Missouri Securities Division is Investigating new Missouri Limited Liability Companies

          A membership interest in a limited liability company is a “security” as broadly defined under the Missouri Securities Act of 2003.[1] Now the Missouri Commissioner of Securities, through its Enforcement Section of the Securities Division (“Enforcement Section”), is sending letters to specified companies that have newly filed with the Missouri Secretary of State as limited liability companies or as foreign companies, which state it has received information of participation in prohibited conduct by these companies.

          Section 409.6-602(b) of the Missouri Revised Statutes[2] provides the Enforcement Section with extremely wide latitude to compel the production of written statements and documents regarding any matter that it considers relevant or material to its investigation. Some of these letters require the compulsory production of documents and written responses:

·         In narrative form detailing the objectives of the limited liability companies;

·         Listing all individuals/entities with investments in the limited liability companies to include names, addresses, telephone numbers, email addresses, and dates and amounts investments;

·         Name and address of all financial institutions where investors’ money was/were deposited; and

·         In narrative form detailing how the investors’ funds are/were used.

In seeking claims of exemption from registration or exception in these letters, the Enforcement Section seems to have assumed that these new limited liability companies are operating in Missouri as an unregistered investment adviser, broker-dealer, investment adviser representative, or broker-dealer agent, whether operating as an investment company or not.  Consequently, these letters should be taken extremely seriously because the costs of defending against Enforcement Section enforcement proceedings that assert these assumptions can be extreme, whether warranted or not.

If you receive one of these letters, you may not want to act alone and wish to consult with one of the experienced attorneys at Cosgrove Law Group, LLC. Call us at 314-563-2490.

Author: Brian St. James

---

[1] §§409.101 to 409-7-703, RSMo 2016 (Cu. Supp. 2022).  

[2] §409.6-602(b), RSMo 2016 (Cum. Supp. 2022). 

FINRA’S NEW DISCLOSURE REVIEWS MAY HELP LIFT BURDEN FOR FIRMS AND REPRESENTATIVES

Beginning July 9, 2018, FINRA will conduct an individual public records search on every applicant when a broker-dealer files a form U-4 application for registration.  FINRA currently performs this search for all registered persons—but only annually.  This additional records search—

which will satisfy the requirement to perform a search of records for judgments, bankruptcies, and liens only—will provide added benefit to member firms and registered persons, according to FINRA.  In FINRA’s May 18, 2018 Information Notice, FINRA claims this additional search is “likely to: (1) reduce the costs to firms associated with conducting these public records checks, which often involve finding and hiring a vendor; (2) result in more timely reporting of disclosure information to the benefit of regulators, investors and firms; and (3) result in a significant reduction of late disclosure fees related to judgments and liens[1].”

Numbers (1) and (2) seem like probable benefits to both the member firms and the registered persons.  Saying the same for number (3), however, appears to be a stretch.  Regardless, the burden of these public records searches is real, especially to smaller broker-dealers.  FINRA taking over this requirement is a welcome change and one that makes sense given that it is already performing the annual searches.  Firms and agents will still need to respond to and file any items that are found in these searches, but the searches themselves will no longer have to be performed in-house or by a third-party vender for each registered hire. 

Finally, firms and registered persons are still required to report unsatisfied liens and judgments within 30 calendar days of learning of the event as long as the agent is registered and to report other activity, such as certain criminal matters per FINRA Rules.

Cosgrove Law Group, LLC regularly assists registered persons with disclosure matters, regulatory inquiries, registration matters, and other matters related to industry registration compliance.  We also have experience assisting broker-dealers with regulatory inquiries related to their registration filings.

---

[1] Firms and registered persons are required to report unsatisfied liens and judgments within 30 calendar days of learning of the event. FINRA determines whether a filing is late based on the date the registered person learned of the judgment or lien and, if it is late, will assess the late disclosure fee based on that date. See Information Notice 8/17/12 (Late Disclosure Fee Related to Reporting of Judgment/Lien Events). Occasionally, an individual is unaware of the existence of a judgment or lien. The public records search facilitates the identification and timely reporting of these events

Missouri Securities Division Cancels the Registration of Missing Investment Adviser Rep

In late 2013, Missouri Commissioner of Securities ordered the cancellation of Joseph Jackson and J. Andrew Jackson & Co. LLC’s registration.  The company was a Registered Investment Adviser with Jackson registered as its investment adviser representative.  

According to the Missouri Order, in July 2012, a Missouri Resident (“MR”) opened an account with Interactive Brokers LLC, a Missouri registered broker-dealer, through J. Andrew Jackson & Co., LLC.  Jackson was listed as the representative of record on the account.  By August, 2012, Jackson, acting as the registered representative on the account, had lost over $83,000 in MR’s account due to his purchasing of options in MR’s account.  Jackson never discussed purchasing options with MR and MR had no knowledge about how options work.   Jackson told MR that he was attempting to “hit a home-run” with the purchases.  In September 2012, Jackson repaid MR $10,000 and agreed to pay MR $5,000 every other week until the losses were recouped.  MR has been unable to contact Jackson since September 21, 2012.  Jackson is believed to have other Missouri clients.    

