[Federal Register Volume 76, Number 105 (Wednesday, June 1, 2011)]
[Proposed Rules]
[Pages 31518-31543]
[FR Doc No: 2011-13370]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

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

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

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

Paper Comments

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

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

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

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

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Table of Contents

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

I. Background and Summary

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

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

II. Discussion of the Proposed Amendments

A. Introduction

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

B. Covered Persons

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

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

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

C. Disqualifying Events

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Orders of Other Regulators

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

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

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

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

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

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

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

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

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

covered person is suspended or expelled from membership in, or
suspended or barred from association with a member of, a securities
self-regulatory organization or ``SRO'' (a registered national
securities exchange or national securities association) for any act or
omission to act constituting conduct inconsistent with just and
equitable principles of trade.\73\ Again, we are not proposing to
change the substance of the current rule (and in particular, are not
proposing to add any look-back period).\74\ The proposal would update
the rule by adding a reference to a registered affiliated securities
association.\75\
---------------------------------------------------------------------------

    \73\ See 17 CFR 230.262(b)(4).
    \74\ The application of this provision is slightly broader under
the proposal than under Rule 262(b)(4), in that it would apply to
all covered persons, including issuers and their predecessors and
affiliated issuers (which are excluded under Rule 262(b)(4)). See
Proposed Rule 506(c)(1)(v).
    \75\ In 2007, the SEC approved the formation of FINRA, a
consolidation of the enforcement arm of the New York Stock Exchange,
NYSE Regulation, Inc. and the NASD. Once formed, FINRA became
responsible for regulatory oversight of all securities firms that do
business with the public. See SR-NASD-2007-023, Release No. 34-
56145, Order Approving Proposed Rule Change to Amend the By-Laws of
NASD to Implement Governance and Related Changes to Accommodate the
Consolidation of the Member Firm Regulatory Functions of NASD and
NYSE Regulation, Inc. (available at http://www.sec.gov/rules/sro/nasd/2007/34-56145.pdf.) Registered national securities exchanges
maintain the right to enforce their own rules.
---------------------------------------------------------------------------

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

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

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

    \79\ Paragraph (a)(5) relates to issuers and their predecessors
and affiliated issuers, and paragraph (b)(5) relates to other
covered persons. Disqualification results if any covered person ``is
subject to a United States Postal Service false representation order
entered under 39 U.S.C. Sec.  3005 within 5 years prior to the
filing of the offering statement, or is subject to a temporary
restraining order or preliminary injunction entered under 39 U.S.C.
Sec.  3007 with respect to conduct alleged to have violated 39
U.S.C. Sec.  3005.'' 17 CFR 230.262(a)(5) and (b)(5).
    \80\ See Proposed Rule 506(c)(1)(vii).
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    (53) Is it appropriate to mirror the current five-year look-back
period for U.S. Postal Service false representation orders? Or should
we extend the look-back period to ten years to correspond with the ten-
year look-back period for regulatory orders under the Dodd-Frank Act?

D. Reasonable Care Exception

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

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

    Our proposal attempts to address the potential difficulty of
ascertaining

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

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

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

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

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

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

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

E. Waivers

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

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

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

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

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

F. Transition Issues

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

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

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

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

    In addition, we are mindful that Section 926 replaced a provision
in an earlier bill that would have eliminated Federal pre-emption of
Rule 506 offerings, thus subjecting such offerings to state ``blue
sky'' regulation. Without pre-emption, existing convictions,
disciplinary orders and other disqualifying events would have operated
to disqualify offerings in the states that have bad actor
disqualification rules. Replacing this provision with Section 926 was
not seen as decreasing investor protection in this regard,\94\
suggesting that Section 926 was intended to take into account pre-
existing disqualifying events.
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    \94\ See NASAA letter, dated April 27, 2010, quoted at CR S3813;
see also letter of the Angel Capital Association, dated April 21,
2010, quoted at CR S3813).
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    Rule 506 is an exemptive rule that establishes a safe harbor from
statutory registration requirements for securities offerings. It does
not create rights, so disqualification from participation in that type
of exempt offering cannot inappropriately prejudice any person.
Moreover, offerings that would be disqualified from reliance on Rule
506 under the new provisions could potentially still be effected on a
registered basis, pursuant to an available statutory exemption such as
Section 4(2) or Section 4(5) of the Securities Act, or pursuant to
another exemptive rule. Alternatively, issuers may regain eligibility
to rely on Rule 506 if they are able to terminate their relationship
with the bad actor whose involvement triggers disqualification.
    We are therefore not proposing to exempt, ``grandfather,'' or
otherwise make special provision for events that occurred before
enactment of the Dodd-Frank Act or the effective date of the proposed
amendments. We are soliciting comment, however, about whether the new
disqualification provisions required under the Dodd-Frank Act would
operate in an unfair manner in particular respects and, if so, how we
should address that. For example, should the rules provide a different
treatment for persons who entered into negotiated settlements prior to
the enactment of the Dodd-Frank Act, the date of this Release or the
effective date of our rules, on the basis that they might not have
settled on the same terms (or at all) if they had known it would result
in disqualification from future Rule 506 offerings? We are soliciting
comment on whether we should provide grandfathering or other
accommodation for some or all events that predate enactment of the
Dodd-Frank Act, this Release or the effective date of our rules,
provided such grandfathering or other accommodation would be consistent
with the requirements of Section 926. We are also seeking comment on
whether we should extend the benefit of waivers previously granted in
respect of disqualification from Regulation A, Rule 505 of Regulation D
or Regulation E, so that such waivers would cover the new

