commenters addressed this point, acknowledging that
it may be appropriate to cover participating officers to address
investor protection concerns \43\ and that doing so may be preferable
to covering all officers.\44\ Both commenters, however, expressed
concern about the potential difficulty of determining which officers
were

actually involved with or participating in an offering.\45\
---------------------------------------------------------------------------

    \43\ See comment letter from Cleary Gottlieb.
    \44\ See comment letter from S&C.
    \45\ See comment letters from Cleary Gottlieb; S&C.
---------------------------------------------------------------------------

    We agree with the majority of commenters that, in the context of
Rule 506 offerings, an ``officer'' test based solely on job title would
be unduly burdensome and overly restrictive. Consequently, the final
rule covers only executive officers of covered entities and officers
who participate in the offering. We believe that this coverage is an
appropriate adaptation of the Rule 262 list of covered persons, taking
into account the larger and more complex organizations that are
involved in many Rule 506 transactions \46\ as compared to the smaller
entities that have used Regulation A, and, on that basis, this
provision of the final rule is ``substantially similar'' to Rule 262.
We note that the term ``officer'' in Rule 262 was used as early as
1955, before we adopted the ``executive officer'' concept that we use
in several of our rules.\47\ It also reflects a consideration of costs
and benefits, focusing on situations where the risks that Section 926
is intended to address are at their most pronounced (when bad actors
are performing policy-making functions or are personally involved with
a securities offering) while alleviating the potential compliance
burden by limiting covered persons to a more manageable number who
should generally be easier to identify.
---------------------------------------------------------------------------

    \46\ There is no cap on the amount of proceeds that may be
raised in an offering relying on Rule 506, and many Rule 506
offerings are larger--in some cases, considerably larger--than would
be permitted under the $5 million aggregate proceeds cap of
Regulation A. For 2012, approximately 41% of Rule 506 offerings
raised more than $5 million, 14% raised more than $50 million and
10% raised more than $100 million.
    \47\ See Revision and Consolidation of Regulation A and
Regulation D, Release No. 33-3555 (July 18, 1955) [20 FR 5401 (July
28, 1955)].
---------------------------------------------------------------------------

    Many issuers will already have determined who their executive
officers are (among other reasons, to provide disclosure about
executive officers in the offering materials), and the officers
participating in an offering will be a question of fact. Participation
in an offering would have to be more than transitory or incidental
involvement, and could include activities such as participation or
involvement in due diligence activities, involvement in the preparation
of disclosure documents, and communication with the issuer, prospective
investors or other offering participants. We anticipate that issuers
should be able to determine which of their own officers are
participating in an offering without undue difficulty, and can exercise
control over which officers participate. We also believe that it is
reasonable to expect that compensated solicitors should be prepared to
confirm which of their officers are participating in an offering as
part of any engagement.
    Beneficial Owners of Issuer Equity Securities. The inclusion of
holders of 10% or more of any class of the issuer's equity securities
as covered persons was one of the areas of the proposing release that
attracted the most comment. The majority of commenters did not support
the inclusion of 10% beneficial owners as covered persons for purposes
of the Rule 506 disqualification provisions.\48\ Several commenters
identified a range of potential burdens and costs issuers would face in
identifying 10% beneficial owners. They described the inclusion of 10%
beneficial owners in the context of Rule 506 offerings as unduly
burdensome,\49\ with 10% holders potentially a ``moving target'' for
issuers engaged in continuous sales and regular redemptions.\50\ Others
pointed out that a person could acquire 10% or more of a class of
securities while having no input or control over the company's
management, or even having an adversarial relationship with
management.\51\ One commenter questioned whether public companies would
be able to comply with the rule.\52\ Two commenters urged the
Commission not to include beneficial owners as covered persons at all
in the new disqualification rule.\53\ Some commenters suggested higher
ownership thresholds, from 20% to majority ownership \54\ or a test
based on actual control,\55\ while others argued against an actual
control test and in favor of a bright-line standard based on a stated
percentage of ownership.\56\
---------------------------------------------------------------------------

    \48\ See comment letters from ABA Fed. Reg. Comm.; Cleary
Gottlieb; Five Firms; Lehman & Eilen; NYCBA; S&C Whitaker Chalk;
the Investment Program Association (July 14, 2011) (``IPA''); Katten
Muchin Rosenman LLP (July 14, 2011) (``Katten Muchin''); the Real
Estate Investment Securities Association (July 14, 2011)
(``REISA''); Seward & Kissel (July 20, 2011) (``Seward & Kissel'');
the Securities Industry and Financial Markets Association (July 14,
2011) (``SIFMA'').
    \49\ See comment letter from Seward & Kissel.
    \50\ See comment letters from ABA Fed. Reg. Comm.; IPA.
    \51\ See comment letter from Lehman & Eilen; see also comment
letters from ABA Fed. Reg. Comm.; Five Firms; S&C.
    \52\ See comment letter from ABA Fed. Reg. Comm. (pointing out
that 10% beneficial owners have no obligation to disclose whether
they are bad actors).
    \53\ See comment letters from ABA Fed. Reg. Comm.; Seward &
Kissel.
    \54\ See comment letters from ABA Fed. Reg. Comm. (25% ownership
threshold, consistent with the ``control'' presumption in Section
2(a)(5) of the Investment Company Act); NYCBA (20% or 25%); IPA
(20%); Lehman & Eilen (25%, consistent with the thresholds used in
other contexts under the federal securities laws, including Form
BD); Cleary Gottlieb (20%, consistent with the level at which
reporting as a ``passive'' investor under Regulation 13D-G is no
longer permitted); S&C (25%, consistent with the ``control''
presumptions in Form BD and Section 2(a)(9) of the Investment
Company Act); Whitaker Chalk (at least 25%, and disregard if there
is a controlling shareholder or group); SIFMA (at least 25%, which
would accord with Form BD and Section 2(a)(9) of the Investment
Company Act, but would prefer 50%); Seward & Kissel (if coverage of
shareholders cannot be eliminated, increase threshold to a
majority).
    \55\ See comment letters from Kutak Rock; REISA; Five Firms; see
also comment letters from Whitaker Chalk (advocating use of the
``affiliate'' standard in Rule 144) and Seward & Kissel (remove 10%
beneficial owners from the list of covered persons, or increase the
ownership threshold to a majority interest).
    \56\ See comment letters from Cleary Gottlieb; NYCBA; S&C.
---------------------------------------------------------------------------

    Some commenters also supported including only voting equity
securities, rather than all equity securities, in determining which
securityholders should be covered persons, generally arguing that only
voting interests confer control.\57\ More specifically, one commenter
recommended that the disqualification provision incorporate the
definition of ``voting security'' contained in Section 2(a)(42) of the
Investment Company Act,\58\ which includes only securities presently
entitling the holder to vote for the election of directors, so that
these rules would apply only to a beneficial owner of equity securities
of an issuer who was entitled to vote for the election of directors (or
their equivalents) of the issuer.\59\ Another suggested that the
provision be limited to voting securities, including general partner
and managing member interests, and exclude passive interests.\60\
---------------------------------------------------------------------------

    \57\ See comment letters from ABA Fed. Reg. Comm.; Kutak Rock;
Lehman & Eilen; NYCBA; Whitaker Chalk; see also Seward & Kissel
(objecting to the disqualification of pooled investment funds based
on the conduct of a 10% passive equity owner).Comment letter from
NYCBA.
    \58\ 15 U.S.C. 80a-2(a)(42).
    \59\ See comment letter from ABA Fed. Reg. Comm.
    \60\ See comment letter from NYCBA.
---------------------------------------------------------------------------

    Other commenters supported the proposed inclusion of 10% beneficial
owners of any class of the issuer's equity securities, based on their
presumptive control of the issuer and the mandate to adopt rules that
are ``substantially similar'' to Rule 262, which covers 10% beneficial
owners.\61\
---------------------------------------------------------------------------

