New law targets securities fraud

March 2, 2009
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The new Michigan Uniform Securities Act provides further protections for businesses seeking to raise capital from investors, as well as protections for investors themselves. The law also provides for harsher civil and criminal penalties against perpetrators of securities fraud, particularly those who prey on seniors.  

Shane Hansen, a partner at Warner Norcross & Judd LLP, said there are three major changes resulting from the new law that will impact local business and the investment community. Hansen practices in the area of financial services regulation of banks, broker-dealers, investment advisers, financial planners and money managers.

Michigan is the 15th state to adopt the model Uniform Securities Act (2002). The law that’s being replaced was enacted in 1965 and was based on a model act drafted in 1956, so it needed updating, Hansen said.

“There had been amendments to the law that tweaked different things, but over so many years, there have been lots of changes in federal securities law, technologies and interstate activity.

“The Internet has dramatically increased interstate activities that involve securities, and Michigan’s law had just not kept up with that.”

What’s different about the Michigan law, Hansen noted, are its provisions regarding intermediaries, or “finders.” A finder is a person who gets compensated for finding, introducing or referring potential purchases and sellers of any kinds of assets or securities. A finder serves strictly as an intermediary for the purpose of introducing the parties and can’t get involved in planning, evaluating or negotiating a transaction, Hansen observed.

The new law, which goes into effect Oct. 1, does not significantly change how a finder is regulated in Michigan but does change the way in which a finder is registered, he said. 

Raising capital is an important activity that’s regulated by securities laws in the new statute because a business seeking investors is making a securities offering. Under current Michigan law, a finder must register with the state’s Office of Financial and Insurance Regulation and is regulated as a limited classification of “investment adviser.”

Under the new law, finders must register with the OFIR as a “broker-dealer” under both state and federal securities laws and must be a member of the Financial Industry Regulatory Authority in order to help businesses raise capital. FINRA is the largest independent regulator for securities firms doing business in the United States: It oversees nearly 5,000 brokerage firms and more than 660,000 registered securities representatives.

“It does make them more accountable because it puts them on the state’s radar screen, so if somebody calls to complain, the state knows who to contact,” Hansen said. “Hopefully, it promotes compliance and gives a little more assurance to businesses seeking to raise capital that the intermediary they’re dealing with is legitimate.”  

Under the new statute, individual investment advisers also have to register with the OFIR. Previously, just the investment firms they worked for had to be registered with OFIR. That provision brings Michigan into uniformity with other states, Hansen noted.

“That, too, allows the state to track who’s involved in those activities and where they work in case an investor registers a complaint about an investment adviser. It also helps to drive home investment advisers’ understanding of their obligations under securities laws,” Hansen explained.

He advises businesses that want to raise capital to do some due diligence on the intermediary with whom they plan to work and encourages investors to look carefully at the business investment to evaluate whether they can bear the risk.

The new act is based on a model uniform act developed in 2002 by the National Conference of Commissioners on Uniform State Laws to harmonize federal and state securities legislation. The regulation is intended to prevent fraudulent sales of securities to investors, whether it be notes, stocks, security futures, bonds, debentures, certificates of interest in profit-sharing agreements, or interests in oil, gas, or mineral rights, and similar instruments.

The legislation expands the enforcement power of Michigan’s Office of Financial and Insurance Regulation and increases the maximum fine for violations from $10,000 to $500,000 per violation for people who prey on seniors and others who aren’t able to protect their own interests.

“The greater sanctions are intended to help the state particularly respond more effectively to securities fraud that affects seniors,” Hansen said. “It’s a growing problem nationally, as well as in Michigan.”

OFIR is now drafting the rules that will implement a number of the statutory provisions of the act — basically the “how-to” aspects of what the statute requires. OFIR Public Information Officer Jason Moon said the agency hopes to have the rules published for public comment this summer. 

Hansen said the rules probably won’t be very controversial, but since they are as yet unwritten, there are some regulatory questions that are up in the air at this point, such as the timetable and process for investment advisers to register.

“The general law would require them to take an examination on their knowledge of state securities law, but the rules might allow for some grandfathering for someone who has been in the business for a number of years and has professional credentials that provide some assurance that they are competent at what they do,” Hansen said.

Additionally, the new legislation creates the Michigan Investor Education Fund, which will be funded entirely by securities fines. Moon said 100 percent of the fines collected will go into the fund. Some of the money from fines will also be used to educate Michigan residents on how to avoid financial scams, including the agency’s expansion of its “Investor Education in Your Community” and expansion of its investment scams training for law enforcement workers. Moon said the Investor Education program has been in existence since April 2007 and that OFIR has reached nearly 2,000 people through the program.

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