disqualification provisions applicable to Rule 506.
Request for Comment
    (63) Should the Commission provide for grandfathering of pre-
existing disqualifying events, or other phase-in procedures for the new
disqualification provisions? What would be the effect on issuers, other
covered persons and investors of implementing the new bad actor
disqualification provisions without grandfathering, as proposed? Would
providing for grandfathering be consistent with the requirements of
Section 926 of the Dodd-Frank Act?
    (64) If we provide for grandfathering, should we grandfather
disqualifying events that occurred before enactment of the Dodd-Frank
Act, before the date of this Release or before adoption or
effectiveness of the amendments to Rule 506? What impact would that
have on investor protection? Would the impact on investor protection be
reduced if we required disclosure of grandfathered events?
    (65) Alternatively, should we grandfather only certain
disqualifying events? For example, we could grandfather orders arising
out of negotiated settlements agreed to before enactment of the Dodd-
Frank Act, or before the rules were proposed, adopted or became
effective, in light of the possibility that the party would not have
agreed to the relevant order if it had known that a collateral
consequence of the agreement would be disqualification from all Rule
506 offerings. This would be similar to the approach taken with respect
to eligibility for being a ``well-known seasoned issuer'' when that
category was created.\95\ Would providing a different treatment for
pre-existing negotiated settlements limit the effectiveness of the bad
actor disqualification rules?
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    \95\ For purposes of defining ``ineligible issuer'' (i.e., an
issuer that is not eligible to be a ``well known seasoned issuer''),
we provided that ineligibility based on settlements would apply only
to judicial or administrative decrees or orders entered into after
the effective date of the new rules. See Release No. 33-8591 (Jul.
19, 2005) [70 FR 44722, 44747]; (available at http://www.sec.gov/rules/final/33-8591.pdf).
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    (66) Rather than, or in addition to, providing for grandfathering,
should we extend waivers previously granted with respect to bad actor
disqualification under Regulation A, Rule 505 or Regulation E to cover
Rule 506 as well? If we were to consider that approach, are there any
categories of such waivers that particularly should or should not be so
extended?
    2. Effect on ongoing offerings. As proposed, our bad actor
disqualification provisions would apply to each sale of securities made
in reliance on Rule 506 after the rule amendments go into effect. Sales
of securities made before the effective date would not be affected by
any disqualification that arises as a result of the adoption of the
amendments, even if such sales were part of an offering that was
intended to continue after the effective date. Only sales made after
the effective date of the amendments would be subject to
disqualification.
    Under the proposal, disqualifying events that occur while an
offering is underway would be analyzed in a similar fashion. Sales made
before the occurrence of the disqualification would not be affected by
it, but sales thereafter would be disqualified unless and until the
disqualification is waived or removed.\96\
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    \96\ Disqualifying events that exist at the time the offering is
commenced but are only discovered later would be treated the same
way if the reasonable care exception applies; otherwise, the sales
would not be eligible for reliance on Rule 506.
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    We believe this approach is consistent with our other rules and
provides appropriate incentives to issuers and other covered persons,
but are soliciting comment on other possible approaches. If we were to
provide that disqualification would be measured only at the time of
commencement of an offering, then disqualifying events that arise after
commencement would be disregarded. Such an approach could make the
rules easier to apply, but would be problematic in light of the
statutory language and may compromise investor protection in the
context of offerings that continue for extended periods. Conversely, we
could provide that all sales in a continuous offering lose the benefit
of the exemption if a disqualification arises during the offering. Such
an approach could encourage issuers to avoid involving potentially
problematic parties in their offerings, but may be too unpredictable
and therefore undermine the benefits of the exemptions.
Request for Comment
    (67) Is it appropriate for disqualification to apply to sales made
after the effective date of the new rules in offerings that are
underway at the time the new rules become effective, as proposed?
    (68) Is it appropriate for disqualification requirements to apply
to each sale of securities, as proposed? Or should we measure
disqualifying events only at time of the commencement of an offering?
Conversely, should we disqualify all sales in a continuous offering if
a disqualification occurs during the offering, including sales that
have already been made?
    3. Timing of implementation. The proposal does not contemplate any
phase-in period or delay before issuers would be required to comply
with the new disqualification rules. However, given that the new rules
may require issuers to take a number of actions before they could
confirm that they were not disqualified from relying on Rule 506 (such
as, for example, undertaking an inquiry of covered persons, modifying
existing due diligence questionnaires, taking steps to remove any
existing disqualifications and seeking waivers of disqualification if
necessary), it may be appropriate to provide additional time after the
rules are adopted but before compliance is required.
Request for Comment
    (69) Is a relatively shorter implementation period (such as 60
days) appropriate for the new disqualification rules, or should we
provide for delayed implementation? If so, how much time would be
appropriate? (90 days? 120 days? Longer?) Please provide support for
your views by reference to the actions that issuers would be required
to take and an estimate of the time periods involved.

