The securities laws of the United States protect investors from dishonest or incompetent sellers of stocks, bonds, as well as investments in any type of “direct participation program” (which includes limited partnership and limited liability company projects offered by EB-5 regional centers). A key aspect of the securities laws of the U.S. is the requirement that brokers, dealers and their representatives be registered with Financial Industry Regulatory Authority, Inc. (FINRA) and with the appropriate self-regulatory organization and U.S. state securities or “blue sky” laws1. If your regional center advisor is a FINRA registered broker/dealer representative, you, the investor, are protected by conduct rules for registered representatives mandated by the SEC, state securities laws, and FINRA (Financial Industry Regulatory Authority). Key elements of the supervisory/disciplinary regime are:
Background Check and Screening of Applicants
In order to be considered for registration as a broker/dealer registered representative with the SEC, an applicant must fill out and sign a Form U4 (Uniform Application for Securities Industry Registration or Transfer) which compels the applicant to disclose, among other biographical information, the applicant’s residential history, employment history, criminal history, and history of investment related complaints, fines, and sanctions.
Competence Testing of Applicants
The applicant must take and pass the Series 7 examination. This six hour exam tests a broad range of investment and financial analysis subjects and has extensive testing on the applicant’s knowledge of FINRA business ethics rules. The test typically requires between 100 and 200 hours of study. Approximately one third of test takers fail the exam. The test may be taken again if not passed.
Strict Ethical Rules Governing Registered Representative Behavior
Registered representatives are covered by a broad range of ethical rules imposed by the SEC, state securities laws, and FINRA (the financial industry’s self-regulatory organization). These rules collectively require:
A registered representative MUST NOT:
- Engage in any manipulative, deceptive or fraudulent behavior
- Make an untrue statement of a material fact, or even fail to state a material fact necessary in order to make the statement made not misleading
- Guarantee a result
- Share commissions or fees with a non-broker/dealer registered representative
- Engage in behavior that constitutes a conflict of interest with the client/customer
A registered representative MUST:
- Be able to evaluate the suitability of investment to the customer’s current portfolio, short-term and long-term goals
- Keep accurate records and make them available for an SEC or State Administrator’s (unscheduled) inspection
- Observe high standards of commercial honor and just and equitable principles of trade
Broker/Dealer Firm Oversight
Every broker/dealer registered representatives must also follow his/her firm’s internal rules. Firms can, and often do, prohibit behavior that is permitted by the SEC or FINRA because their firm license is at risk and they don’t want their representatives coming even close to danger.
Penalties for Non-Compliance
- Can lose license and/or be fined even if unintentional
- Can face criminal penalties if intentional
- Can be terminated if violated firm’s rule, and will have difficulty later trying to get a new job.
- All customer complaints, regardless of outcome, will go on the representative’s U-1 form and appear on FINRA’s BrokerCheck.
FINRA Continuing Education
Registered representatives must participate in FINRA Continuing Education and demonstrate mastery of the latest FINRA rules and regulations.
1 Our President, John Roth, has been a FINRA Associate member registered through NMS Capital Advisors LLC, a FINRA member broker dealer, since May 2016.