    \61\ See comment letters from Better Markets; DTC; NASAA; Bybel
Rutledge LLP (July 11, 2011) (``Rutledge'').
---------------------------------------------------------------------------

    We are persuaded, with the majority of commenters, that the Rule
262 standard of 10% ownership of any class of the issuer's equity
securities could be overinclusive, pulling in securityholders who do
not control the activities of the issuer and whose prior bad conduct
may not reflect on the issuer or the current offering. It may

therefore impose costs and burdens that are not justified in relation
to the potential benefits. We considered in particular the underlying
objectives of the bad actor rules, as well as the potential
administrative complexity of monitoring fluctuating ownership levels
resulting from continuous sales or regular redemptions by certain
issuers, and an issuer's inability to control the actions of an
adversarial or non-compliant securityholder who does not disclose
whether its relationship to the issuer may trigger disqualification.
    We agree with most commenters that it would be appropriate to limit
the coverage of securityholders under new Rule 506(d) to those having
voting rights. In light of the range of possible structures and control
arrangements among issuers relying on Rule 506, however, we have not
adopted a specific definition of ``voting securities.'' We intend that
the term should be applied based on whether securityholders have or
share the ability, either currently or on a contingent basis, to
control or significantly influence the management and policies of the
issuer through the exercise of a voting right.\62\ For example, we
would consider that securities that confer to securityholders the right
to elect or remove the directors or equivalent controlling persons of
the issuer, or to approve significant transactions such as
acquisitions, dispositions or financings, would be considered voting
securities for purposes of the rule. Conversely, securities that confer
voting rights limited solely to approval of changes to the rights and
preferences of the class would not be considered voting securities for
purposes of the rule.
---------------------------------------------------------------------------

    \62\ We note that securityholders that have the ability to
control or significantly influence the management and policies of
the issuer through other means will generally be covered by Rule
506(d) in another capacity, such as, for example, as the functional
equivalent of an ``executive officer'' or ``director'' of an issuer.
---------------------------------------------------------------------------

    We are also concerned that measuring ownership based on the
percentage beneficial ownership of any class of an issuer's securities,
rather than of the issuer's total outstanding securities, may be both
overinclusive and underinclusive. Where a class of securities
represents a very small percentage of the issuer's outstanding equity
securities or voting power, even a large percentage ownership of the
class may not confer the kind of control or influence over the issuer
that the bad actor disqualification rules are intended to address. At
the same time, in the case of a class of supervoting or high vote
securities, ownership of a relatively small percentage of that class
may carry with it control over a relatively large percentage of total
voting power. Accordingly, rather than including beneficial owners of
any class of the issuer's equity securities, the final rule includes
beneficial owners of a specified percentage of the issuer's total
outstanding voting equity securities, calculated on the basis of voting
power. This change will focus the rule on securityholders that have or
share the ability to direct a substantial portion of a vote, and will
avoid the potential overinclusiveness and underinclusiveness of a
share-based or class-based calculation.
    After considering commenters' concerns, we have also determined to
raise the beneficial ownership threshold from 10% to 20%, which we
believe is a reasonable and measured approach in the context of Rule
506 offerings that preserves investor protection and provides an
efficient and clear ``bright-line'' test.\63\
---------------------------------------------------------------------------

    \63\ We note that the 20% threshold aligns with the level of
ownership at which filing as a ``passive investor'' on Schedule 13G
under Regulation 13D-G is no longer permitted. See 17 CFR 230.13d-
1(c).
---------------------------------------------------------------------------

    Accordingly, the rules we adopt today cover beneficial owners of
20% or more of the issuer's outstanding equity securities, calculated
on the basis of voting power, rather than 10% beneficial owners of any
class of securities, as originally proposed.
    We considered, but are not adopting, a standard based on actual
control of the issuer. We share the concern voiced by some commenters
\64\ that a facts-and-circumstances based standard such as actual
control would significantly increase the burden of inquiry associated
with determining whether an offering was disqualified, and may give
rise to unnecessary cost and uncertainty in the application of Rule
506(d). We believe that keeping a ``bright-line'' standard based on a
specified level of ownership reduces the burden of compliance and
responds to the statutory mandate to adopt a rule that is
``substantially similar'' to Rule 262.
---------------------------------------------------------------------------

    \64\ See comment letters from Cleary Gottlieb; NYCBA; S&C.
---------------------------------------------------------------------------

    Assessing beneficial share ownership based on ownership of total
outstanding voting securities, based on voting power, rather than
ownership of any class, and increasing the ownership threshold from 10%
to 20% should ease the burden of compliance because there will be fewer
beneficial owners to track. Nevertheless, we do not believe that the
change will diminish the investor protection benefits of Rule 506(d) in
the circumstances posing the highest potential risk to investors, when
securityholders exercise actual control over the issuer, because such
securityholders are likely to be covered persons in some other
capacity. Under the functional definitions of ``director'' and
``executive officer,'' anyone who performs the functions of a director;
controls a principal business unit, division or function of the issuer
or performs policy making functions for the issuer will be a covered
person as a director or executive officer of the issuer. In addition,
as discussed below, shareholders that are ``promoters'' involved with
the issuer will be covered in that capacity.
    Investment Managers of Pooled Investment Funds. After further
consideration and review of comment letters, we have determined to
expand the list of covered persons to include investment managers \65\
of issuers that are pooled investment funds; the directors, executive
officers, other officers participating in the offering, general
partners and managing members of such investment managers; and the
directors and executive officers of such general partners and managing
members and their other officers participating in the offering.\66\ We
requested comment on whether to include investment advisers of private
funds, but did not propose to include them. Three commenters supported
such an expansion to promote investor protection,\67\ while six opposed
it on a variety of bases, including that investment advisers are
already subject to fiduciary duties and an extensive regulatory regime;
\68\ that persons who actually control a pooled investment fund issuer
would likely be covered in other capacities, for example as promoters
or through a position with

the fund's general partner; \69\ and that extending the rule in this
way would be premature, would require a separate rulemaking project or
would violate the ``substantially similar'' requirement.\70\ We agree
that, depending on the circumstances, investment managers that actually
control a pooled investment fund may already be covered persons as
``promoters'' (a concept discussed in greater detail below), or as
``directors'' or ``executive officers'' of the issuer. We also note
that the regulation of investment advisers has been subject to recent
change, so that many investment managers to pooled investment funds
that invest in securities are subject to new reporting and other
obligations.\71\ As a result of our reconsideration and review of the
comment letters, however, we have determined to include investment
managers to pooled investment funds and their principals as covered
persons in the Rule 506 disqualification rules.\72\
---------------------------------------------------------------------------

    \65\ We are using the term ``investment manager,'' rather than
``investment adviser'' as discussed in the proposing release. Under
Section 202(a)(11) of the Investment Advisers Act of 1940 [15 U.S.C.
80b-2(a)(11)] ``(the ``Advisers Act'')'', an ``investment adviser''
is generally a person or firm that, for compensation, is engaged in
the business of providing advice, making recommendations, issuing
reports, or furnishing analyses on securities. Some pooled
investment funds invest in assets other than securities, such as
commodities, real estate and certain derivatives. In order to ensure
that Rule 506(d) covers the control persons of these funds, we are
using a more general term, which encompasses both investment
advisers and other investment managers.
    \66\ We are not adopting a definition of the term ``pooled
investment fund'' as it is used in Rule 506(d). The term has been
used in Form D for years in its ordinary and commonly understood
sense, and we intend to use it in Rule 506(d) in the same way. The
term should not be confused with ``pooled investment vehicle,'' a
term defined more narrowly in Rule 206(4)-8 under the Advisers Act,
17 CFR 275.206(4)-8.
    \67\ See comment letters from Better Markets; DTC; NASAA.
    \68\ See comment letters from ABA Fed. Reg. Comm.; SIFMA;
Whitaker Chalk.
    \69\ See comment letter from Katten Muchin;
    \70\ See comment letters from Lehman & Eilen; Rutledge.
    \71\ See Reporting by Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors on
Form PF, Release No. IA-3308 (Oct 31, 2011) [76 FR 71128]; Rules
Implementing Amendments to the Investment Advisers Act of 1940,
Release No. IA-3221 (June 22, 2011) [76 FR 42950].
    \72\ See Rule 506(d)(1).
---------------------------------------------------------------------------