Since June of 2013, investigators of the Missouri Securities Division made several attempts to contact Jackson at his last known addresses and phone numbers to no avail.  Thus, pursuant to Section 409.4-408(e) of the Missouri Securities Act,

(e) If the commissioner determines that a registrant or applicant for registration is no longer in existence or has ceased to act as a broker-dealer, agent, investment adviser, or investment adviser representative, or is the subject of an adjudication of incapacity or is subject to the control of a committee, conservator, or guardian, or cannot reasonably be located, a rule adopted or order issued under this act may require the registration be canceled or terminated or the application denied.

Therefore, in the interest of investors and because all means of contacting Jackson had been exhausted, the Commissioner ordered the cancellation of the registrations of both Jackson and J. Andrew Jackson & Co. LLC. 

It remains to be seen whether Jackson will resurface.  If that happens, we will likely see another Enforcement Action concerning his alleged neglect and mishandling of client accounts. 

While this advice is probably obvious to most of our readers, investment adviser reps should always maintain contact with their clients.  Finally, if you receive an inquiry from a State Securities Department or other related agency, contact the attorneys at Cosgrove Law Group, LLC immediately. 

Are You Doing Something That Requires Registration?

Not everyone involved in an investment transaction is an agent requiring registration. The activities requiring registration as an agent or broker is found in statute, common law and regulatory opinions. Although no single factor has been identified by these authorities to determine whether someone engaged in a financial transaction requires registration, factors given weight have been; whether the individual was involved in negotiations, solicited the investors, discussed the details of the investment, and if the person received compensation on a transaction-related basis.

Although Missouri has not statutorily or through administrative rulemaking defined those activities, there is guidance at the federal level from SEC No Action Letters and common law. In SEC v. U.S. Pension Trust Corp., No. 07-22570-CIV, 2009 WL 2365702 (S.D. Fla. July 30, 2009), the district court looked at several factors to determine whether a person’s activities were outside of the activities requiring registration as a broker. These factors include whether the person: (1) actively solicited investors; (2) advised investors as to the merits of an investment; (3) acted with “certain regularity of participation in securities transactions; and (4) received commissions or transaction based remuneration. U.S. Pension Trust, 2009 WL 2365702 at *9.

Two states provide a registration process for persons who participate in the offer or sale of securities who are not agents or brokers, Texas and Michigan. In Michigan these persons are “finders” and are defined as a person who, for consideration, participates in the offer to sell, sale, or purchase of securities or commodities by locating, introducing, or referring potential purchasers or sellers. Section 451.801, RSMi (Cum. Supp. 2008). Finders are included in the definition of investment adviser in the Michigan Securities Act and must register as such. In Texas, finders are defined as “An individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor solely for the purpose of a potential investment in the securities of the issuer, but does not participate in negotiating any of the terms of an investment and does not give advice to any such parties regarding the advantages or disadvantages of entering into an investment, and conducts this activity in accordance with §115.11 of this title (relating to Activities of a Finder). Note that an individual registered as a finder is not permitted to register in any other capacity; however, a registered general dealer is allowed to engage in finder activity without separate registration as a finder.” TX 7 CSR 7-115.1. Texas provides a registration process for finders.

The Missouri Securities Act contains exemptions for agent registration. The Act defines an agent in Section 409.1-102(1), RSMo, (Cum. Supp. 2008), as “an individual other than a broker-dealer, who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities or represents an issuer in effecting or attempting to effect purchases or sales of the issuer’s securities.” Section 409.4-402. (a), RSMo (Cum. Supp. 2008), the registration provision for agents of broker-dealers in the Missouri Securities Act reads: “It is unlawful for an individual to transact business in this state as an agent unless the individual is registered under this act as an agent or is exempt from registration as an agent under subsection (b).”

The Missouri Securities Act’s exemption provision for agent registration found in Section 409.4-402(b) RSMo. (Cum. Supp. 2008), specifically provides in subdivision Section 409.4-402(b)(3), “an individual who represents an issuer with respect to an offer or sale of the issuer's own securities or those of the issuer’s parent or any of the issuer's subsidiaries, and who is not compensated in connection with the individual’s participation by the payment of commissions or other remuneration based, directly or indirectly, on transactions in those securities.” Moreover, subdivision (8) provides: “an individual who represents an issuer and who restricts participation to performing clerical or ministerial acts is exempt from registration.”

The prudent course of action is to evaluate your status and conduct and consult with counsel or your state regulator before you engage in any securities transaction as an unregistered person.

