Purpose

• This bill updates Minnesota law to strengthen and expand oversight of securities broker-dealers, broker-dealer agents, investment advisers, and related offerings. It adds rules for how offerings are filed, how records are kept, and how compliance is enforced. It also aligns Minnesota’s rules with federal securities frameworks for certain offerings.

Main provisions

• Overview of changes to 80A.50 (Federal covered securities and small corporate offerings)

  • Federal covered securities: For certain federal covered securities that aren’t exempt, Minnesota may require filing of records before and after the initial offer, including records from the federal registration statement and consent to service of process.
  • Reporting and data: After the initial offer, issuers may need to provide records to help compute fees and to report the value of securities sold in Minnesota if those sales aren’t in the federal filings.
  • Notice filings: A notice filing for federal covered securities can be effective for one year and may be renewed by submitting copies of required records filed with the SEC.
  • Form D and Form 4D: For securities under Section 18(b)4(D) of the Securities Act of 1933, issuers must include a copy of Form D (and Appendix) with the notice filing and consent to service of process.
  • Stop orders: The administrator may issue a stop order if there’s noncompliance with notice or fee requirements; the stop order can be void if deficiencies are corrected.
  • Small corporate offering registration (SCOR): The bill allows certain smaller offerings to register in Minnesota if the issuer meets eligibility, with detailed disqualification rules (who cannot use SCOR) and automatic effective dates unless stopped.
  • Registration materials: SCOR statements must use Form U7 and include required documents such as consent to service of process, description of securities, copies of organizational documents, opinions of counsel, and offering documents.
  • Offering limits and exemptions: Offers under SCOR are limited to levels allowed by federal Regulation A and Regulation D, with specified conditions for Regulation A Tier 2 and Regulation Crowdfunding (Reg CF).

• Regulation A Tier 2 and Regulation Crowdfunding (Reg CF)

  • Regulation A Tier 2: Minnesota requires initial notice filings at least 21 days before the first Minnesota sale, with renewal every 12 months and potential amendments to increase the offering.
  • Regulation Crowdfunding (Reg CF): For offerings under federal Reg CF, issuers with a Minnesota base or substantial Minnesota participation must file uniform notices or other documentation (Uniform Notice of Federal Crowdfunding Offering or other documents) and follow renewal/ amendment procedures similar to Reg A Tier 2.

• Post-registration requirements (80A.66)

  • Financial requirements and reports: Rules may set minimum financial requirements for broker-dealers and investment advisers; those entities must file financial reports as required and correct any inaccuracies promptly.
  • Records and retention: Broker-dealers and investment advisers must keep necessary records and may store them in accepted data formats; records must be accessible to Minnesota regulators.
  • Written supervisory procedures: Broker-dealers must establish written supervisory procedures and designate supervisory staff; copies must be kept at each branch.
  • Private funds: Investment advisers to private funds must file specific records and reports corresponding to SEC Rule 204-4, including details like assets under management, leverage, counterparty risk, positions, valuation policies, types of assets, and side arrangements (side letters) that affect investors.
  • Audits and inspections: The administrator may conduct audits or inspections of broker-dealers, investment advisers, and private fund records, with the ability to copy or remove records and charge reasonable costs.
  • Custody and bonds/insurance: Rules may require insurance, bonds, or other security for clients’ funds or securities held by broker-dealers or investment advisers, with minimum amounts and exceptions for higher net worth firms.
  • Custody rules: An agent may not have custody of client funds or securities except under supervision of a broker-dealer or investment adviser.
  • Continuing education: Individuals registered must participate in approved continuing education programs.
  • Business continuity and succession planning: Investment advisers must have written plans to protect records, communicate with clients and regulators, and recover business operations after interruptions.
  • Physical security and cybersecurity: Investment advisers must implement written security policies to protect client information and ensure resilience in the face of cyber threats, including annual privacy policy updates to clients.
  • Client privacy policy: Delivery of a privacy policy to clients annually (and updated when changes occur) describing how nonpublic personal information is collected and shared.
  • Transaction confirmations: Broker-dealers must promptly provide written confirmations of transactions, including detailed information about the trade, parties, and whether the order was unsolicited; conform to SEC Rule 10b-10 delivery standards where applicable.
  • Waivers and contract terms: Contracts cannot waive rights under Minnesota securities laws or commissioner orders; any such waivers are void.
  • Principal office employment: Minnesota-based broker-dealers must have at least one registered person employed full-time at the principal Minnesota office, with limited exceptions for certain investment programs or investment companies.