    Most operating companies making Rule 506 offerings are corporations
or limited liability companies that function through their officers,
directors and managing members. By comparison, most pooled investment
funds making Rule 506 offerings are partnerships or other flow-through
entities that have few, if any, employees, and function through their
investment managers and the managers' personnel. In order to provide
equivalent treatment of operating companies and pooled investment
funds, the final rule establishes a new ``bright-line'' category of
presumed control persons for pooled investment fund issuers. This
should make the final rule clearer and easier to apply, and will more
effectively protect investors from bad actors that exercise influence
or control over a pooled investment fund.
    Some commenters argued that adding fund investment managers was
unnecessary, given that fund investment advisers are generally subject
to regulation either at the state or the federal level. We believe our
Securities Act disqualification rules are, in many respects, designed
to supplement and build upon other enforcement and regulatory efforts.
For instance, registered broker-dealers subject to limitations on their
activities as a result of disciplinary proceedings could separately be
disqualified from participating in a Rule 506 offering under the
amendments we adopt today. We do not believe that the regulatory scheme
to which a pooled investment fund's investment manager may be subject
is a substitute for bad actor disqualification.
    We appreciate that the bad actor provisions in Rule 262 do not
cover investment managers of issuers that are pooled investment funds.
Regulation A, however, is generally not available to or used by pooled
investment funds,\73\ so its disqualification provisions do not have to
address the structure and governance arrangements typical of pooled
investment fund issuers. Analogous disqualification rules under the
Securities Act and the Investment Company Act do, however, include
investment managers of pooled investment funds. For example, the
disqualification provisions of Regulation E (which, like Regulation A,
is an exemption from registration under Section 3(b)(1) of the
Securities Act,\74\ but is designed for use by pooled investment funds
and similar entities) include as covered persons both the investment
adviser to a pooled investment fund issuer as well as partners,
directors, and officers of the investment adviser.\75\ Similarly,
Section 9(a) of the Investment Company Act automatically disqualifies
investment advisers of registered investment companies (and certain
affiliated persons) based on criminal convictions and certain court
orders.\76\
---------------------------------------------------------------------------

    \73\ Regulation A by its terms is not available to any pooled
investment fund that is an ``investment company registered or
required to be registered under the Investment Company Act of
1940.'' 17 CFR 230.251(a)(4). As a practical matter, it is not
available to other pooled investment funds because most such funds
attempt to maintain that status under either Section 3(c)(1) or
Section 3(c)(7) of that statute, which prohibits them from engaging
in public offerings like those under Regulation A. See Investment
Company Act secs. 3(c)(1), 3(c)(7), 15 U.S.C. 80a-3(c)(1), 80a-
3(c)(7).
    \74\ 15 U.S.C. 77c(b)(1).
    \75\ 17 CFR 230.602(c).
    \76\ See 15 U.S.C. 80a-9(a).
---------------------------------------------------------------------------

    We also recognize that, depending on the circumstances, some
investment managers of pooled investment funds and certain of their
personnel would be covered already under Rule 506(d), even if we did
not expand the coverage of the rule. For example, some investment
manager firms would be deemed to be ``promoters'' of a pooled
investment fund issuer, and some of their individual principals would
be deemed the functional equivalent of ``directors,'' ``executive
officers'' or ``promoters'' of the issuer. Nevertheless, since we have
concluded that such persons should be covered, we believe it is
preferable to cover them directly, rather than indirectly. This
treatment will avoid the necessity for issuers or others to engage in a
potentially time-consuming, fact-intensive inquiry to determine whether
or not they are within another category of covered persons.
    Promoters. Although ``promoters'' are included as covered persons
in Rule 262 \77\ and were included as covered persons in the proposed
rules for that reason, three commenters raised questions about the
treatment of promoters under the new disqualification rules.\78\ One
suggested that directors, executive officers, general partners and
managing members of promoters be included, so that promoters would be
addressed in the rule in the same way as issuers and compensated
solicitors.\79\ The second questioned whether inclusion was necessary
given the breadth of the other categories of covered persons, but
suggested that if promoters are included, the term should be defined so
as to include only persons who are involved with the offering and have
a material financial interest in its outcome (or at a minimum, the rule
should be revised to make clear that fund investment advisers are not
deemed to be promoters).\80\ The third argued that promoters should not
be covered persons unless they are involved in the day-to-day
management of the issuer or will be paid remuneration for the
solicitation of purchasers.\81\
---------------------------------------------------------------------------

    \77\ Rule 262(b) covers ``any promoter of the issuer presently
connected with it in any capacity.'' The term ``promoter'' is
defined in Rule 405 to mean any person who: (i) Acting alone or
together with others, directly or indirectly takes initiative in
founding or organizing the business or enterprise of an issuer; or
(ii) in connection with the founding or organization of the business
or enterprise of an issuer, directly or indirectly receives 10% or
more of any class of issuer securities or 10% or more of the
proceeds from the sale of any class of issuer securities (not
including securities received solely as underwriting commissions or
solely in exchange for property). The Rule 405 definition applies to
Rule 262 by virtue of Rule 261. 17 CFR 230.261.
    \78\ See comment letters from Cleary Gottlieb; SIFMA; S&C.
    \79\ See comment letter from Cleary Gottlieb.
    \80\ See comment letter from S&C.
    \81\ See comment letter from SIFMA.
---------------------------------------------------------------------------

    We determined not to make any changes in the definition or coverage
of promoters. The category of ``promoter'' is broad, and captures all
individuals and entities that have the relationships with the issuer or
to the offering specified in Rule 405.\82\ In particular, the
definition requires issuers to look through entities and makes it

unnecessary for us to separately cover the officers, directors and
other control persons of entities that qualify as promoters. Rule 405
defines a promoter as any person--individual or legal entity--that
either alone or with others, directly or indirectly takes initiative in
founding the business or enterprise of the issuer, or, in connection
with such founding or organization, directly or indirectly receives 10%
or more of any class of issuer securities or 10% or more of the
proceeds from the sale of any class of issuer securities (other than
securities received solely as underwriting commissions or solely in
exchange for property). The test considers activities ``alone or
together with others, directly or indirectly''; therefore, the result
does not change if there are other legal entities (which may themselves
be promoters) in the chain between that person and the issuer.
---------------------------------------------------------------------------

    \82\ See note 77.
---------------------------------------------------------------------------

    As adopted, the disqualification provisions of Rule 506(d) will
cover the following persons, which we refer to in this release as
``covered persons'':
     The issuer and any predecessor of the issuer or affiliated
issuer;
     Any director, executive officer, other officer
participating in the offering, general partner or managing member of
the issuer;
     Any beneficial owner of 20% or more of the issuer's
outstanding voting equity securities, calculated on the basis of voting
power;
     Any investment manager to an issuer that is a pooled
investment fund and any director, executive officer, other officer
participating in the offering, general partner or managing member of
any such investment manager, as well as any director, executive officer
or officer participating in the offering of any such general partner or
managing member;
     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 (which we refer to as a
``compensated solicitor''); and
     Any director, executive officer, other officer
participating in the offering, general partner, or managing member of
any such compensated solicitor.\83\
---------------------------------------------------------------------------

    \83\ See Rule 506(d)(1).
---------------------------------------------------------------------------

