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Financial Industry Regulatory Authority (FINRA) Provides Guidance on the Applicability of the Suitability Rule to Broker-Dealers Marketing Private Placements in the EB-5 Context

In an interpretive letter to a broker-dealer dated August 26, 2013, FINRA (Financial Industry Regulatory Authority) interpreted the suitability requirements under Rule 2111 for recommendations to foreign nationals making investments to participate in the EB-5 Investor Visa Program. This guidance has sweeping implications for broker-dealers that market securities in connection with EB-5 projects. Specifically, broker-dealers interested in marketing securities for EB-5 projects now have interpretive guidance on their obligations regarding the applicability of the suitability rule when placing foreign investors in EB-5 offerings.

Why is FINRA issuing guidance relating to an immigration program?

Created by Congress in 1990, the EB-5 Investor Visa Program allows foreign investors to qualify for U.S. permanent residence status through investments of at least $1 million (or $500,000 in areas of high unemployment) in new commercial enterprises that create jobs. These investments are typically structured as private placements of unregistered securities. If the issuer in an EB-5 private placement wishes to use a U.S. third-party to market the investments for a commission or other transaction-based compensation, the third-party is likely, subject to Section 15(a) of the Securities Exchange Act of 1934, required to be an SEC-registered (and perhaps also state-registered) broker-dealer and FINRA member. The use of potential broker-dealers who have not registered with the SEC to market EB-5 investments has become an area of increasing SEC scrutiny. Issuers are beginning to turn more frequently to FINRA registered broker-dealers to market securities connected with their EB-5 projects. FINRA has jurisdiction over these broker-dealers and is now starting to regulate activities within the EB-5 sphere.

How does FINRA Rule 2111 apply in the recommendation of EB-5 related securities?

FINRA has now clarified that both the reasonable basis and customer-specific suitability analyses that broker-dealers must document are different for EB-5 deals than for other private placements. Specifically, under the guidance in its interpretive letter, FINRA has stated that broker-dealers have an obligation to evaluate the immigration compliance aspects of an EB-5 project (e.g., job creation projections and conformity with EB-5 program requirements) and to consider the visa or immigration merits of an investment for each EB-5 investor. These factors are to be considered along with reviewing the viability of an enterprise, prospects for investment return, and the investor’s overall profile. Thus, EB-5 compliance and immigration concerns are factored into a suitability recommendation alongside investment performance considerations. This guidance places additional burdens on broker-dealers that market securities to foreign investors seeking permanent residence through the EB-5 program.

What are the Rule 2111 “reasonable basis” suitability requirements for EB-5 investment recommendations?

FINRA imposes a reasonable-basis suitability test to ensure that a broker has performed due diligence before recommending an investment. More particularly, Rule 2111 requires a broker to understand the nature of a recommended security or investment, including its risks and potential rewards, in determining that an investment is suitable for at least some investors. This is an objective test that can only be satisfied after comprehensive due diligence about an issuer, an issuer’s business and related factors. For EB-5 investments, FINRA stated that, in addition to a reasonable investigation of an issuer, a broker-dealer “should analyze whether the private placement is consistent with the requirements of the EB-5 program, such as whether it constitutes an investment in a domestic project that will create or preserve at least 10 jobs for U.S. workers.” This is significant because it requires that broker-dealers placing EB-5 securities incorporate considerable immigration law expertise into their due diligence process.

What are the Rule 2111 “customer-specific” suitability requirements for EB-5 investment recommendations?

FINRA members also have a customer-specific obligation to have a reasonable basis for concluding that a recommended security is suitable for a particular customer. Rule 2111 requires firms and their associated persons to seek to obtain comprehensive information about an investor’s background or profile, including the investor’s age, other investments, financial situation and needs, risk tolerance, liquidity needs, and investment objectives. For EB-5 investments, the fact that an investor is seeking U.S. permanent residence is material to a suitability recommendation. FINRA stated that “the member should evaluate the investment in the context of the customer’s goal of obtaining U.S. residency through purchasing an investment that is consistent with the requirements of the EB-5 program.” This guidance is helpful in that it recognizes that investments that may not otherwise be suitable for a particular foreign investor may be suitable for him or her if accompanied by credible visa prospects. FINRA member firms relying on immigration components as part of their customer-specific suitability analysis must document the balancing of investment return prospects and risks with immigration considerations carefully and fully in a way that demonstrates requisite familiarity with U.S. immigration laws and practices.


