FINRA Fines Broker-Dealers for Sales of Non-Traditional ETFs

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To raise capital, brokerage firms sometimes sell their own or an affiliate's securities. Such broker-dealer self-offerings BDOs can take the form of registered public offerings or private placements.

This Alert addresses issues raised by a broker's private placement of its own or its affiliate's securities broker dealer for sale finra BDOsparticularly to firm customers. While private BDOs can be legitimate investments, enforcement actions see below highlight the potential for abuse in private BDOs. Some of these cases involved the use of high-pressure sales tactics targeted at elderly or retired investors.

We issued this Alert to help investors understand what private BDOs are, the risks involved with broker dealer for sale finra, and how to identify the telltale signs of fraud or other misconduct. The money that brokerage firms raise in private BDOs is usually used to finance their operations or those of an affiliate. When you invest in a private BDO, you are investing in the brokerage firm itself or its affiliate.

As such, you share in the risks that the business will be unsuccessful or unprofitable or you could participate broker dealer for sale finra successful operations of the firm or its affiliates when the increased value of the firm or affiliate's equity is reflected in the value of its securities.

SEC rules place certain limitations on the way private BDOs and other private placements of securities can be sold to investors. Brokerage firms generally are not permitted to advertise the BDO and the number of small investors to whom the securities can be offered is usually limited.

Private BDOs, therefore, are subject to significantly fewer disclosure requirements and less regulatory oversight than registered public offerings, and they are illiquid. Investing in a private BDO can involve significant risk. And private BDOs that are publicized through spam emails or cold calling are often fraudulent or otherwise problematic. Before investing, consider the following:. Such firms may materially misrepresent management experience and other aspects of the company, omit information pertaining to disciplinary actions against the firm or individuals, and are in dire financial straits.

Verify any information you learn from your broker. Individuals and firms that broker dealer for sale finra fraudulent or problematic private BDOs may make false or misleading statements to lure you into making an investment. To receive the latest Investor Alerts and other important investor information sign up for Broker dealer for sale finra News. What is a Private BDO? Before investing, consider the following: The Offering May Be Illegal —Any company that offers or sells securities in a public offering must either register the securities with the SEC or meet one of the exemptions from registration.

Otherwise the offering is illegal. But to meet these exemptions, the securities often cannot be advertised to the general public. You May Not Be Able to Sell Your Investment —Sometimes the reason that a brokerage firm is conducting a private BDO is that the firm or its affiliate whose shares it is selling is not a public company. The risks of buying securities in a private BDO are increased when none of the company's stock is publicly traded.

You cannot be certain when, or even if, the company will take steps that broker dealer for sale finra result in a public market for the securities. That means you cannot be sure that you will be able to sell the shares. Even if the company does go public through an initial public offering IPOfederal and state laws often require that unregistered or private securities that are acquired in transactions such as private BDOs must be held for a year or more before investors can sell them. Private companies also are often new and untested, without revenue, or experienced management.

So even when they are legitimate, they are highly risky. The brokerage firm benefits a great deal from your investment in it. While brokers generally benefit when you buy any investment from them, this is particularly true for private BDOs where the firm or its affiliate gets all your money rather than just a commission. Find out why the brokerage firm wants to raise money. Is it because the firm has been losing money or needs capital to meet regulatory requirements?

In one case, a firm obtained customer accounts from defunct brokerages and used the firms' customer lists to identify potential victims. High Pressure Sales Tactics. Dishonest broker dealer for sale finra often use high pressure, "boiler room" sales tactics, hounding you to invest in a private BDO. Beware of brokers who tell you broker dealer for sale finra the brokerage firm will soon conduct an IPO and that you will broker dealer for sale finra large profits once the firm's securities are publicly traded.

Promises of Unusually High Returns. Brokers make optimistic price projections and predications broker dealer for sale finra future performance, often with no documentation to back them up. Some private BDO frauds involve promises that you can't lose money. Brokers should provide financial statements on the request of potential investors. Protecting Yourself The following steps will help protect you from making an investment decision you later regret: Check out the broker dealer for sale finra firm, the broker, and other individuals before you invest.

