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Not Every Broker-Dealer is an EB-5 Broker-Dealer

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.

©2017 Greenberg Traurig, LLP. All rights reserved.

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About this Author

Of Counsel

William B. Mack focuses his practice on government affairs, government contracts, administrative law, government investigations, legislative, lobbying and regulatory and compliance matters. William is experienced in government and politics at the federal, state and local level. He is also experienced in advising companies on regulatory and compliance matters relating to the Securities and Exchange Commission regulations, the Exchange Act, Anti-Money Laundering laws and Financial Industry Regulatory Authority (FINRA) rules.

Prior to joining the...

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