Broker-Dealer

Private Placement Brokers Should Be Legalized Along with M&A Brokers

January 21, 2015 | Dan MacIntyre

In 2005, an American Bar Association task force published an exhaustively researched report that highlighted a huge “gray market” of unregistered brokerage activity, conducted by people that sometimes refer to themselves as “finders,” that is critical to the development of early stage companies, but operating in technical violation of the Securities Exchange Act of 1934 (“ABA Report”). Other than occasional enforcement actions against bad actors, the SEC did little to address this problem until early 2014, when it issued a No-Action letter which blessed certain restricted activities of merger and acquisition brokers (“M&A Brokers”). The SEC’s approach to other private placement brokers has been to restrict their activities even further. Compare Paul Anka, SEC No-Action Letter (July 24, 1991) (granting legal “finder” status) with Brumberg, Mackey & Wall, PLC., SEC No-Action Letter (May 17, 2010) (restricting “finder” status). Courts have not always agreed with the SEC. See SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011) (proposing a non-exhaustive six-factor test for registration).

On January 6th, the first day of the 114th Congress’s new session, the House of Representatives considered H.R. 37. This bill proposes again multiple pieces of legislation that passed the House in the previous congress but were not taken up by the Senate. The bill has now been remanded to the House Committee process. H.R. 37 contains eleven separate items which would affect the current financial regulatory landscape. One of the proposed provisions responds to concerns about financial intermediaries such as finders that participate in mergers and acquisitions. This blog post advocates that Congress, while considering legalization of M&A Brokers, should also legalize a limited class of private placement brokers.
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FINRA Issues Regulatory Notice Clarifying New Suitability Rule

June 20, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice in May clarifying its new suitability rule, Rule 2111. The rule, which was approved by the Securities and Exchange Commission (SEC) in November 2010, will be implemented on July 9, 2012. The Notice is intended to answer industry questions and provide guidance on the new rule.

According to FINRA, the new rule imposes the same obligations as the predecessor rule and related case law. It is intended to clarify and codify three main suitability obligations.

The first obligation is reasonable-basis suitability, which has two components: a broker must (1) perform reasonable diligence to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks and rewards, and (2) determine whether the recommendation is suitable for at least some investors based on that understanding.

The second obligation is customer-specific suitability, in which the broker must have a reasonable basis to believe that a recommendation of a security or investment strategy is suitable for the particular customer based on the customer’s investment profile.
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SEC Approves FINRA Rule Relating to Broker-Dealer Obligations in Private Placements

June 19, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) approved the Financial Industry Regulatory Authority’s (FINRA) Rule 5123 on June 7, 2012. The text of the final rule can be found here. The rule is creates some obligations for broker-dealers when they are engaged in selling private placements of securities. Due to a number of concerns, the SEC did not approve the rule until FINRA made a number of changes to the originally proposed rule. The final rule, which includes three amendments, was approved on an accelerated basis. The rule does not apply to all private placements. Sales to institutional accounts, qualified purchasers, investment companies, and other classes of purchasers are excluded.

The original proposal would have required broker-dealers involved in a private placement transaction to disclose to each of the investors prior to the sale the anticipated use of the proceeds from the offerings and the amount and type of offering expenses and offering compensation. If the disclosure documents did not include this information, the broker-dealer would have had to create a document for the investor containing the information. The proposal also required each broker-dealer to file the document with FINRA within fifteen days of the date of the first sale. If there were any amendments to the documents, then the amendments would also have to be filed with FINRA within fifteen days.
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Georgia Securities Commissioner Proposes Rule Amendments

February 3, 2012 | Steve Parker

The Georgia Commissioner of Securities has proposed twelve amendments to investment adviser and broker-dealer rules it promulgated late last year under the Georgia Uniform Securities Act. Although some of the amendments deal with housekeeping issues and typographical errors, several are substantive and of interest to industry participants and their counsel.

A proposed change to Rule 590-4-2-.03 would clarify that Rule 505 Form D filings under the Uniform Limited Offering Exemption must be made within 15 days after the first sale of securities in the state, rather than 15 days prior to the sale, as required by the rule as originally adopted.

The second proposed amendment applies to registration of securities by non-profit entities under Rule 590-4-2-.07, often used for so-called “church bonds.” Under the rule as originally adopted, the application of NASAA Statements of Policy relating to church bonds was permissive rather than mandatory: “The Statements of Policy … may be applied, as applicable, to the proposed offer or sale of a security …” and “may serve as the grounds for the disallowance of the exemption” provided by the Act. Under the amendment, the use of the NASAA Policies is now mandatory, the “may” having been replaced by “shall” in both cases.
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SEC Postpones “Fiduciary Duty Rule” Again

February 1, 2012 | Steve Parker

One year ago, the Securities and Exchange Commission (SEC) staff recommended that a uniform fiduciary standard be applied to both broker-dealers and investment advisers. Recently, however, the SEC postponed a corresponding rule proposal for a second time.

In January, SEC Chairman Mary Schapiro sent a letter to Congressman Scott Garrett, Chairman of the House Capital Markets Subcommittee, stating that it needs to gather additional information for an economic analysis of the impact of a standard of care regulation. Although the SEC had previously set it for action in 2011, that time frame has now been changed to “date to be determined.” The SEC has already designated specific time frames for 51 other rules and reports required by the Dodd-Frank Act.