You can get information from the following sources: Use FINRA BrokerCheck to make sure the brokerage firm and broker are properly registered and to research the disciplinary history of a firm or registered individual.

Many of the individuals and firms involved in fraudulent BDOs have had run-ins with securities regulators. In one case, an individual involved in a private BDO had been barred from the securities industry. Obtain a copy of the brokerage firm's report on Form XA Form XA-5 is the audited financial report that every registered broker or dealer must file annually with the SEC.

Your state securities regulator. Contact your state securities regulator to find out whether it has information about the company and the people behind it. Even if the firm may not have to register its securities with the SEC, it may have to register them with your state. Check with the Better Business Bureau to find any complaints against the firm or its brokers.

Ask your broker these questions How does broker dealer for sale finra investment match my investment objectives? What is the risk that I could lose the money I invest? How easily can I sell? What is the price I would get if I sold immediately?

Will the securities be restricted? How long before I can sell my shares if the firm went public? What will the proceeds of the offering be used for? How was the price of the security determined? How long has the firm or its affiliate been in business? Are they making money? Have they experienced any financial difficulties?

Do you, the firm, its affiliate or their management have any legal or regulatory problems or filed for bankruptcy protection? Will you be paid a commission or receive any type of compensation, including stocks, stock options, or warrants, for selling the shares in the BDO?

Watch Out for Red Flags. Tecumseh Holdings Corporationet al. July 25, SEC v. Discover Capital Broker dealer for sale finra Corp. July 10, SEC v. February 17, To receive the latest Investor Alerts and other important investor information sign up for Investor News.

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There are various types of investment professionals. And the products and services each type can—or cannot—provide will depend on the license s and training the person or firm has. While many people use the word broker generically to describe someone who handles stock transactions, the legal definition is somewhat different—and worth knowing.

A broker-dealer is a person or company that is in the business of buying and selling securities—stocks, bonds, mutual funds, and certain other investment products—on behalf of its customers as broker , for its own account as dealer , or both. Individuals who work for broker-dealers—the sales personnel whom most people call brokers—are technically known as registered representatives.

Individual registered representatives must register with FINRA, pass a qualifying examination, and be licensed by your state securities regulator before they can do business with you.

You can obtain background information on broker-dealers and registered representatives—including registration, licensing, and disciplinary history—by using FINRA BrokerCheck or calling us toll-free You can also contact your state securities regulator. To find your regulator, check the government listing of your phone book or contact the North American Securities Administrators Association at www.

Broker-dealers vary widely in the types of services they offer, falling generally into two categories—full-service and discount brokerage firms. Full-service firms typically charge more for each transaction, but they tend to have large research operations that representatives can tap into when making recommendations, can handle nearly any kind of financial transaction you want to make, and may offer investment planning or other services.

Discount broker-dealer firms are usually cheaper, but you may have to research potential investments on your own—though the broker-dealer websites may have a lot of information you can use. Registered representatives are primarily securities salespeople and may also go by such generic titles as financial consultant, financial advisor, or investment consultant. The products they can sell you depend on the licenses they hold.

For example, a representative who has passed the Series 6 exam can sell only mutual funds, variable annuities, and similar products, while the holder of a Series 7 license can sell a broader array of securities. When a registered representative suggests that you buy or sell a particular security, he or she must have reason to believe that the recommendation is suitable for you based on a host of factors, including your income, portfolio, and overall financial situation, your tolerance for risk, and your stated investment objectives.

More What to Expect When You Open a Brokerage Account This publication explains what to expect if you do decide to open a brokerage account, including what information you will be asked to provide, what decisions you will be asked to make, what questions you should ask your broker and what your rights are as a customer of a brokerage firm.

Tips for Working With Your Investment Professional These tips can help ensure a productive relationship with your investment professional. Understanding the Brokerage Firm Transfer Process At times, investors transfer their securities accounts between broker-dealers. Here are some basic facts about the account transfer process.