• Prohibited conduct in providing investment advice (80A.69)

  • Fraud in investment advice: It is illegal to use devices, schemes, or acts of fraud in giving investment advice or in the issuance of analyses or reports related to securities.
  • Definition and enforcement: The administrator may define fraudulent, deceptive, or manipulative acts and prescribe means to prevent them. This includes other related conduct that may be deemed fraudulent or deceptive in advisory services.

• Other enforcement and compliance concepts

  • Stop orders, disqualification, and conditional admissions: The bill outlines mechanisms to pause offerings for noncompliance and to address disqualification scenarios in SCOR.
  • Principal office requirements: Emphasizes on-site presence of registered personnel at Minnesota principal offices to ensure supervision and local accountability.

Significant changes to existing law

• Expanded filing and recordkeeping for federal covered securities and small offerings, including pre- and post-offering records, Form D, and appending Form D details to Minnesota filings.
• New or expanded authority for the Minnesota securities administrator to issue stop orders for noncompliance and to enforce via renewals, amendments, and disqualification provisions.
• Introduction of Regulation A Tier 2 and Regulation Crowdfunding notice filing requirements and renewal processes at the state level, aligning Minnesota with federal Tier 2 and Reg CF frameworks.
• Upgraded post-registration duties for broker-dealers and investment advisers, including financial reporting, supervisory procedures, privacy protections, cybersecurity, business continuity, and private fund reporting.
• New minimum custody-related safeguards (bonds or insurance) and stricter controls on custody of client funds or securities.
• Strengthened prohibitions on fraudulent investment advice, with authority to define fraudulent acts and to intervene to prevent deceptive practices.

Who is affected

• Broker-dealers and broker-dealer agents operating in Minnesota, including their filing, recordkeeping, supervisory, and custody requirements.
• Investment advisers and investment adviser representatives, especially those advising private funds, with enhanced reporting, cybersecurity, privacy, and continuity planning obligations.
• Issuers and sponsors using federal covered securities, Regulation A Tier 2, or Reg CF to raise capital in Minnesota, including the need to file notices, Form D information, and renewal/amendment procedures.
• Minnesota residents and investors participating in offerings under federal Regulation A Tier 2 or Reg CF, who gain additional protections and clearer disclosures.

Relevant terms section follows.

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Relevant Terms - broker-dealer, broker-dealer agent, investment adviser, investment adviser representative - federal covered securities, Securities Act of 1933, Section 18(b)(2), Section 18(b)(4)(D) - federal Regulation A, Regulation A Tier 2, Regulation D, Rule 504, Form D - small corporate offering registration (SCOR), Form U7, Form BD, Form U2 - Regulation Crowdfunding (Reg CF) - notice filing, renewal, amendment, stop order - disqualification, administrative enforcement order - post-registration requirements, financial requirements, financial reports - records, recordkeeping, data storage, 17a (Securities Exchange Act) - private fund, advanced reporting (SEC Rule 204-4) - assets under management, leverage, counterparty risk, valuation policies, side letters - custody, bond, insurance - written supervisory procedures, branch office, principal office, Minnesota presence - privacy policy, nonpublic personal information - cyber security, physical security, business continuity, succession planning - customer confirmation, trade details, unsolicited trades, agent identity - fraud, deceptive practices, fraudulent acts, manipulation - back-office concepts: notice filings, offering documents, indentures, articles of incorporation, bylaws