From time-to time the U.S. Securities and Exchange Commission decides to remind everyone about what is necessary to comply with a provision of the securities laws. A recent example of this occurred last week when the SEC announced a settlement (In the Matter of Ranieri Partners, LLC and Donald W. Phillips; File No. 15243; March 8, 2013) involving a cease and desist order and fines totaling almost a half a million dollars. In the simplest terms, the allegation in the SEC complaint is that an individual engaged in securities sales activities that require registration as, or association with, a registered broker-dealer without complying with those registration requirements, and that the principals of a private fund group for which that individual solicited investors permitted that violation and failed to supervise the individual.
These charges do not stake out new ground. Both the SEC and state securities administrators have consistently maintained that such registration, or association with a registrant, is required. They have always asserted a broad interpretation of the definitions of a “broker” or a “dealer.” The significance of this complaint and settlement is not that it establishes new law – the significance is that the SEC, by bringing this case, is refocusing attention in an area where it believes that there has been a failure of compliance with these requirements. This arises currently in two segments of the securities industry.
One area is the sale of securities of “private funds.” These entities are exempt from registration under the Investment Company Act of 1940, but the sale of the interests in private funds generally involves the sale of securities. The registration of advisers to such funds that was enacted as part of the Dodd-Frank Act has enabled the SEC to obtain information regarding such funds at a level not previously seen, and as a result the SEC is now focusing on the fact that the offer and sale of securities of such funds has been conducted in many instances by unregistered people and entities. This can be particularly troubling when the individuals are barred from or restricted as to their participation in securities activities, and then proceed without registration and supervision.
The second area, of particular interest here, is a special sub-set of private funds and securities offerings involving investments in securities offered in connection with an EB-5 program. There is a significant concern that the means used to make the offers and sales of the securities involved in the program does not comply with federal (or state) securities laws. These programs generally require the offer and sale of securities, and far too often those compensated in connection with these transactions do not appear to be properly licensed or associated.
The message is clear – if you intend to offer or sell securities and receive compensation for your efforts, you must register as a broker-dealer or become associated with a registered firm. I expect that this case may be intended as a reminder, a “shot across the bow,” and that future cases will be likely, and are likely to seek stronger penalties.
Steven Felsenstein advises investment companies registered under the Investment Company Act of 1940, investment advisers registered under the Investment Advisers Act, and other administrators and service providers involved in the industry. Steven also represents broker-dealers and transfer agents registered under the Securities Exchange Act of 1934, and issuers of securities under the Securities Act of 1933. Steven represents clients in connection with administrative proceedings conducted by the SEC and FINRA, and participates in related actions. Steven’s prior practice includes experience as a staff member in the Division of Corporation Finance and as a Branch Chief in the Division of Investment Management at the U.S. Securities & Exchange Commission.