Investors have access to free electronic search tools through self-regulatory organizations, federal, and state regulators to research investment firms and professionals. This post describes several free tools that give access to information beyond what you can learn using Google and other search engines.

FINRA’s BrokerCheck is a good starting place to learn about registration and reported discipline. BrokerCheck allows you to search for an investment firm or professional by name or CRD number. BrokerCheck will tell you whether a firm is a broker or an individual is a registered representative regulated by FINRA. If regulated by FINRA, a BrokerCheck search will include information about reported disclosures, such as arbitrations or customer disputes, and provide information about registration. Click on the “Detailed Report” link—as the name of the link implies—for more detailed information, including summaries of any complaints. Also, keep in mind that through expungement, a broker can ask FINRA to remove customer complaints and arbitrations from records available through BrokerCheck. This means that an expunged complaint will not show up in your BrokerCheck search. Further, customer complaints are not always timely reported and may be missing from BrokerCheck.

FINRA also provides a free search tool for certain disciplinary actions since 2005. This search tool is available at https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions-online.

If a firm is registered as an investment adviser or an individual is registered as an investment adviser representative, searching for the firm or individual using BrokerCheck will provide you with a link to the SEC’s Investment Adviser Public Disclosure website. For investment adviser representatives, the SEC’s Investment Adviser Public Disclosure search provides information similar to what FINRA makes available about brokers and registered representatives using BrokerCheck. For investment adviser firms, the SEC’s search tool gives access to the firm’s Form ADV, brochure, and Form CRS. These documents include information about an investment adviser’s business, including information about fees.

You should also check with the division in your state that regulates investment advisers. Some state regulators make available free information about investment advisers licensed to conduct business in the state. For example, the State of Oregon provides a free search tool that gives access to limited license information here: https://www4.cbs.state.or.us/ex/dfcs/dfcslic/adviser/.

On August 26, 2020, the SEC adopted amendments to the definition of “accredited investor.” Many private capital market offerings, including securities offerings conducted pursuant to Rule 506(b) and Regulation D under the Securities Act of 1933, along with certain offerings under state securities laws, are limited to accredited investors. These private offerings are sometimes higher risk than investments available in traditional markets. The amendments expand the definition to allow an individual investor who meets a financial sophistication test to qualify as an accredited investor. An individual may now qualify as an accredited investor based on professional knowledge, experience or certification. Previously, an individual had to meet income or net worth thresholds to be an accredited investor. The amendments also add to the entities that may now qualify to participate in private offerings. 

In explaining its rationale for expanding the definition, the SEC said it does not believe wealth should be the only means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Underlying this change is the SEC’s theory that purportedly sophisticated investors are not in need of the same level of investor protections otherwise available under the securities laws and regulations. Advocates for investor rights have criticized the SEC for failing to address the fact that many individual investors who already qualify as accredited investors do not have the financial sophistication and access to information to understand and assess the risks of many private offerings. PIABA, for example, sent the SEC a comment letter in May, emphasizing the SEC’s primary objective of protecting investors and warning that the expanded definition undermines investor protection. PIABA’s comment letter is available here. The SEC’s Final Rule is available here.

Proposed Regulation 21F, that the U.S. Securities and Exchange Commission is currently reviewing, could impact the SEC whistleblower program. To receive a cash award under the program, a whistleblower must voluntarily disclose original information that leads to a successful enforcement in which the SEC obtains an order of monetary sanctions in excess of $1 million. The SEC sets the whistleblower’s award within a range of 10-30% of the sanctions collected. In setting an award, the SEC must comply with Section 21F of the Securities Exchange Act.

In June 2018, the SEC proposed new rules for the whistleblower program that would give the SEC more flexibility in determining awards. For relatively small awards, under $2 million, the new rule would allow the SEC to adjust the award upward. However, if the award is likely to exceed $30 million, the SEC could limit the award to 10% of the sanctions collected.

Under the current rules and Section 21F of the Securities Exchange Act, the SEC is to consider several factors in setting the award, including the degree of assistance and the significance of the information provided by the whistleblower. An emphasis under the proposed rule on the amount likely to be collected, instead of the factors in Section 21F, may discourage whistleblowers from coming forward, especially in very large cases.

To learn more about these and other proposed changes, visit the SEC website.

