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Mar 2018
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March 21, 2018

Michigan Proposes New Securities Act Ruleset ~ Public Comment Period Closes April 3, 2018

A proposed set of administrative rules under the Michigan Uniform Securities Act (2002) (MUSA) has been published (click here) by The Michigan Department of Licensing and Regulatory Affairs (LARA), Corporations, Securities, and Commercial Licensing Bureau (Bureau). Most of the proposed rules are based on model state rules developed by the North American Securities Administrators Association (NASAA) (click here). Public comments on the proposed rules can be submitted to the Bureau until Tuesday, April 3, 2018.
 
Proposed rules of special interest include:
 
  • Greater clarity around the registration exclusion for capital-raising intrastate “finders” in proposed Rule 1.2 in light of the Michigan Court of Appeals decision in Pransky v. Falcon Group, Inc., Inc. (June 18, 2015), but see “Pransky's Finding for Finders—Michigan Investors, Not So Much,” The Michigan Business Law Journal, Spring 2017;  
  • New “bad actor” disqualifications from Michigan securities offering exemptions in proposed Rule 2.3;
  • A new “merger and acquisitions broker” (business broker) exemption from Michigan broker-dealer registration in proposed Rule 4.2 (similar to SEC no-action relief and pending federal legislation);  
  • New requirements for “private fund advisers” to remain exempt from Michigan investment adviser registration in proposed Rule 4.5;
  • Extensive requirements for “Michigan investment markets” to be registered and regulated as a limited purpose intrastate broker-dealer in proposed Rule 4.8;  
  • New bonding and financial qualifications for Michigan-registered investment advisers in proposed Rules 4.14 and 4.17;
  • New proxy voting requirements for Michigan-registered investment advisers in Rule 4.20 (similar to SEC requirements); voting-related record-keeping requirements in Rule 4.24(2)(aa) appear to be unnecessarily burdensome for state-registered advisers;  
  • New business continuity and succession planning requirements for investment advisers in Rule 4.21; as written, this rule applies to both registered and exempt advisers (but not SEC-registered advisers);
  • Extensive recordkeeping requirements for Michigan-registered advisers in Rule 4.24; including detailed transactional records for all securities directly or indirectly owned by the investment adviser and its associated “access persons” (similar to the SEC Rule 204A-1 Code of Ethics requirements, but without a corresponding state ethics rule);  
  • Extensive prohibited practices for investment advisers (Rule 4.25) and for broker-dealers (Rule 4.27) and, respectively, their investment adviser representatives and agents; and
  • A new “solicitors” exemption from Michigan investment adviser registration and related requirements in proposed Rule 4.29.  

The proposed MUSA rules will supersede all existing rules under the prior state securities act. The new rules cover substantially all aspects of state securities regulation in Michigan, including the following subjects among others:
 
Securities Offerings; Secondary Public Trading
 
  • Securities offering, registration, qualification, exemptions, and disqualifications;
  • Federal-covered securities notice-filings;
  • Statements of policy for certain types of securities offerings; and
  • An updated list of “nationally recognized securities manuals” covering publicly held securities eligible for secondary trading by or through a Michigan-registered broker-dealer.
 
Broker-dealers and their Agents
 
  • Broker-dealer and agent registration, qualifications, and regulation;
  • Capital-raising “finders” exclusion (“intrastate” basis only) from broker-dealer status;
  • “Merger and acquisition brokers” (business brokers) registration exemption;
  • Minimum financial requirements; and
  • Extensive dishonest and unethical business practices.
 
Investment Advisers, Representatives, and Private Fund Advisers
 
  • Investment adviser and representative registration, qualifications, and regulation;
  • Private fund adviser registration exemptions, requirements, and disqualifications;
  • Federal covered investment adviser notice filings;
  • Solicitor exemption from Michigan investment adviser registration;
  • Bonding and minimum financial requirements for investment advisers;
  • Investment adviser disclosure brochures;
  • Requirements when an investment adviser has custody of client funds or securities;
  • Required books and records for state-registered investment advisers;
  • Business continuity and succession planning requirements;
  • Requirements and prohibitions for investment adviser services contracts; notably permitting implied client consent in change of control transactions; and
  • Extensive prohibited investment adviser business practices.
 
Michigan Investment Markets (secondary trading of intrastate securities)
 
The MUSA was amended in 2014 to add Chapter 4A, Michigan Investment Markets, a type of intrastate broker-dealer that would act as a market or exchange for transactions involving securities previously issued in intrastate offerings. Rule 4.8 lays out the extensive requirements to apply for this type of Michigan-only registration, including proof of compliance with Sections 5, 6, and 15 of the Securities Exchange Act of 1934 (e.g., an SEC no-action letter). Rule 4.16 prescribes minimum financial requirements for a Michigan investment market and customer protection rules based on SEC broker-dealer requirements.
 
Other Topics
 
  • Requirements and proscriptions if using senior-specific certifications or professional designations;
  • Interpretive opinions and various types of fees; and
  • Use of electronic signatures.
 
Transition and Effective Date
 
A date for LARA’s adoption of the new ruleset is not yet known, but it is anticipated by late Summer or Fall 2018—the effective date will be 180 days later. Generally, there are no rule-specific transitional periods. Compliance with some of the rules’ requirements within the 180-day period may be challenging, so early preparations for these new rules is strongly encouraged. When effective, these MUSA rules will replace the six “Transition Orders” issued in 2009, 2010, and 2011 (click here) to implement the MUSA that became effective on October 1, 2009 (click here).
 
Public Comments
 
Public comments on any or all of the proposed MUSA rules may be submitted to LARA by 4:30 P.M. on Tuesday, April 3, 2018, electronically or in paper to:
 
Department of Licensing and Regulatory Affairs
Corporation, Securities, and Commercial Licensing Bureau
Attention:  Stephen Brey
P.O. Box 30018
Lansing, MI 48909-7518
Phone: 517-241-9212
Fax: 517-241-7539
E-mail: breys@michigan.gov
 
LARA is also holding a public hearing to receive comments starting at 8:30 AM on March 27, 2018, at:
 
Library of Michigan
Forum, 1st Floor
702 W. Kalamazoo Street
Lansing, Michigan 48915
 
This rulemaking process commenced in 2015. LARA’s MUSA rulemaking history is available (click here) and its Regulatory Impact Statement and Cost Benefit Analysis (as amended) is available (click here).
 
We have been proactively engaged in the rulemaking process working cooperatively with the Bureau through the Securities Committee of the Business Law Section of the State Bar of Michigan. The Committee submitted extensive comments on prior drafts of these rules (click here) and the Bureau incorporated the overwhelming majority of those suggested changes.
 
We encourage you to carefully review the proposed MUSA rules. If you have questions or would like assistance in submitting public comments on the proposed rules, please contact any member of our Funds and Investment Services Practice Group.

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