Nearly all U.S. broker-dealers are members of the Financial Industry Regulatory Authority (FINRA). FINRA regulates, and provides oversight and guidance for its member firms. When a broker-dealer becomes a FINRA member, they enter into a membership agreement which, among other things, specifies which financial products and services the broker-dealer is permitted to offer to its clients. Engaging in securities transactions that are not authorized by broker-dealer’s membership agreement can subject that broker-dealer to penalties and enforcement actions.
Many broker-dealers whose membership agreements grant them authority to sell private placements assume that this gives them the ability to sell EB-5 securities. However, if a firm has authority to sell private placements, that does not necessarily mean that they are qualified to sell EB-5 securities. While sold as a private placement within the U.S., EB-5 securities are a specialized product which require additional controls, policies and procedures. EB-5 issuers who seek to engage a broker-dealer to sell their offerings, should learn about that broker-dealer’s experience with EB-5 securities.
An existing broker dealer can seek permission from FINRA to sell new products by filing a continuing membership application (CMA). Under FINRA Rule 1017, a member firm is required to submit a CMA when there has been (or will be) a “material change in business operations.” In interpretative guidance, FINRA has stated that whether or not an event is a “material change in business” ultimately depends on “an assessment of all relevant facts and circumstances.” See NASD NTM 00-73. The factors to be considered are: the nature of the proposed expansion; the relationship, if any, between the proposed new business line and the firm’s existing business; the effect the proposed expansion is likely to have on the firm’s capital; the qualifications of the firm’s personnel; and the degree to which the firm’s existing financial, operational, supervisory, and compliance systems can accommodate the new business line. Depending on the broker-dealer’s current business and membership agreement, selling EB-5 products for the first time may require the broker-dealer to file a CMA. Broker-dealers that are uncertain whether or not they have the authority to distribute EB-5 securities (or any other product), should consult with counsel, and if in doubt, can solicit an opinion from FINRA by filing a materiality consultation request.
- New York
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