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, as well as investment advisers and their agents, be registered with the U.S. Securities and Exchange Commission (SEC) and with the appropriate U.S. state securities or “blue sky”1 laws. If your regional center advisor is a SEC registered broker/dealer representative (most, currently, are not), 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 SEC business ethics rules. The test typically requires between 100 and 200 hours of study. The passing grade is 70. 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 often prohibit behavior that is permitted by 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.
Ongoing Testing and Education
Registered representative must pass a FINRA test every three years and pass a firm test every year.
Errors & Omissions Insurance Available
Registered representatives typically carry insurance which can provide recompense to investors in the event of a registered representative’s error(s) or omission(s).
 The oft-quoted purpose of these laws is to stop the sale of “speculative schemes which have no more basis than so many feet of ‘blue sky’..[and]..to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations.” Justice Joseph McKenna in Hall v. Geiger-Jones Co., 242 U.S. 539 (1917)