FINRA recently published its 2019 Risk Monitoring and Examination Priorities Letter (“Priorities Letter”) highlighting topics upon which FINRA will focus in the coming year. Unlike letters in prior years, the Priorities Letter focuses primarily on areas that FINRA considers to be material new priorities. Of particular interest to the growing number of companies providing financial services through an online platform is the first materially new priority highlighted by FINRA in its Priorities Letter—online distribution platforms.
FINRA has taken notice that broker-dealers are increasingly involved in the distribution of securities through online platforms in reliance on either Rule 506(c) of Regulation D or Regulation A under the Securities Act of 1933. FINRA notes that some online distribution platforms are owned and operated by broker-dealers, whereas others are operated by unregistered entities, which may use broker-dealers as selling agents or brokers of record, or to perform activities such as custodial, escrow, back-office, and financial technology–related functions.
FINRA is concerned that some broker-dealers involved with online distribution platforms assert that they are not selling or recommending securities, despite evidence to the contrary, such as the handling of customer accounts and funds or the receipt of transaction-based compensation. In light of these concerns, the Priorities Letter states that FINRA will evaluate broker-dealers involved with these platforms with respect to how they:
In light of the broad visibility of offerings distributed through online platforms, FINRA will also evaluate how broker-dealers address the risk of offering documents to or communications with the public that omit material information or may contain false or misleading statements, and address the risk of promissory claims of high targeted returns.
FINRA also highlighted specific concerns related to private offerings relying on Regulation D or Regulation A. FINRA will evaluate how broker-dealers subject to Regulation D address the risk of sales to nonaccredited investors and noncompliant escrow arrangements and, for offerings subject to Regulation A, the risk of excessive or undisclosed compensation arrangements between broker-dealers and issuers.
FINRA is actively reviewing the role played by broker-dealers involved in online distribution platforms (including crowdfunding platforms, digital asset–related platforms, and online advisory platforms, among others). As a result, broker-dealers involved with such platforms, as well as non-broker-dealer platform sponsors, should carefully evaluate how they are addressing the risks identified by FINRA.
Other issues highlighted in the Priorities Letter will be addressed in future client alerts.