Disqualification of Felons and Other “Bad Actors” From Rule 506 Offerings, 31518-31543 [2011-13370]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

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


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 239

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


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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-21-11 on the subject line; or
     Use the Federal Rulemaking Portal (https://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 (https://www.sec.gov/rules/proposed.shtml). Comments also are 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Room 1580, Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

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

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

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[[Page 31519]]

Table of Contents

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

I. Background and Summary

    Section 926 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act''),\6\ entitled ``Disqualifying 
felons and other `bad actors' from Regulation D offerings,'' requires 
the Commission to adopt rules to disqualify certain securities 
offerings from reliance on the safe harbor provided by Rule 506 for 
exemption from registration under Section 4(2) of the Securities Act of 
1933. This release proposes amendments to Rules 501 and 506 and Form D 
to implement Section 926 of the Dodd-Frank Act.
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    \6\ Public Law 111-203, Sec.  926, 124 Stat. 1376, 1851 (July 
21, 2010) (to be codified at 15 U.S.C. 77d note).
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    Rule 506 is one of three exemptive rules for limited and private 
offerings under Regulation D.\7\ It is by far the most widely used 
Regulation D exemption, accounting for an estimated 90-95% of all 
Regulation D offerings \8\ and the overwhelming majority of capital 
raised in transactions under Regulation D. Rule 506 permits sales of an 
unlimited dollar amount of securities to be made, without registration, 
to an unlimited number of accredited investors \9\ and up to 35 non-
accredited investors, so long as there is no general solicitation, 
appropriate resale limitations are imposed, any applicable information 
requirements are satisfied and the other conditions of the rule are 
met.\10\
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    \7\ The others are Rule 504 and Rule 505, 17 CFR 230.504 and 
230.505, which are discussed in notes 100 and 98 below.
    \8\ For the twelve months ended September 30, 2010, the 
Commission received 17,292 initial filings for offerings under 
Regulation D, of which 16,027 (approximately 93%) claimed a Rule 506 
exemption.
    \9\ Rule 501 of Regulation D lists eight categories of 
``accredited investor,'' including entities and natural persons that 
meet specified income or asset thresholds. See 17 CFR 230.501. In a 
separate rulemaking required by Section 413(a) of the Dodd-Frank 
Act, the Commission has proposed amendments to the accredited 
investor standards in our rules under the Securities Act of 1933 to 
exclude the value of a person's primary residence for purposes of 
the $1 million accredited investor net worth determination. See 
Release No. 33-9177 (Jan. 25, 2011) [76 FR 5307] (available at 
https://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 https://www.sec.gov/rules/proposed/2007/33-8828.pdf.)
    \14\ Comment letters received on the 2007 Proposal are available 
at https://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 https://www.sec.gov/spotlight/regreformcomments.shtml. In 
this release, we refer to comment letters we received on this 
rulemaking project in response to this invitation as ``advance 
comment letters.'' The advance comment letters we received in 
anticipation of this rule proposal appear under the heading ``Adding 
Disqualification Requirements to Regulation D Offerings,'' Title IX 
Provisions of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
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    Section 926 of the Dodd-Frank Act instructs the Commission to issue 
disqualification rules for Rule 506 offerings that are ``substantially 
similar'' to Rule 262,\16\ the bad actor disqualification provisions of 
Regulation A,\17\ and that are also triggered by an expanded list of 
disqualifying events, including certain actions by state regulators, 
enumerated in Section 926. The disqualifying events currently covered 
by Rule 262 include:
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    \16\ 17 CFR 230.262.
    \17\ 17 CFR 230.251 through 230.263. Regulation A is a limited 
offering exemption that permits public offerings of securities not 
exceeding $5 million in any 12-month period by companies that are 
not required to file periodic reports with the Commission. 
Regulation A offerings are required to have an offering circular 
containing specific mandatory information, which is filed with the 
Commission and subject to review by the staff of the Division of 
Corporation Finance.
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     Felony and misdemeanor convictions in connection with the 
purchase or sale of a security or involving the making of a false 
filing with the Commission (the same criminal conviction standard as in 
Section 926 of the Dodd-Frank Act) within the last five years in the 
case of issuers and ten years in the case of other covered persons;

[[Page 31520]]

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

II. Discussion of the Proposed Amendments

A. Introduction

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

B. Covered Persons

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

[[Page 31521]]

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

[[Page 31522]]

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

C. Disqualifying Events

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

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

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

[[Page 31523]]

Commission.\38\ For purposes of Rule 506, we are proposing to refer to 
the date of the relevant sale, rather than the date of first sale, 
because we believe it creates a more appropriate look-back period for 
offerings that may continue for more than one year. Multiyear offerings 
are not uncommon under Rule 506.\39\
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    \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.
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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 
https://www.sec.gov/comments/s7-18-07/s71807-57.pdf).
    \41\ See NASAA Advance Comment Letter (Nov. 4, 2010) (available 
at https://www.sec.gov/comments/df-title-ix/regulation-d-disqualification/regulationddisqualification-1.pdf).
    \42\ See Unif. Sec. Act Sec.  508 (amended 2002) (available at 
https://www.abanet.org/buslaw/newsletter/0009/materials/uniformsecure.pdf).
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 31524]]

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

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

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

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

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

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

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

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

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

[[Page 31525]]

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

    \53\ See Release Nos. 34-48161 (Jul. 10, 2003) [68 FR 42444] 
(available at https://www.sec.gov/rules/sro/nasd/34-48161.pdf) and 
34-49779 (May 27, 2004) [69 FR 32084] (available at https://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 https://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 https://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 https://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,