Recently, a REIT sought to avoid using a broker-dealer in a distribution.  Woe, onto those who seek to avoid the broker-dealer, especially when it leads to a SEC investigation and enforcement action. 

The REIT charged a 3% commission as part of its sales process, and used its website, social media, and radio ads.  These commissions and marketing tactics violated Exchange Act Rule 3a4-1, and, as a result, the REIT was operating as a broker-dealer in violation of Section 15(a) of the Securities Exchange Act of 1934.  The REIT was also charged with failing to comply with the Securities Act of 1933’s prospectus requirements. 

The REIT’s actions fly in the face of well-settled law.  It could have been easily remedied.  Essentially, the REIT could have avoided the enforcement action if it had used a broker-dealer or taken modest precautions by not charging a commission or engaging in these marketing scenarios.    See  Remember always consult counsel before declining the use of a broker-dealer’s services.


Ernie Badway, the Chair of Fox Rothschild’s Securities Industry Group, will be speaking at the National Conference of the  National Society of Compliance Professionals.  Registration information may be found at:

Recently, the SEC issued a concept release to obtain input on possible changes to the offering rules.  The SEC may change Regulation D private placements, Regulation Crowdfunding, secondary trading rules, the accredited investor definition and the use of private funds to raise capital, among other things.

The SEC may consider changes to the definition of accredited investor, by re-evaluating the financial qualifications’ thresholds; making separate categories of investors based upon experience, profession, or an exam; and/or measuring accreditation through investments.  Similarly, the SEC wants to make changes to private funds.  In particular, the SEC may include qualified purchaser funds in the accredited investor definition as well as changing the definition of a qualified client to make it easier to obtain performance fees.

In sum, those interested should comment to ensure their voices are heard as the SEC navigates these changes.

Fox Partner Kristen Howell was, recently, quoted in a Law360 article on security tokens following the ICO collapse.

This is the last in our series on the FINRA expungement process, and, unfortunately, the future looks grim.

Not only has FINRA made it nearly impossible (in an obvious attempt to curry favor with the public investor bar), but now it is considering some shocking additional changes to the process. Essentially, FINRA is looking to put the proverbial “final nail in the coffin” to any hope for expungement.

For example, FINRA is considering increased fees for expungement requests and a one-year limitation on requesting expungement relief. FINRA also would like to control the selection of arbitrators from the Expungement Arbitrator Roster. Additionally, FINRA is seeking to preclude subsequent expungement claims where the brokers did not request expungement in the underlying customer case, as well as formulating additional standards for recommending expungement. Finally, FINRA may require all expungement hearings must be in person or via videoconference. All of these proposals have not been adopted, but are shockingly scary.

In sum, FINRA’s expungement rules have severely limited a broker from seeking expungement. One wonders why have the process at all.

This is our second blog on the vanishing FINRA expungement process.

FINRA identifies specific grounds for expungement in FINRA Rule 2080. Rule 2080(b)(1) provided three specific grounds for expungement relief: (1)       the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or (3) the claim, allegation or information is false.

Although FINRA Rule 2080 does not expressly require that the arbitrators determine that one of the three grounds has been met, FINRA has provided guidance that the arbitrator should find one of these three grounds to grant expungement relief. Sadly, since firms are now required to report allegations of sales practice violations despite the broker not being named a party, the expungement process has been used more often to have unmeritorious complaints expunged.

FINRA has also implemented procedures for arbitrators considering requests for expungement relief in FINRA Rule 12805. Arbitrators must consider a request for expungement relief by: (1) holding a recorded hearing session by telephone or in person; (2) review settlement documents and consider the amount of payments and conditions of the settlement; (3) provide a written explanation of the reasons for ordering expungement; and (4) assess forum fees against the parties requesting relief. FINRA, unfortunately, did not stop here. FINRA was pressured by the claimant’s bar to provide “guidance” to arbitrators. This “guidance” was a kick in the teeth to the expungement process.

FINRA now stated the importance of allowing customers to participate in expungement hearings and explicitly noted that arbitrators should: (1) allow customers (and their counsel) to attend expungement hearings; (2) allow customers to testify at expungement hearings; (3) allow customers to introduce evidence at expungement hearings; (4) allow customers to cross-examine the broker and other witnesses at expungement hearings; and (5) allow customers to present opening and closing arguments at expungement hearing.

FINRA also required that arbitrators order brokers to provide customers with a copy of the expungement request so that they are on notice of the expungement proceeding.

Prior to 1999, brokers could obtain expungement relief solely through arbitration, but, in 1999, FINRA introduced court confirmation of the expungement process. This requirement provides an additional layer of review to the expungement process, increasing the costs and time associated with the expungement process.

However, as will be discussed in our last blog, all hope seems to have vanished for any semblance of fairness in this process.

Over the past 20 years, FINRA has made it nearly impossible for brokers to expunge customer complaints and dispute information from their public records. Over the next three blogs, we will discuss the evolution of FINRA’s expungement process and how difficult expungement relief is for brokers to obtain in the future.

In 1981, the CRD system was created, and is now an online registration and licensing system for the securities industry. The CRD contains, among other things, information about every broker’s employment history, registrations, and licenses, as well as customer complaints or regulatory actions brought against the broker. The CRD system is the broker’s securities record.

Since a customer complaint is reported on a broker’s record regardless of the merit of the complaint, FINRA, grudgingly, allows brokers to seek expungement of disputed customer complaints from their records. However, what FINRA gives with one hand, it takes away with the other, making it nearly impossible to obtain expungement relief as discussed over the next blogs.

FINRA also established BrokerCheck to provide the public with information on members firms and their associated persons. BrokerCheck is an online tool for investors to research their brokers (or prospective brokers). FINRA requires firms to include a reference to BrokerCheck on each firm’s webpage and where registered persons are profiled. BrokerCheck is used to review the broker and firm records, allowing investor’s access to a broker’s complaint history.

Our next 2 blogs will discuss the expungement process and the future (or lack thereof) of it.

FINRA maybe in the process of allowing its examiners to punish member firms for rules’ infractions.  See  There is no proposed rule as of today.  However, such a rule would be a game changer in the sense that examiners, who, generally, do not have the authority to enforce FINRA’s rules would now be in the proverbial “driver’s seat” without any of the ordinary checks FINRA usually provides in the enforcement process.  In any event, this is definitely one to keep an eye on.