G. Amendment to Form D

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

III. Possible Amendments To Increase Uniformity

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

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

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

    We are considering and requesting public comment on whether the new
bad actor disqualification standards required by the Dodd-Frank Act for
Rule 506 offerings should be applied on a more uniform basis. Under our
proposal, Rule 506 of Regulation D would be the only exemption subject
to the disqualification rules mandated by Section 926 of the Dodd-Frank
Act. The other Securities Act exemptions that currently provide for
``bad actor'' disqualification (Regulation A,\97\ Rule 505 of
Regulation D,\98\ and Regulation E \99\) would continue to follow the
disqualification schemes that are currently in effect. Offerings under
Rule 504,\100\ the remaining Regulation D exemption, would be the only
Regulation D exemption not subject to any Federal disqualification
requirements. We are concerned that there may be confusion, and that
compliance costs could be increased, if different disqualification
standards apply to these exemptions.\101\ We are also concerned that
new disqualification standards applicable only to Rule 506 offerings
could negatively affect the market for offerings under our other
exemptive rules. We are therefore soliciting comment on whether the
proposed new disqualification provisions of Rule 506 should be extended
to cover these other exempt offerings.\102\
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    \97\ See note 17.
    \98\ 17 CFR 230.505. Rule 505 permits offerings of up to $5
million of securities annually, without general solicitation, to an
unlimited number of accredited investors and up to 35 non-accredited
investors. Rule 505 offerings are subject to the same conditions as
apply to Rule 506 offerings (see note 10 above), except that non-
accredited investors are not required to be sophisticated.
    \99\ 17 CFR 230.601 through 230.610. Regulation E is an
exemption for offerings up to $5 million by small business
investment companies (``SBICs'') and business development companies
(``BDCs''). SBICs are investment funds licensed and regulated by the
Small Business Administration that use their own capital plus funds
borrowed with an SBA guarantee to make equity and debt investments
in qualifying small businesses. See Investment Company Act Sec.
2(a)(46), 15 U.S.C. 80a-2(46). A BDC is a closed-end investment
company that has elected to be subject to Sections 55 through 65 of
the Investment Company Act and that is operated for the purpose of
investing in and making significant managerial assistance available
to certain types of companies. See Investment Company Act Sec.
2(a)(48), 15 U.S.C. 80a-2(48). Regulation E offerings are required
to have an offering circular containing specific mandatory
information, which is filed with the Commission and subject to
review by the staff of the Division of Investment Management.
    \100\ 17 CFR 230.504. Rule 504 permits offerings of up to $1
million of securities by issuers that are not (i) reporting
companies under the Securities Exchange Act, (ii) investment
companies or (iii) development stage companies with no specific
business plan or purpose, or whose business plan is to engage in a
merger or acquisition with an unidentified entity or entities.
Offerings under Rule 504 must generally comply with Regulation D
requirements regarding limitations on manner of sale (no general
solicitation) and limitations on resale. The manner of sale and
resale limitations do not apply, however, to offerings that are
subject to state-level registration or that rely on state law
exemptions permitting general solicitation so long as sales are made
only to accredited investors.
    \101\ Regulation A, Rules 504 and 505 of Regulation D and
Regulation E are used much less frequently than Rule 506. For the
year ended September 30, 2010, we received 17,292 initial filings
for offerings under Regulation D, of which 16,027 claimed a Rule 506
exemption, 254 claimed a Rule 505 exemption, 713 claimed a Rule 504
exemption and 151 claimed both Rule 504 and 506 exemptions.
Transactions relying on Regulation A or Regulation E are rare; for
the year ended September 30, 2010, seven Regulation A offerings and
one Regulation E offering were completed. Note that the staff of the
Division of Corporation Finance does not routinely review Form D
filings to confirm that claimed exemptions are actually available.
The figures presented above are based on exemptions claimed in Form
Ds that were filed during the relevant period.
    \102\ If we were to adopt a uniform approach, the rules applied
to all exempt transactions would give effect to any changes from our
proposal that were ultimately adopted (including, for example, the
possible inclusion of final orders of the Commission and the CFTC as
disqualifying events, on which we have requested comment in Part
II.C.3 of this Release).
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    All bad actor disqualification provisions in our current Securities
Act exemptive rules are substantially similar: Rule 505 effectively
incorporates by reference Rule 262, with some changes in defined