Beginning June 30, 2020, brokerage firms and their associated persons will have to comply with Regulation Best Interest (Reg BI), which sets a new standard of conduct when working with retail investors. The SEC adopted Reg BI, as the name suggests, to require firms and associated persons to work in the best interest of investor customers, not the firm’s own interest. Along with the overarching requirement that broker-dealers put the customer first, Reg BI includes four major obligations: 1) full disclosure of all material facts (such as of fees); 2) care, including exercise reasonable diligence, skill, as well as care, in making investment recommendations; 3) mitigation and control of conflicts of interest; and 4) compliance. Broker-dealers must implement policies and procedures to ensure these obligations are met. The Reg BI duties apply to investment recommendations, investment strategies, and account changes (such as rollovers).

Reg BI largely replaces FINRA’s suitability rule for many investors and is meant to be a heightened standard that firms must meet. The “care” obligation under Reg BI, however, aligns closely with the existing FINRA suitability rule and preserves suitability concepts. For institutional customers, in contrast to retail investors, the suitability rule is still in effect.

Reg BI also bars broker-dealers from using sales contests, sales quotas, bonuses, and other non-cash compensation based on a representative selling a specific investment or type of investment within a defined period of time.

On June, 3, 2020, the U.S. Securities and Exchange Commission (“SEC”) obtained a preliminary injunction against investment adviser Paul Horton Smith, Sr. and related entities. The SEC alleges Smith and his entities engaged in a Ponzi scheme targeting senior citizens.

The SEC’s complaint refers to three entities associated with Smith: Northstar Communications, LLC, eGate, LLC, and Planning Services, Inc. Through these entities, the complaint alleges that Smith targeted seniors, guaranteeing investors annual interest payments in so called “private annuity contracts.” Smith did not in fact invest the money as promised, the SEC explained, and instead used the money to pay investors in a Ponzi-like fashion. The SEC also alleges that Smith held himself out to be a trusted fiduciary.

The case is Securities and Exchange Commission v. Paul Horton Smith, Sr., et al., Central District of California, No. ED CV 20-1056 PA (SHKx).

The U.S. Securities and Exchange Commission (“SEC”) filed a complaint for fraud against Applied Bioscience Corp. in May 2020. The SEC alleges that Applied Biosciences Corp. sought to exploit the COVID-19 pandemic for profit. In March 2020, the company changed its focus from cannabinoid-based products to pandemic-related products to “help battle the spread of COVID-19.” In late March, the company issued a press release outlining their sales of home test kits to the general public for COVID-19. The SEC determined that no shipments occurred and that the press release was misleading as the company did not disclose the FDA had not approved or authorized the sale of any COVID-19 at home test kits.

The SEC’s complaint charges the company with fraud for violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The case is Securities and Exchange Commission v. Applied Biosciences Corp., S.D.N.Y., Case No. 20 Civ. 3729.

In September, the SEC alleged that Elon Musk falsely claimed in a series of tweets on August 7, 2018 that he had lined up funding and support to take Tesla private at $420 per share, with backing from Saudi Arabia’s public investment fund. The announcement boosted Tesla’s stock price about 6 percent to close at $379.57 a share that day, although the price has since fallen 28.4 percent, to $271.78, as of Wednesday evening. Continue reading “Tesla Settles with SEC – Other Suits Remain”

According to an article in the publication called The Hill, President Trump’s appointee to the SEC suggested that the SEC may consider removing a ban that has been in place for years that has prohibited securities issuers from putting class action bans in their disclosures relating to IPO’s.

Continue reading “SEC considering allowing class action bans in IPO’s”

A motion for preliminary approval of a class action settlement was filed in California federal court on December 19, 2017 by investors in Marvell Technology. Under the deal, Marvell will pay pay $72.5 million to end an investor class action alleging the company’s stock dropped 16 percent after inflated revenue projections proved false.

Continue reading “Marvell Technology settles securities class action for $72.5 million”

A brief remark from SEC Commissioner Michael Piwowar during a July 17, 2017, Q&A suggests that he believes the U.S. Securities and Exchange Commission might soon allow companies to introduce mandatory arbitration clauses into their corporate charters.

Continue reading “SEC Commissioner suggests that SEC will allow corporations to put mandatory arbitration clauses into their charters to avoid shareholder securities fraud class actions”