    We are also adopting a provision under which events relating to
certain affiliated issuers are not disqualifying if they pre-date the
affiliate relationship.\84\ Rule 262(a)(5) currently provides that
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. We included a similar provision in the proposal, but clarified
that it applied to all potentially disqualifying events that pre-date
affiliation. All of the commenters that addressed that point were
supportive of the proposal,\85\ and we are adopting it as proposed.
---------------------------------------------------------------------------

    \84\ See Rule 506(d)(3).
    \85\ See comment letters from ABA Fed. Reg. Comm.; NYCBA;
Rutledge; Whitaker Chalk; Alfaro Oil and Gas LLC (July 14, 2011)
(``Alfaro'').
---------------------------------------------------------------------------

    We also solicited comment on whether we should apply the
disqualification rules differently to entities that have undergone a
change of control. Five commenters supported differential treatment
following a change of control, primarily arguing that entities act only
through their personnel, and disqualifying events would no longer be
relevant if the persons responsible for the events are no longer in
control.\86\ Another commenter argued that disqualification should
cease to apply following changes of policy, as well as changes of
control.\87\ Three commenters opposed providing different treatment for
entities that have undergone a change of control, generally noting that
it would be difficult to establish whether a change of control had
occurred, that such a provision could be susceptible to abuse, and that
change of control might more appropriately be considered in the context
of an application for waiver of disqualification.\88\ We have decided
to adopt the rules as proposed, as advocated by the latter group of
commenters, and are not providing different treatment for entities that
have undergone a change of control or a change of policy. We wish to
avoid both undue complexity in application of the rules and potential
abuse by bad actors that may claim to have undergone a change of
control when no bona fide change of control has in fact occurred. As
discussed in Part II.E below, we are amending the existing delegation
of authority to the Director of the Division of Corporation Finance so
it will cover waivers of disqualification under Rule 506. We expect
that staff will adopt procedures for the prompt issuance of waivers of
Rule 506 disqualification upon a proper showing that there has been a
change of control and the persons responsible for the activities
resulting in a disqualification are no longer employed by the entity or
exercise influence over such entity.
---------------------------------------------------------------------------

    \86\ See comment letters from ABA Fed. Reg. Comm.; Five Firms;
Kutak Rock; Lehman & Eilen, Whitaker Chalk; see also comment letter
from L. Burningham (June 29, 2011) (``Burningham'') (suggesting that
issuers not be disqualified if they have removed bad actors).
    \87\ See comment letter from SIFMA (disqualification should
apply only if senior management in control when disqualifying event
arose are still employed by the issuer or a controlling affiliate
continues in a senior management or executive role; disqualification
should also cease to apply if issuer has implemented policies and
procedures designed to prevent occurrence of activities that gave
rise to disqualification, and such policies and procedures have been
approved by a regulator or a court).
    \88\ See comment letters from DTC; NYCBA; Rutledge.
---------------------------------------------------------------------------

C. Disqualifying Events

    Section 926 of the Dodd-Frank Act requires our Rule 506
disqualification provisions to be ``substantially similar'' to those
set forth in Rule 262 of Regulation A, and also to cover certain
criminal convictions and regulatory orders enumerated in Section 926.
In the proposal, the disqualifying events from Rule 262 and Section 926
were combined and integrated in a proposed rule that included the
following disqualifying events:
     Criminal convictions (felony or misdemeanor), entered
within the last five years in the case of issuers and ten years in the
case of other covered persons, in connection with the purchase or sale
of any security; involving the making of a false filing with the
Commission; or 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; \89\
---------------------------------------------------------------------------

    \89\ See Proposed Rule 506(c)(1)(i).
---------------------------------------------------------------------------

     Court injunctions and restraining orders, including 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 in connection with the purchase or
sale of any security; involving the making of a false filing with the
Commission; or 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; \90\
---------------------------------------------------------------------------

    \90\ See Proposed Rule 506(c)(1)(ii).
---------------------------------------------------------------------------

     Final orders issued by state banking, credit union, and
insurance regulators, federal banking regulators, and the National
Credit Union Administration that either create a bar from association
with any 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 are
based on a violation of any law or regulation that prohibits
fraudulent, manipulative, or deceptive conduct within the last ten
years;\91\
---------------------------------------------------------------------------

    \91\ See Proposed Rule 506(c)(1)(iii).
---------------------------------------------------------------------------

     Commission disciplinary orders entered pursuant to Section
15(b) or 15(B)(c) of the Securities Exchange Act of 1934 (the
``Exchange Act'') or Section 203(e) or (f) of the Investment Advisers
Act of 1940 (the ``Advisers Act'') that, at time of the sale, suspend
or revoke a person's registration as a broker, dealer, municipal
securities dealer or investment adviser; place limitations on the
activities, functions or operations of such person; or bar such person
from being associated with any entity or from participating in the
offering of any penny stock; \92\
---------------------------------------------------------------------------

    \92\ See Proposed Rule 506(c)(1)(iv).
---------------------------------------------------------------------------

     Suspension or expulsion from membership in, or suspension
or a bar from association with a member of, an SRO, i.e., a registered
national securities exchange or a registered national or affiliated
securities association; \93\
---------------------------------------------------------------------------

    \93\ See Proposed Rule 506(c)(1)(v).
---------------------------------------------------------------------------

     Stop orders applicable to a registration statement and
orders suspending the Regulation A exemption for an offering statement
that an issuer filed or in which the person was named as an underwriter
within the last five years and being the subject at the time of sale of
a proceeding to determine whether such a stop or suspension order
should be issued; \94\ and
---------------------------------------------------------------------------

    \94\ See Proposed Rule 506(c)(1)(vi).
---------------------------------------------------------------------------

     U.S. Postal Service false representation orders including
temporary or preliminary orders entered within the last five years.\95\
---------------------------------------------------------------------------

    \95\ See Proposed Rule 506(c)(1)(vii).
---------------------------------------------------------------------------

    We solicited comment on a number of possible modifications to the
list of disqualifying events, such as including additional events and
lengthening or shortening the look-back period associated with each
event. Following is a discussion of each of the disqualifying events
originally proposed, the comments on the proposal and the disqualifying
event as adopted today.
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 Rule 262(a)(3),
which covers criminal convictions of issuers, and Rule 262(b)(1), which
covers criminal convictions of other covered persons. In the proposing
release, we identified two differences between the felony and
misdemeanor conviction provisions of Section 926(2)(B) and Rule 262.
First, Section 926(2)(B) does not include a specific time limit (or
``look-back period'') on convictions that trigger disqualification,
whereas Rule 262 provides a five-year look-back period for criminal
convictions of issuers and a ten-year look-back period for criminal
convictions of other covered persons. Second, Rule 262 includes a
reference to criminal convictions ``arising out of the conduct of the
business of an underwriter, broker, dealer, municipal securities dealer
or investment adviser,'' which does not appear in Section 926.
    The proposed rule was based on Rule 262, and provided that a
covered person would be disqualified if such covered person 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 in connection with the purchase or sale of any
security; involving the making of any false filing with the Commission;
or 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.\96\
---------------------------------------------------------------------------

    \96\ Proposed Rule 506(c)(1)(i).
---------------------------------------------------------------------------

    The proposed rule included look-back periods of five years for
criminal convictions of issuers (including predecessors and affiliated
issuers) and ten years for other covered persons, which correspond to
Rule 262.\97\ We requested comment on whether the scope of the
provision should be broader or narrower, and whether a longer, or
permanent, look-back period would be appropriate for either issuers or
other covered persons.
---------------------------------------------------------------------------

    \97\ Consistent with Rule 262, the look-back period is to the
date of the conviction, not to the date of the conduct that led to
the conviction. 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 order or other sanction.
---------------------------------------------------------------------------

