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On October 14, 2011, at the invitation of the Florida Office of Financial Regulation (OFR), the Florida Securities Dealers Association (FSDA) recommended 20 changes to the administrative rules governing OFR’s Division of Securities to improve regulation of securities dealers and investment advisers in Florida. At a meeting of the Governor and Cabinet, sitting as the Florida Financial Services Commission, on May 12, 2014, OFR unveiled new rules to adopt four of those 20 recommendations.

Florida's "Non-Delegation" Doctrine

Florida’s Constitution has long been held to prevent state statutes and rules from “incorporating by reference” the laws of other jurisdictions as those laws might be amended in the future. Under this “non-delegation” doctrine, federal laws or rules of self-regulatory organizations can only be incorporated into Florida law as they exist at the time the Florida regulations incorporating them are enacted. As consequence, Florida administrative agencies must periodically re-adopt their regulations in order to pick up later changes in the incorporated regulations. FSDA pointed out changes in federal law that require this exercise, particularly regarding the definition of “branch office” and governing registered investment advisers. OFR has published notices of development of rulemaking specifically to update references to incorporated material. Preliminary texts of the proposed rule development can be found here.

Abolition of "Merit Review"

FSDA recommended OFR consider abolition of state evaluation of offerings of securities for their “merit” as investment opportunities. Although the meaning of OFR’s preliminary text is unclear, it is proposing to remove some of these rules from Chapter 69W-700, governing the registration of securities. These amendments are aimed to achieve consistency with recent amendments to federal securities laws, in particular, amendments to Regulation A required by the Dodd Frank Act. The proposed amendments, inter alia, would split Regulation A into two tiers: the first governing public offerings up to $5 million; and the second governing public offerings up to $50 million. To incentivize issuers of securities to make use of Regulation A, the new rules would exempt many Regulation A offerings from state securities laws and qualification requirements.

"Custody" For Investment Advisors

A key recommendation of FSDA was reform of Florida’s rules on when a registered investment adviser will be deemed to have “custody” of customer’s managed assets. An adviser will be deemed to have such custody, triggering stringent regulatory requirements, even when it does not actually possess the managed assets, if the adviser has the right to deduct its fees from the customer’s account.

The preliminary text would strike the definition of “custody” at Rule 69W-200.001(11) possibly removing from OFR’s regulations the scattering of related provisions that has become a trap for the unwary. Whether real reform will result evidently has to await rule development.