If you are a broker-dealer seeking to market securities in connection with an EB-5 project, you will need to perform heightened due diligence with respect to immigration matters. We anticipate further changes on the horizon with FINRA. Before beginning a private placement for an EB-5 project, member firms need to consider, among other things, the extent to which modifications of their Membership Agreement, their supervisory systems and controls, and their continuing education program will be necessary. From a practical standpoint, FINRA’s guidance means that broker-dealers recommending EB-5 investments will need to understand and advise investors on the viability of job creation projections and on a project’s compliance with related EB-5 regulatory requirements. This is a substantial additional burden for FINRA members undertaking the marketing of EB-5 offerings.

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About this Author

Douglas Hauer, Corporate Immigration Attorney, Mintz Levin, Immigration EB-5 Financing Securities & Capital Markets Israel

Doug is a noted authority on the EB-5 investor visa program, which gives developers a path for securing capital for real estate, hospitality, and infrastructure projects. His fluency with the program makes Doug an essential resource for companies looking for financing from offshore sources. International entrepreneurs and companies also rely on him when launching a business within the borders of the US. He is ideally positioned to advise clients on immigration and corporate law issues that arise in doing business in the US. 

Doug is a Member in the firm's Corporate & Securities...

Steve Ganis, Mintz Levin, Derivatives Litigation Attorney, AML Sanctions Lawyer

Steve has over 15 years of experience as a government and private-sector lawyer practicing financial services law, specializing in the federal banking, securities, and derivatives laws. He is globally recognized for his knowledge of anti-money laundering (AML) and sanctions regulations.

He handles a wide range of matters for institutions and high-level financial services executives involving regulation of clearing and introducing broker-dealers, mutual funds, hedge funds, transfer agents, private equity funds, institutional investors, banks, thrifts, insurance companies, futures commission merchants, commodity trading advisors, commodity pool operators, foreign exchange and over-the-counter (OTC) derivatives dealers, money services businesses, clearing agencies, alternative trading systems, and futures and options exchanges.

Steve has represented firms as outside counsel, a compliance officer, or in-house counsel before all major US financial services regulators, including the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Agency (FINRA, formerly the NASD and NYSE), the Commodity Futures Trading Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and various state banking regulators.

Steve has experience in the full range of laws governing regulated financial institutions, including the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940 (’40 Act), the Commodity Exchange Act, the Bank Holding Company Act, the Federal Reserve Act, the National Bank Act, the Federal Deposit Insurance Act, the Bank Secrecy Act of 1970 (including the USA Patriot Act), the International Emergency Economic Powers Act, the Trading with the Enemy Act, and the Foreign Corrupt Practices Act.

He analyzes and applies these statutes and their regulations to achieve practical business and operations solutions for a wide variety of sectors and activities, including asset management, transfer agency, retail and institutional brokerage, clearance and settlement, commercial banking, trust and custody services, payments processing, and spot, futures and OTC derivatives trading. In addition, Steve has considerable experience with due diligence and regulatory issues in mergers and acquisitions of financial services complexes.

From 2003 to 2008, Steve served on the US Department of the Treasury Bank Secrecy Act Advisory Group (BSAAG), a committee of regulators, law enforcement officials, and industry experts who advise the Director of FinCEN concerning AML regulation and the prevention of money laundering and terrorist financing.

Steve speaks and teaches frequently about AML and OFAC, including at the FINRA Institute at the Wharton School of Business and FINRA’s AML Boot Camp, and on numerous panels at conferences and seminars of the Securities Industry and Financial Markets Association (SIFMA, formerly SIA), the Investment Company Institute (ICI), the National Investment Company Service Association (NICSA), and other industry and bar associations.