    Commenters were divided in their reaction to this aspect of the
proposal. Most commenters argued that the Commission should stay close
to the language of Section 926 and Rule 262.\98\ One commenter
criticized the proposal as overbroad and suggested ways to narrow
it,\99\ while two commenters urged expansion of the rule to cover a
broader range of criminal convictions.\100\ In an advance comment
letter \101\ and again in its comment letter, NASAA argued for
extension of the disqualification rules to cover all criminal
convictions involving fraud or deceit, as well as convictions involving
the making of a false filing with any state, involving a commodity
future or option contract, or any aspect of a business involving
securities, commodities, investments, franchises, insurance, banking or
finance. One other commenter supported extending coverage to all
criminal convictions involving fraud or deceit.\102\ Three commenters
expressly opposed NASAA's suggested extension on the basis that it
would create a vague and overbroad standard.\103\
---------------------------------------------------------------------------

    \98\ See comment letters from Rutledge; Five Firms; S&C Seward
& Kissel; SIFMA; NYCBA.
    \99\ See comment letter from REISA (suggesting limiting false
filings provision to ``intentional, material and misleading'' false
filings and limiting convictions ``arising out of the business'' to
those ``directly related to the offer or sale of securities to
investors'').
    \100\ See comment letters from NASAA; Better Markets.
    \101\ See advance comment letter from NASAA (Nov. 4, 2010).
    \102\ See comment letter from Better Markets.
    \103\ See comment letters from NYCBA; S&C SIFMA.
---------------------------------------------------------------------------

    On the length of look-back periods, some commenters argued for a
uniform ten-year period,\104\ some for longer or permanent
disqualification in certain cases,\105\ some for the five- and ten-year
periods proposed,\106\ and some for shorter periods for covered persons
and issuers.\107\ On whether convictions in foreign courts should be
considered, most commenters objected, generally citing due process
concerns and concerns about the cost and burden of inquiry into foreign
proceedings.\108\ Four commenters supported adding foreign convictions,
generally on the basis that conduct outside the United States was as
relevant as conduct within the United States for disqualification
purposes.\109\ One commenter suggested

that Section 926(2)(B) could be read not to be limited to U.S.
proceedings.\110\
---------------------------------------------------------------------------

    \104\ See comment letters from Better Markets; Kutak Rock; see
also comment letters from NASAA (uniform look-back period of at
least ten years); DTC (ten-year look-back except permanent
disqualification for securities fraud and violations of Rule 506).
    \105\ See comment letters from DTC (permanent disqualification
for securities fraud and Section 5 violations); J. Davis (June 13,
2011) (suggesting that conviction of any securities violation or
felony should be permanently disqualifying).
    \106\ See comment letters from Cleary Gottlieb; Rutledge.
    \107\ See comment letters from REISA (uniform five-year period);
D. Sarna (August 23, 2011) (uniform five-year period); SIFMA
(uniform period not longer than one year).
    \108\ See comment letters from Cleary Gottlieb; Five Firms;
NYCBA; S&C Sullivan & Worcester LLP (July 1, 2011) (``S&W'');
SIFMA; Whitaker Chalk.
    \109\ See comment letters from C. Barnard; DTC; Better Markets;
advance comment letter from NASAA.
    \110\ See comment letter from Rutledge.
---------------------------------------------------------------------------

    In sum, most commenters agreed that the final rules should be
closely based on Rule 262. To the extent that commenters advocated
changes from the proposal, however, there was no consensus about what
changes would be desirable or appropriate. We do not believe that the
shift from Regulation A to potentially larger and more complex
transactions under Rule 506 warrants either expanding or narrowing the
scope of coverage of criminal convictions, or modifying the existing
five- and ten-year look-back periods. Given that the rule is required
to be ``substantially similar'' to Rule 262, and that there are no
changes warranted by the application to the Rule 506 context, we are
adopting the provision as proposed.
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 any security or involving the making of any
false filing with the Commission.'' \111\ 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.'' \112\
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.\113\
---------------------------------------------------------------------------

    \111\ 17 CFR 230.262(a)(4).
    \112\ 17 CFR 230.262(b)(2).
    \113\ Disqualification is triggered only when a person ``is
subject to'' a relevant injunction or order. Therefore, 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. For example, an injunction issued four years
before the relevant securities offering (within the five-year look-
back period), and then lifted before the offering occurred, would
not be disqualifying. The look-back period functions as a cut-off
for injunctions and orders that are still in effect at the time of
an offering. For example, disqualification will not arise from an
injunction issued more than five years before an offering, even if
the injunction is permanent.
---------------------------------------------------------------------------

    The proposed provision reflected the substance of these two
provisions in a simplified, combined format. Rule 506 transactions may
involve compensated solicitors, rather than traditional underwriters,
so the proposed rule also covered orders arising out of the conduct of
the business of such compensated solicitors. Under the proposal, an
offering would be disqualified if any covered person is subject to any
order, judgment or decree of any court of competent jurisdiction,
entered within five years before any sale in the offering that, at the
time of such sale, restrains or enjoins such person from engaging or
continuing to engage in any conduct or practice in connection with the
purchase or sale of any security; involving the making of any false
filing with the Commission; or 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.\114\
---------------------------------------------------------------------------

    \114\ Proposed Rule 506(c)(1)(ii).
---------------------------------------------------------------------------

    Five commenters recommended adoption of the provisions as
proposed.\115\ Two commenters suggested narrowing the coverage of
orders arising out of the conduct of the business of the listed
financial intermediaries, and limiting the provision either to cases
where there is a finding of fraudulent, manipulative or deceptive
conduct,\116\ or to matters relating to a broker-dealer's activities of
offering securities as a placement or selling agent or
underwriter.\117\ Two commenters argued that court orders and judgments
should not trigger disqualification unless the defendant was afforded
notice and an opportunity to appear.\118\ One such commenter went
further to recommend that all appeals should have been exhausted or the
time for appeal expired before disqualification is triggered.\119\
---------------------------------------------------------------------------

    \115\ See comment letters from Cleary Gottlieb; Lehman & Eilen;
NYCBA; Rutledge (arguing, as to look-back periods in particular,
that ``substantially similar'' means that new rules should mirror as
much as possible existing Rule 262 provisions); SIFMA.
    \116\ See comment letter from NYCBA (acknowledging that the
limitation they recommend may not be ``substantially similar'' to
Rule 262).
    \117\ See comment letter from SIFMA.
    \118\ See comment letters from ABA Fed. Reg. Comm.; R. Sherman
(May 25, 2011).
    \119\ See comment letter from ABA Fed. Reg. Comm.
---------------------------------------------------------------------------

    One commenter requested clarification that disqualification will
apply only for persons specifically named in an order, and not to all
who may be within a class of persons brought within the scope of an
order.\120\ For example, an injunction may be issued against a named
defendant ``and its agents, servants, employees, attorneys, and all
persons in active concert or participation with them who receive actual
notice'' of the order. The commenter requested confirmation that, in
these circumstances, only the named defendant, and not all members of
the class of persons brought within the scope of the order, would be
understood as ``subject to'' the order for disqualification purposes.
---------------------------------------------------------------------------

    \120\ See comment letter from ABA Fed. Reg. Comm.
---------------------------------------------------------------------------

    We are adopting the provision as proposed. We see no basis for
departing from the coverage and look-back periods that apply under
existing Rule 262. In particular, we have determined not to impose due
process requirements, such as notice and an opportunity to appear, or
to require that all appeals have been exhausted or the time for appeal
expired, as a condition to disqualification. We are sensitive to the
concerns raised by commenters about the risk that ex parte orders may
trigger disqualification. Nevertheless, in light of the statutory
mandate and the Commission's waiver authority, we are not narrowing the
provision. We believe that disqualifying events that arise out of such
circumstances are better addressed through the waiver process.
    We are also not persuaded that the shift to potentially larger,
more complex transactions under Rule 506 or other considerations
justifies such a change from the Rule 262 standards. Nor do we want to
add a significant new burden of inquiry, requiring issuers to determine
not just that a covered person is subject to an order, but also that
the order is procedurally adequate. On balance, we believe that the
risk that disqualification may arise from ex parte proceedings could be
better addressed through the waiver process, rather than through
additional requirements for factual inquiry that would affect all
offerings. As for appealable orders, as noted in the proposing release,
we are concerned that suspending disqualification during the pendency
of a potentially lengthy appeals process may significantly undermine
the intended benefits of the rule.\121\
---------------------------------------------------------------------------