FINRA CLOSES COMMENTS ON REGULATORY NOTICE 09-70: PROPOSED CHANGES TO REGISTRATION AND QUALIFICATION REQUIREMENTS

In December 2009, the Financial Industry Regulatory Authority (“FINRA”) proposed changes to the consolidated FINRA rulebook, which incorporated the National Association of Securities Dealers (“NASD”) rules on registration and qualifications. These changes were proposed pursuant to FINRA Regulatory Notice 09-70: “FINRA Requests Comment on Proposed Consolidated Registration and Qualification Requirements” (“Proposal”).

Essentially, the purpose of the Proposal is to streamline NASD Rules 1021 and 1031. Under the NASD, these rules governed registration requirements of representatives and principals. Under current FINRA rules, investment bankers and broker-dealers of FINRA member firms must register. Additionally, FINRA member firms may register any individuals that engage in legal, compliance, internal audit, or back-office operations. The primary effect of the proposal would significantly broaden the current “permissive” registration categories to allow member firms to register certain persons employed by member firms or their financial services affiliates. Because of this expansion, FINRA also would introduce new stand-alone registration categories:

(1) active registration, for individuals engaged in investment banking or securities activities

(2) inactive registration, for individuals engaged in the “bona fide” business purpose of the member

(3) retained associate registration, for individuals functioning as financial services affiliates.

The actual text of the Proposal can be accessed here.

The comment period was slated to end February 1, 2010, but was extended to March 1, 2010. Twenty-one organizations submitted comments, voicing opinions ranging from full support to complete abandonment. The organizations included investment firms such as Edward Jones and T.Rowe Price and industry associations like the North American Securities Administrators Association, Inc. (“NASAA”) and the Securities Investment and Financial Markets Association (“SIFMA”). Most of the comments voiced general overall support, but suggested small changes to help effectuate a more efficient transition. See SIFMA Comment and Edward Jones Comment. The NASAA was one of the few who voiced complete abandonment of the acquisition of NASD rules into the consolidated FINRA rulebook. The primary objection to the Proposal is FINRA’s lack of guidance on the appropriate substance of a registered inactive person’s education and continuing education requirements. However, NASAA suggests this issue could be solved by continued use of FINRA’s current qualification examination waiver process, which would be superseded by the new rules. Further, the NASAA believes these three new registration categories constitute radical changes that are structured for the convenience of member firms not investor protection.

FINRA has not yet filed its rule proposal with the Securities and Exchange Commission, which may suggest the organization will make changes before its submission.

NEW PROPOSED SECURITIES RULES IN FLORIDA

The Florida Office of Financial Regulation (“Office”) recently updated some of its securities rules. The Office submitted notice for several proposed rule changes that are primarily to keep its rules up-to-date with the most current federal laws and cross references. For example, references to NASD had to be switched to FINRA after the SEC approved their consolidation back in 2007. Despite these “housekeeping” changes, there are a few noteworthy proposals that are substantive in nature. The substantive proposals come pursuant to House Bill 483 that passed during the 2009 Florida legislative session. The purpose of the bill was to increase investor protection through an expansion of certain agency powers. House Bill 483 became effective July 1, 2009, but the Office of Financial Regulation is beginning to submit its proposals for the supplementary rules.

One such substantive change is Proposed Rule 69W-1000.001, which creates a set of disciplinary guidelines in accordance with House Bill 483. The rule expands the disciplinary power of the Office of Financial Regulation to impose additional sanctions against individuals and firms that are subject to regulation under the Florida Securities and Investor Protection Act (“Securities Act”). Under the new rule, the Office has the power to impose cease and desist orders in conjunction with any sanction laid out in the Securities Act and raises the levels of minimum fines. The rule also sets out an extensive and comprehensive factors list to determine the appropriate sanction.

Proposed Rule 69W-600.0011 was also added pursuant to House Bill 483. Under this proposed rule, applicants could be subject to registration disqualifying periods for dealers, issuer dealers, investment advisors, as well as “relevant persons.” “Relevant persons” for purposes of the rule include “any direct owner, principal, or indirect owner that is required to be reported on behalf of the applicant on a Form BD or a Form ADV.” A Form BD is required for the application for broker-dealer registrations, and a Form ADV is required for applications for investment advisor registration. Grounds for disqualifying periods are based upon criminal convictions, pleas of nolo contendere, and pleas of guilt, regardless of whether there was an adjudication. The disqualifying periods range from five years to fifteen years depending on whether the crime is a classified as “Class A” or “Class B.” Class A crimes are felonies involving an act of fraud, dishonesty, breach of trust, money laundering, and any other crime involving a question of “moral turpitude.” Class B crimes are misdemeanors involving “fraud, dishonest dealing or any other act of moral turpitude.” Pleas receive a disqualifying period of three years. There is also a provision allowing registrants to submit any evidence of mitigating factors that may reduce the length of disqualification.

The Office of Financial Regulation is charged with safeguarding private financial interests of the public through licensing, chartering, examining, and regulating depository and non-depository financial institutions and financial service companies in Florida. It also serves to protect consumers from financial fraud and preserve the integrity of Florida’s markets and financial service industries.