In the letter to Rep. Garrett, Chairman Schapiro wrote, “SEC staff are drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. In this request, it is our hope commentators will provide information that will allow commission staff to continue to analyze the various components of the market for retail financial advice.”
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SIFMA To FINRA: Change Punishment for Unpaid Promissory Notes

January 30, 2012 | Steve Parker

In a letter sent to the Financial Industry Regulator Authority (FINRA) last November, the Securities Industry and Financial Market Association (SIFMA) wants FINRA to give harsher punishments to brokers who have failed to pay back promissory notes to firms. It specifically sought to prevent brokers from being able to plead poverty to escape arbitration payment orders. The purpose of the notes is to provide cash for recruiting and retention incentives. They are typically designed as forgivable loans as long as the broker stays at the firm for a specified amount of time. If the brokers choose to leave early, then they are required to pay back the note.

As a result of not paying the promissory note back, firms have gotten more aggressive in filing arbitration claims for repayment, and in most cases the firm wins. In 2011, there were 778 promissory note cases filed which is a decrease from 2010 during which 1,152 cases were filed. If a broker does not pay the promissory award, FINRA files an action against him/her that could lead to suspension. Once a monetary award has been issued in a FINRA arbitration proceeding, the broker has 30 days to pay the award. If the broker can show an inability to pay back the note; however, he/she will not be suspended and can continue to work for another firm.
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Social Media Scam Artist Shut Down by SEC

January 9, 2012 | Steve Parker

The Securities and Exchange Commission (SEC) recently filed a cease-and-desist order against an Illinois man, Anthony Fields, for scamming investors with a fictitious securities offering. Fields attempted to sell more than $500 billion in securities using various social media websites, including LinkedIn.

Fields claimed to be a representative of a “leading institutional broker-dealer” through his firms: Anthony Fields & Associates and Platinum Securities Brokers. He was not registered as a broker/dealer with the SEC nor was he licensed as an associate with a registered broker/dealer.

The SEC has claimed that Fields violated numerous securities regulations. Allegedly, he promoted fictitious bank guarantees by setting up an unfunded investment adviser and an unfunded broker-dealer. He registered both of these with the SEC; however, he did so by filing false applications in March 2010. He also failed to maintain adequate books and records or carry out proper compliance procedures. Finally, he overstated his assets under management by claiming he had $400 million when, in actuality, he had none.
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FINRA And SEC To Firms: Improve Branch Office Supervision

January 6, 2012 | Steve Parker

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) recently jointly issued a Risk Alert and a Regulatory Notice on broker-dealer branch office inspections designed to help securities industry firms better supervise their branch offices, as well as to underscore the importance of that supervision.

“An effective risk based branch office inspection program is an important component of a broker-dealer’s supervisory system and, when constructed and implemented reasonably, it can better protect investors and the firm’s own interest,” stated Stephen Luparello, Vice Chairman of FINRA.

The risk alert specifically makes the following recommendations to firms, including:

Increasing the frequency of branch inspections, especially unannounced visits;
Customizing examinations to branch activity based on risk assessments;
Involving more senior personnel in exams;
Insuring that examiners have no conflicts of interest; and
Increasing supervision of certain offices based upon surveillance data and requiring corrective actions to address deficiencies noted.

SEC Hits Mid-Sized RIA’s for Compliance Violations, Signaling Continued Interest

December 6, 2011 | Steve Parker

The Securities and Exchange Commission Enforcement Division last week settled enforcement actions against three mid-sized registered investment advisors for failing to establish, maintain and follow written compliance procedures. Two of the firms had assets under management less than the new $100 million cutoff for federal registration, and the other firm’s assets were just over that amount.

OMNI Investment Advisors, Inc., was a two-advisor firm with 190 accounts and $65 million under management. The SEC found that it had no compliance program in place for over two years, during which time the owner and CCO was out of the country and not actively engaged in the firm’s business. When the SEC announced an examination of the firm in late 2010, the firm apparently purchased an “off-the-shelf” compliance manual designed for both broker-dealers and investment advisors, but did not customize it for its own advisory business. No annual compliance reviews were conducted, and the firm’s advisors were apparently not supervised. The firm’s owner was also found to have backdated and failed to review a number of documents containing his signature, including client advisory agreements. As a sanction, the SEC barred the firm’s owner from the securities industry and fined him $50,000, in addition to censuring the firm.
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Social Media and the Investment Adviser

June 7, 2011 | Steve Parker

More and more brokers and investment advisers are becoming familiar with the applicable social media regulations, including those described in FINRA Regulatory Notice 10-06, to put into place procedures that permit the wide use of social media for marketing purposes. These social media sites are proving an invaluable way to create and build client relationships, referral networks and other marketing opportunities. While this guidance was welcomed by firms, much of FINRA’s guidance is proving incomplete, as broker-dealers struggle to find ways, for example, to implement procedures to comply with FINRA’s record-keeping and other requirements.

Subject firms wishing to employ greater social media need to make sure that they follow FINRA’s requirements and those of the Exchange Act, the Investment Adviser’s Act and applicable state law. The most important factor is, of course, full, accurate, fair, complete and honest disclosures particularly on those pages that are permanent as opposed to transient messages. As FINRA made clear, all social media records, even Tweets and Facebook wall postings, must be maintained by the firm as part of their supervision. Additionally, a firm needs to set a written social media policy and follow the policy thoroughly.

From a compliance standpoint, for entities subject to FINRA rules, it is important to realize that blog posts, websites, banner ads, bulletin boards and static content on social media sites are considered advertisements under Rule 2210 and thus subject to the detailed requirements of that rule, including principal review or approval prior to posting for publication. This includes profile, background and wall information.
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