    \121\ Disqualification would be terminated immediately, however,
if the judgment or order were reversed or vacated.
---------------------------------------------------------------------------

    With regard to who would be viewed as subject to an order, we
intend to apply the new provisions consistently with the way that Rule
262 has historically been applied. For disqualification purposes, the
staff has interpreted Rule 262 to limit those considered ``subject to''
an order to only the persons specifically named in the order.\122\
Others who are not specifically

named but who come within the scope of an order (such as, for example,
agents, attorneys and persons acting in concert with the named person)
will not be treated as ``subject to'' the order for purposes of
disqualification.
---------------------------------------------------------------------------

    \122\ For a more general discussion of interpretations of the
meaning of ``subject to'' an order, see note 156 and accompanying
text.
---------------------------------------------------------------------------

3. Final Orders of Certain Regulators
    The text of Section 926(2)(A) of the Dodd-Frank Act provides that
Commission requirements 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.
    As we noted in the proposing release, Section 926(2)(A) is
essentially identical to Section 15(b)(4)(H) of the Exchange Act and
Section 203(e)(9) of the Advisers Act. The only difference is that
Section 926(2)(A)(ii) contains a ten-year look-back period for final
orders based on violations of laws and regulations that prohibit
fraudulent, manipulative and deceptive conduct, while the Exchange Act
and Advisers Act provisions have no express time limit for such orders.
    We proposed to reflect Section 926(2)(A) as new Rule
506(c)(1)(iii), with three changes from the text of Section 926(2)(A),
which were intended to eliminate potential ambiguities and allow for
easier application of the rule. First, the proposal specified that an
order must bar the covered person ``at the time of [the] sale,'' to
clarify that a bar would be disqualifying only for as long as it has
continuing effect. Second, the provision measured the look-back period
from the date of the relevant sale, not from ``the date of filing of
the offer or sale,'' as provided in Section 926 of the Dodd-Frank Act,
so it would align with the other look-back periods in the rule.
Finally, the provision required that orders must have been ``entered''
within the look-back period, to clarify that the date of the order, and
not the date of the underlying conduct, was relevant for that
determination.
    Under the proposal, an offering would be disqualified if any
covered person 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 at the time of such sale, bars the person from
association with an entity regulated by such commission, authority,
agency, or officer; engaging in the business of securities, insurance
or banking; or engaging in savings association or credit union
activities; or 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.\123\
---------------------------------------------------------------------------

    \123\ Proposed Rule 506(c)(1)(iii).
---------------------------------------------------------------------------

    We solicited comment on a number of aspects of the proposed
provision, including the treatment of bars, the definition of the terms
``final order'' and ``fraudulent, manipulative and deceptive conduct,''
and the potential to cover orders of other regulators in addition to
those mandated by Section 926 of the Dodd-Frank Act, particularly the
Commission and the Commodity Futures Trading Commission (``CFTC''). As
discussed in more detail below, we are adopting the provision
substantially as proposed, but adding the CFTC to the list of
regulators whose regulatory bars and other final orders will trigger
disqualification.
    CFTC Orders. The proposing release solicited comment on whether
orders of the CFTC or any other regulator not referred to in Section
926 should result in disqualification from Rule 506 offerings. Four
commenters favored adding CFTC orders as a disqualification
trigger.\124\ One noted that ``conduct that would typically give rise
to a CFTC sanction is similar to the type of conduct that would result
in disqualification if it were the subject of action by other
regulators in the securities, banking and insurance fields.'' \125\
Others cited benefits such as improved investor protection,
harmonization of the treatment of regulatory entities, and improved
internal consistency of the bad actor rules.\126\ Another asserted that
it was ``obvious'' that at least some CFTC orders should be covered by
the disqualification rules.\127\ Two of these commenters also
recommended that the rules cover orders of additional regulators.\128\
Seven comment letters opposed adding CFTC orders, generally arguing
that such an addition would not be ``substantially similar'' to Rule
262 and questioning the Commission's legal authority to add such a new
disqualifying event.\129\
---------------------------------------------------------------------------

    \124\ See comment letters from Better Markets, Cleary Gottlieb,
NYCBA, NASAA.
    \125\ See comment letter from Better Markets.
    \126\ See comment letters from Cleary Gottlieb, NASAA.
    \127\ See comment letter from NYCBA.
    \128\ See comment letters from Better Markets (advocating
addition of orders by other agencies with jurisdiction over
misconduct in the financial services arena, including the Consumer
Financial Protection Bureau and the Federal Trade Commission); NASAA
(advocating addition of orders under state franchise, investment and
finance laws).
    \129\ See comment letters from ABA Fed. Reg. Comm.; Five Firms;
Katten Muchin; Lehman & Eilen; Rutledge; Schuyler Roche; SIFMA.
---------------------------------------------------------------------------

    We are persuaded that appropriate CFTC orders should be included as
a disqualification trigger in new Rule 506(d). As we noted in the
proposing release, the conduct that would typically give rise to CFTC
sanctions is similar to the type of conduct that would result in
disqualification if it were the subject of sanctions by another
financial services industry regulator. For that reason, CFTC orders
trigger consequences under other Commission rules (for example, both
registered broker-dealers and investment advisers may be subject to
Commission disciplinary action based on violations of the Commodity
Exchange Act).\130\ In addition, the CFTC (rather than the Commission)
has authority over the investment managers of pooled investment funds
that invest in commodities and certain derivatives products; unless
Rule 506(d) covers CFTC orders, regulatory sanctions against those
investment managers are not likely to trigger disqualification. For
these reasons, we believe that including orders of the CFTC will make
the bad actor rules more internally consistent, treating relevant
sanctions similarly for disqualification purposes, and should enable
the disqualification rules to more effectively screen out felons and
bad actors.
---------------------------------------------------------------------------

    \130\ See, e.g., Section 15(b)(4)(D) of the Exchange Act (15
U.S.C. 80(b)(4)(C)) and Section 203(e)(5) of the Advisers Act (15
U.S.C. 80-b3(e)(5)).
---------------------------------------------------------------------------

    We have decided to include CFTC orders in the bad actor
disqualification scheme by adding the CFTC to the list of regulators in
Rule 506(d)(1)(iii). As a result, disqualification will be triggered

only by CFTC orders that constitute ``bars'' or ``final orders''
relating to prohibitions on ``fraudulent, manipulative or deceptive
conduct'' on the basis discussed below.
    Bars. Our requests for comment focused on whether there was a need
for the Commission to explicitly state that all orders that have the
practical effect of a bar (prohibiting a person from engaging in a
particular activity) should be treated as such, even if the relevant
order did not call it a ``bar.'' We also requested comment on whether
it would be appropriate to provide a cut-off date (for example, ten
years) for permanent bars.
    Several commenters urged us to provide additional guidance about
what constitutes a bar.\131\ We believe the statutory language is
clear: bars are orders issued by one of the specified regulators that
have the effect of barring a person from association with certain
regulated entities; from engaging in the business of securities,
insurance or banking; or from engaging in savings association or credit
union activities. Any such order that has one of those effects is a
bar, regardless of whether it uses the term ``bar.'' Orders that do not
have any of those effects are not bars, although they may be
disqualifying ``final orders,'' as discussed below.
---------------------------------------------------------------------------

    \131\ See comment letters from Alfaro; ABA Fed. Reg. Comm.;
Rutledge; SIFMA; Whitaker Chalk.
---------------------------------------------------------------------------

