Broker-Dealer

OCIE issues risk alert re. COVID-19

OCIE issued a risk alert to share observations with broker-dealers and investment advisers (firms) based on OCIE’s ongoing COVID-19 outreach to registrants relating to the following six areas:

    1. (1) protection of investors’ assets – firms should consider additional steps to protect client assets (e.g. with regard to validating disbursements and protecting seniors);
    1. (2) supervision of personnel – firms should consider the impact of personnel working remotely as well as limitations on due diligence of other parties or new personnel;
    1. (3) practices relating to fees, expenses, and financial transactions – firms should consider the increased risk of misconduct due to increased financial pressures on firms and their personnel to compensate for lost revenue;
    1. (4) investment fraud – firms should consider the heightened risk of investment fraud through fraudulent offerings;
    1. (5) business continuity – firms should consider additional steps for protracted remote operations (e.g. security and support for infrastructure and personnel, succession planning); and
    1. (6) the protection of investor and other sensitive information – firms should consider the impact of remote operations on the protection of PII as well as heightened risks related to cybersecurity (e.g. heightened risk of fraudsters engaging in phishing scams).

June 25 Webinar: Finders and Unregistered Broker-Dealers: Understanding the Risks and Recent Developments

Larry Stadulis and Peter Hong will be participating in a Strafford webinar on June 25 @ 1 pm EDT. Registration information can be found here. Here is a description:

Historically, the SEC has been aggressive in bringing enforcement actions against those involved in transactions with unregistered broker-dealers and those that fail to register as broker-dealers – most recently in several cases alleging unregistered dealer activity. The SEC continues to impose sanctions on private equity firms and managers for using unregistered broker-dealers. The SEC is also carefully scrutinizing unregistered broker-dealer issues in its OCIE compliance exams of private investment funds.

Fund managers and companies can be subject to SEC enforcement actions for aiding and abetting a finder’s violation of the broker-dealer registration requirements. Besides SEC sanctions, the use of an unregistered broker-dealer brings the risk of rescission under federal and state securities laws. Involving finders in capital raising thus carries significant risks, and there is no safe harbor or clear distinction of a finder’s duties in the securities laws.

The SEC has issued some guidance to clarify the distinction between a legally operating finder and an unregistered broker-dealer. This guidance includes no-action letters, rules, and interpretations for M&A brokers, investment platforms, and crowdfunding participants.

Peter M. Hong, Partner at Stradley Ronon Stevens & Young; Eden L. Rohrer, Partner at K&L Gates and Lawrence P. Stadulis, Co-Chair, Fiduciary Governance at Stradley Ronon Stevens & Young, will analyze the legal pitfalls for securities issuers who utilize unregistered “finders” to solicit investors, the SEC’s restrictive position on permissible activities of finders, activities that require broker-dealer registration, and SEC regulatory actions regarding unregistered broker-dealers. The panel will also discuss the SEC’s focus on broker-dealer issues in the private fund market, the ICO market, as well as the online crowdfunding portal space, and recent enforcement actions.

The panel will review these and other key issues:

  • What activities require broker-dealer registration with the SEC and FINRA?
  • What penalties and actions do issuers face in using unregistered broker-dealers in their capital raising efforts?
  • How do the SEC’s and FINRA’s guidance on finder activities in the M&A arena inform the permissible activities of finders in the securities and fund arenas?

For more information >

Or call 1-800-926-7926
Ask for Use of Unregistered Finders to Solicit Investors on 6/25/2020
Mention code: UL5ST4-47UJAY

Why states have opted to “Go Your Own Way” on fiduciary standards re. broker-dealers and investment advisers

Over the past 2 years, the states have taken disparate approaches to filling what they perceive as a regulatory void when the DOL Fiduciary Rule was struck down by a federal court. At the outset, most states, with the exception of Nevada, took a disclosure-based approach (most notably, NY and NJ), and legislation was the preferred avenue. Now, the trend is toward heightening the standard of care (disclosure appears to be viewed skeptically) through regulation (executive/governor’s branch). Though it varies by state, there at times can be incongruity of approach taken within a state. For example, the New Jersey legislation favored disclosure, whereas Governor Murphy preferred a new standard of care. Though the New Jersey legislation is unlikely to be reintroduced next year, it highlights a risk for market participants when there is inconsistency intrastate and interstate. We are expecting to see draft bills over the coming months for the next session in a small handful of states, but will also keep a (very) close eye on if and when either or both of New Jersey and Massachusetts decide to move forward with their fiduciary duty regulations applicable to broker-dealers and investment advisers. Nevada is also likely to be moving forward with finalization on its proposed fiduciary implementing regulation.