New FINRA Rule 2040 became effective late last month, requiring broker-dealers who sell EB-5 securities disclose to investors the amount of finder fee payments to non-registered foreign persons and receive written acknowledgement from the investors that they are aware of the fees paid.
Additionally, FINRA only permits member firms to pay transaction-related compensation to non-registered foreign finders where the finders’ sole involvement is the initial referral, and the member firm complies with the following conditions:
- the member firm has assured itself that the finder who will receive the compensation is not required to register in the United States as a broker-dealer nor is subject to a disqualification as defined in Article III, Section 4 of FINRA’s By-Laws, and has further assured itself that the compensation arrangement does not violate applicable foreign law;
- the finder is a foreign national (not a U.S. citizen) or foreign entity domiciled abroad;
- the customers are foreign nationals (not U.S. citizens) or foreign entities domiciled abroad transacting business in either foreign or U.S. securities;
- customers receive a descriptive document, similar to that required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940, that discloses what compensation is being paid to finders;
- customers provide written acknowledgment to the member firm of the existence of the compensation arrangement and such acknowledgment is retained and made available for inspection by FINRA;
- records reflecting payments to finders are maintained on the member firm’s books, and actual agreements between the member firm and the finder are available for inspection by FINRA; and
- the confirmation of each transaction indicates that a referral or finders fee is being paid pursuant to an agreement.
Michael Gibson believes that this rule “could transform the EB-5 visa industry from one of non-disclosure and non-transparency concerning agent compensation agreements if complied with” and suggests that investors may be “very upset when they learn how much their agents are being compensated”. Despite this risk, however, FINRA member firms should make every effort to comply with Rule 2040 to prevent even greater consequences from federal regulators, including having to possibly rescind the offering, refund investor’s capital, civil and criminal penalties.