    Consistent with the proposal, the final rule provides that an order
must bar the person ``at the time of [the] sale'' from one or more of
the specified activities, to make clear that a bar is disqualifying
only for as long as it has continuing effect.\132\ Thus, for example, 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 is permitted to reassociate, assuming that the bar had no
continuing effect after reassociation. Several commenters argued that
we should impose a cut-off date for permanent bars.\133\ This would
effectively treat permanent bars the same as other final orders, which
are disqualifying only if issued during the look-back period. We are
not, however, departing from the current standard under Rule 262 either
by imposing a look-back period (making all regulatory bars issued
within a specified period before a sale disqualifying, even if no
longer in effect) or by imposing a cut-off date (which would make bars
no longer disqualifying after the requisite time period has passed,
even if the bar is permanent or otherwise still in effect). Under Rule
262, bars are disqualifying for as long as they are in effect but no
longer, matching the period of disqualification to the duration of the
regulatory sanction. We are adopting the same approach for Rule 506.
Persons who are subject to an indefinite bar who do not wish to
reassociate but do wish to participate in Rule 506 offerings could
consider applying for a waiver.
---------------------------------------------------------------------------

    \132\ This accords with the Commission's 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 Advisers Act only so long as some act is being performed (or not
performed) pursuant to the order). See note 156 and accompanying
text.
    \133\ See comment letters from ABA Fed. Reg. Comm.; Katten
Muchin; Lehman & Eilen; Rutledge; Schuyler, Roche & Crisham, P.C.
(July 14, 2011) (``Schuyler Roche''); SIFMA.
---------------------------------------------------------------------------

    We recognize that, in the proposal and in the final rule, the
treatment of court injunctions and restraining orders, on one hand, and
regulatory bars and orders, on the other hand, is different in some
respects. Court injunctions and restraining orders are subject to a
five-year look-back period, which functions as a cut-off (i.e.,
injunctions and restraining orders issued more than five years before
the relevant sale are no longer disqualifying, even if they are still
in effect or permanent). The treatment of court injunctions and
restraining orders is consistent with Rule 262, and therefore responds
to the requirement to develop a ``substantially similar'' rule, while
the treatment of regulatory bars and orders is specifically mandated by
Section 926 of the Dodd-Frank Act. Commenters did not generally support
harmonizing our approach to court injunctions and restraining orders
with the mandated treatment of regulatory bars and orders, and we do
not believe that the shift from Regulation A to Rule 506 offerings
justifies extending the time period for disqualification associated
with court injunctions and restraining orders.
    Final Orders. Section 926 of the Dodd-Frank Act does not specify
what should be deemed to constitute a ``final order'' that triggers
disqualification. The proposal included an amendment to Rule 501 to
provide a definition of ``final order,'' based on the definition that
the Financial Industry Regulatory Authority (``FINRA'') uses in forms
that implement language in Section 15(b)(4)(H) of the Exchange Act,
which is identical \134\ to the language used in Section 926.\135\
Under the proposal, ``final order'' would 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.''
---------------------------------------------------------------------------

    \134\ Note, however, that Section 15(b)(4)(H) does not contain a
look-back period, unlike the 10-year look-back period specified in
Section 926(2)(A)(ii).
    \135\ The definition of ``final order'' used by FINRA applies to
Forms U4, U5 and U6, which are used for reporting the disciplinary
history of broker-dealers and associated persons under Exchange Act
Section 15(b)(4)(H). 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.
---------------------------------------------------------------------------

    The proposing release requested comment on other potential
approaches to the term ``final order,'' such as whether the rule should
consider orders final only if they are non-appealable, and whether the
rule should cover only orders issued in a process that provides for
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. We also queried whether disqualifying matters that arose in the
context of a settlement with a regulatory authority should be treated
the same as non-settled matters. The proposing release also discussed
whether the Commission should defer to the regulator issuing the order
to determine whether the issued order was a ``final order'' for
purposes of disqualification in Rule 506.
    Several commenters agreed that a definition of ``final order''
would be helpful in promoting uniform and predictable treatment of
regulatory actions.\136\ Four commenters were generally supportive of
the proposed definition.\137\
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    \136\ See, e.g., letters from NYCBA; Rutledge; SIFMA.
    \137\ Letters from C. Barnard; Rutledge; Better Markets; Munck
Carter, LLP (July 14, 2011) (``Munck Carter'').
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    Two commenters suggested adding minimum procedural standards to the
definition of ``final order.'' \138\ One advocated building ``basic due
process elements'' into the definition by adding the concept of notice
and an opportunity for a hearing.\139\ This commenter suggested that,
in order to ensure that settled matters would be treated the same as
litigated matters, the definition should require ``an opportunity for
hearing'' rather than some specified actual proceeding.\140\ The other
commenter recommended that, for an order to constitute a ``final
order,'' a regulator ``must have made a

finding of fact and set forth conclusions of law on a record.'' \141\
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    \138\ Letters from NYCBA; SIFMA.
    \139\ Letter from NYCBA.
    \140\ Id.
    \141\ Letter from SIFMA.
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    Taking into account the potential impact of disqualification on
issuers and other market participants, we are persuaded that the
definition of ``final order'' should be limited to orders issued under
statutory authority--including statutes, rules and regulations--that
provides for notice and an opportunity for hearing.\142\ As a result,
under our final definition, ex parte orders issued under statutory
authority that does not provide for notice and an opportunity for
hearing will not trigger disqualification. We are not, however,
imposing procedural requirements beyond a basic requirement that notice
and opportunity for hearing be provided for in the statutes, rules and
regulations under which an order is issued. The proceedings covered in
Rule 506(d)(1)(iii) take many different forms, and it would not be
appropriate for our rules to impose procedural requirements that may
not be met by the proceedings of every state or federal regulator whose
orders are required to trigger disqualification under Section 926 of
the Dodd-Frank Act. We are also not requiring that a hearing actually
have occurred. There may be no hearing, for example, in the context of
a settled matter; however a settlement is considered for this purpose
to have been made after an opportunity for hearing. The basic
requirement we have included should be sufficient to address the
fundamental fairness concern.
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    \142\ See Rule 501.
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    We believe that focusing on the nature of the relevant legal
authority for an order rather than the particular facts and
circumstances surrounding the order will provide more certainty to
issuers seeking to determine whether a covered person subject to an
order is in fact subject to a ``final order'' that would be
disqualifying. An issuer would only need to determine whether the
statutory authority provided for these procedural safeguards, not
whether in fact notice was given and an opportunity for hearing was
provided. This approach is consistent with comment we received
stressing the importance of making the disqualification provisions
clear and simple to administer, based on ``bright line'' provisions or
an ``objective test'' wherever possible.\143\ The focus on legal
authority rather than the facts of each case will also likely reduce
the incidence of covered persons, in an effort to participate in an
offering, claiming procedural irregularities where such irregularities
did not occur. A market participant that is subject to an order that
was issued without in fact receiving notice and an opportunity for
hearing will be able to challenge the order itself, and may also seek a
waiver of disqualification from the Commission.
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    \143\ Letter from NYCBA
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    We do not believe that limiting final orders in this way will
compromise investor protection because, in most instances, ex parte
orders are of short duration and will either expire or be replaced by a
subsequent order that would meet our procedural requirements.
    Commenters were divided on the question of whether orders should be
deemed final if they are still subject to appeal. Three commenters
objected to adding a requirement that final orders be non-appealable,
generally on the basis that the resulting delay could compromise
investor protection.\144\ Three other commenters argued that the
definition of ``final order'' should be limited to non-appealable
orders.\145\ We remain concerned that delay incident to the appeals
process could undermine the intended benefits of the rule, and are
therefore adopting the definition of ``final order'' without a
requirement that the order be non-appealable.\146\
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    \144\ Letters from C. Barnard; NYCBA; Rutledge.
    \145\ Letters from SIFMA; REISA; Alfaro.
    \146\ See Rule 501.
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    As adopted, the definition of ``final order'' contained in new Rule
501(g) provides that ``final order'' shall mean a written directive or
declaratory statement issued by a federal or state agency described in
Sec.  230.506(d)(1)(iii) under applicable statutory authority that
provides for notice and an opportunity for hearing, which constitutes a
final disposition or action by that federal or state agency.
    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.'' In light of the specificity of
the language of Section 926, the proposal did not include standards or
guidance with respect to what constitutes ``fraudulent, manipulative or
deceptive conduct.''
    In the proposing release we solicited comment on whether the rule
should provide a definition for ``fraudulent, manipulative or deceptive
conduct'' and, if we provided a definition, what should be included in
such a definition. Recognizing that Section 926(2)(A)(ii) refers to the
final orders of the relevant regulators, the proposing release also
requested comment on whether the ``fraudulent, manipulative or
deceptive conduct'' determination should be considered and decided only
by the relevant regulator issuing the final order. In particular, we
asked whether ``fraudulent, manipulative or deceptive conduct'' should
be understood to require knowing misconduct or scienter, and noted the
concern expressed by some commenters that ``technical or administrative
violations'' should not be a source of disqualification.\147\
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    \147\ See advance comment letter from Investment Program
Association (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).
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    Some commenters believed that the Commission should provide
standards for fraudulent, manipulative or deceptive conduct to clarify
and limit the types of orders by state and federal regulators that will
trigger disqualification.\148\ These commenters supported a definition
that requires scienter, generally modeled on the scienter standards of
Section 10(b) of the Exchange Act and Rule 10b-5.\149\ Many of these
commenters also argued that violations they characterized as
``technical'' or ``administrative,'' such as late filings and books and
records violations, without a requirement of scienter, should not give
rise to disqualification.\150\ On the other hand, a commenter who
opposed defining ``final order'' to include scienter pointed out that
scienter is not required for all state securities law violations or for
violations of federal banking regulations (where the standard is unsafe
or unsound banking practices or breach of fiduciary duty), so limiting
the definition of fraudulent, manipulative or deceptive conduct to
scienter-based violations would potentially result in orders by those
regulators not giving rise to disqualification even though they are
explicitly mandated to be covered by Section 926. In the commenter's
view, this would be contrary to Congressional