terms,\103\ and Rule 602 is substantially similar in its language and
effect, although it does not explicitly refer to Rule 262. We are
considering whether to preserve this basic uniformity by conforming all
existing bad actor disqualification requirements for exempt offerings
to the standards proposed to be applied to Rule 506 offerings, and are
requesting public comment on that approach.
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    \103\ See 17 CFR 230.505(b)(2)(iii).
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    In the 2007 Proposal, the Commission suggested a uniform approach
to disqualification for all offerings under Regulation D.\104\ Both in
response to the 2007 Proposal \105\ and in advance comments on this
rulemaking,\106\ NASAA voiced support for such a uniform approach. Most
comment letters did not support the 2007 Proposal to subject all
Regulation D offerings to bad actor disqualification, and particularly
objected to applying bad actor disqualification requirements to Rule
506.\107\ Given that the Dodd-Frank Act now requires bad actor
disqualification for Rule 506 offerings, and that these constitute a
significant majority of transactions under Regulation D, we are
considering whether many of the same policy reasons for disqualifying
bad actors could be applicable to each of the Regulation D exemptions,
as well as to the exemptions under Regulation A and Regulation E, and
that uniform disqualification may further investor protection. We are
also considering whether imposing uniform disqualification standards
across the remainder of Regulation D might promote clarity and
simplicity in applying our exemptive rules, and reduce costs imposed by
an inconsistent regulatory structure. We also have a concern that
adding new disqualification provisions that apply only to offerings
under Rule 506 may negatively affect the market for offerings under our
other exemptive rules. Bad actors may be encouraged to migrate to
offerings under these other exemptions, which would raise investor
protection concerns. In addition, investors may perceive a higher risk
of fraud in such offerings, which would potentially affect the
marketability and issuance costs of all offerings under the exemptions
without the new standards, whether or not bad actors are involved.
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    \104\ See note 13.
    \105\ See NASAA Comment Letter, note 40.
    \106\ See NASAA Advance Comment Letter, note 41.
    \107\ See, e.g., Comment Letters of the American Bar Association
(Oct. 12, 2007) (available at http://www.sec.gov/comments/s7-18-07/s71807-52.pdf); Tenant-in-Common Association (Oct. 17, 2007)
(available at http://www.sec.gov/comments/s7-18-07/s71807-55.pdf);
and Davis, Polk & Wardwell (Oct. 9, 2007) (available at http://www.sec.gov/comments/s7-18-07/s71807-39.pdf).
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    In order to adopt such a uniform approach, we would have to amend
our rules and our proposal in a number of ways, including the
following:
     If we applied bad actor disqualification to all Regulation
D offerings, we would need to codify the provision as a new paragraph
(e) of Rule 502 (the ``General Conditions to be Met'' for Regulation D
offerings) rather than in Rule 506, and would need to delete the
current disqualification provisions of Rule 505(b)(2)(iii). The
disqualification provisions of Rule 262 of Regulation A and Rule 602 of
Regulation E would need to be amended to conform to new Rule 502(e).
     We would add underwriters and their directors, officers,
general partners and managing members to the categories of covered
persons described in the proposal. This would generally

harmonize with Rule 262.\108\ Underwriters may participate in offerings
under Regulation A and Regulation E and in certain transactions under
Rule 504 of Regulation D, and so would have to be included if our
disqualification rules were to cover such transactions.
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    \108\ All of these are covered persons under current Rule 262
except for the managing members of underwriters.
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     We would need to make a number of changes to harmonize
with existing Rule 602 of Regulation E. For example, we would need to
add as covered persons, for issuers that are registered investment
companies, ``private funds'' as defined in Section 202(a)(29) of the
Investment Advisers Act of 1940 or that elect to be regulated as
``business development companies,'' \109\ their investment advisers and
the general partners, managing members, directors and officers of such
investment advisers.\110\ We would need to add a reference in the
paragraph addressing Commission disciplinary orders to orders
suspending or revoking registration as an investment company issued
under Section 8(e) of the Investment Company Act of 1940, and we would
need to add references, in the paragraph addressing stop orders and
orders denying an exemption, to similar proceedings and orders in
relation to Regulation E offering circulars.\111\
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    \109\ See note 99.
    \110\ This is one area where the approach under Regulation D,
Regulation A and Regulation E would not be completely uniform