intent and the plain language of Section 926.\151\
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    \148\ See comment letters from Alfaro; ABA Fed. Reg. Comm.; Five
Firms; the Managed Funds Association (Aug. 12, 2011) (``MFA'');
NYCBA; REISA; SIFMA; S&C Whitaker Chalk.
    \149\ See comment letters from ABA Fed. Reg. Comm.; Five Firms;
MFA; NYCBA; REISA; SIFMA; S&C Whitaker Chalk. See also comment
letter from Cleary Gottlieb (supporting a scienter requirement for
all regulatory orders, including orders of the Commission, with an
exception for Commission orders related to violations of Section 5
of the Securities Act).
    \150\ See, e.g., comment letters from Five Firms; MFA; SIFMA.
    \151\ See comment letter from Rutledge.
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    We do not believe that Section 926(A)(ii) is limited to matters
involving scienter. Scienter is not a requirement under Section
15(b)(4)(H) of the Exchange Act or Section 203(e)(9) of the Advisers
Act, from which the language of Section 926 is drawn. Commission orders
are issued under these sections based only on the existence of a
relevant state or federal regulatory order; the Commission has stated
that, while the degree of scienter involved is a factor in determining
what sanction is appropriate,\152\ the Commission can order sanctions
even where scienter is not an element of the underlying state anti-
fraud law violation.\153\ Scienter may also not play a similar role in
other areas of regulation specified in Section 926(A)(ii), such as
insurance, banking and credit union regulation, as it does under the
federal securities laws. We do not believe it is appropriate to limit
the provision to matters involving scienter absent a clear statutory
direction to do so, particularly when the relevant language has been
construed in other contexts not to be so limited, and when imposing
such a limitation may result in excluding regulatory orders that are
explicitly mandated to be covered by the new rules. Accordingly, the
final rules do not include a definition of ``fraudulent, manipulative
or deceptive conduct'' and in particular do not limit ``fraudulent,
manipulative or deceptive conduct'' to matters involving scienter.
---------------------------------------------------------------------------

    \152\ Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979),
aff'd on other grounds, 450 U.S. 91 (1981).
    \153\ See In the Matter of Mitchell M. Maynard and Dorice A.
Maynard, Release No. IA-2875 (May 15, 2009).
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    Final Rule. As adopted, Rule 506(d)(1)(iii) provides that
disqualification will arise if a covered person 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; the U.S.
Commodity Futures Trading Commission; or the National Credit Union
Administration that:
     At the time of the sale, bars the person from association
with an entity regulated by such commission, authority, agency, or
officer; engaging in the business of securities, insurance or banking;
or engaging in savings association or credit union activities; or
     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 the sale.\154\
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    \154\ Rule 506(d)(1)(iii).
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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.'' \155\
Under these provisions (other than Section 15B(a), discussed below),
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.
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    \155\ 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)(1), and Section 203(i)(1)(A) of the Advisers
Act, 15 U.S.C. 80b-3(i)(1)(A), give the Commission authority to
impose civil money penalties in these disciplinary proceedings.
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    Our proposed rule was based on Rule 262(b)(3), but eliminated the
anomalous reference to Section 15B(a), which is not a source of
sanctioning authority, and codified the prior interpretive position
that disqualification would continue only for as long as some act is
prohibited or required to be performed pursuant to the order (with the
consequence that censures and orders to pay civil money penalties,
assuming the penalties are paid in accordance with the order, are not
disqualifying, and a disqualification based on a suspension or
limitation of activities expires when the suspension or limitation
expires).\156\ Under the proposed rule, an offering would be
disqualified if any covered person is subject to an order of the
Commission entered pursuant to section 15(b) or 15B(c) of the Exchange
Act or section 203(e) or (f) of the Advisers Act that, at the time of
such sale, suspends or revokes such person's registration as a broker,
dealer, municipal securities dealer or investment adviser; places
limitations on the activities, functions or operations of such person;
or bars such person from being associated with any entity or from
participating in the offering of any penny stock.\157\
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    \156\ See Proposed Rule 506(c)(1)(iv); 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 ``[i]n 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).
    \157\ Proposed Rule 506(c)(iv).
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    We requested comment on the appropriateness of codifying the
interpretive position and imposing any look-back period for Commission
disciplinary sanctions. Specifically, we requested comment on whether
the rules should provide that orders to pay civil money penalties are
disqualifying if the penalties are not paid as ordered. The proposal
drew relatively little comment, all of which was supportive.\158\ We
are adopting the rule as proposed, now numbered Rule 506(d)(1)(iv).
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    \158\ See comment letter from Rutledge; see also comment letters
from Lehman & Eilen; SIFMA.
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5. Certain Commission Cease-and-Desist Orders
    Section 926 of the Dodd-Frank Act mandates that bad actor
disqualification result 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. The state and federal regulators
listed in Section 926 include: State authorities that supervise banks,
savings associations, or credit unions; state insurance regulators;
appropriate federal banking agencies; and the National Credit Union
Administration. The Commission is not included in the Section 926(2)(A)
list of regulators. Although we did not propose specific amendments to
the rule to include the Commission, we explained that adding the
Commission's cease-and-desist orders to the disqualification provisions
could further enhance the investor protection intent of the
disqualification provisions and would contribute to creating an
internally consistent set of rules that would treat relevant sanctions

similarly for disqualification purposes. In the proposing release, we
pointed out in particular that orders issued in stand-alone Commission
cease-and-desist proceedings \159\ are not disqualifying under current
bad actor disqualification provisions,\160\ and the proposal did not
include such orders as disqualifying for purposes of Rule 506
offerings.
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    \159\ 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.
    \160\ Current provisions also do not cover 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 disqualifying under
Rule 262.
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    Our request for comment covered a range of issues, including
whether it was appropriate to include the Commission in the list of