Broker-dealers are an essential part of the fundraising process. These entities can be small, independent firms or part of a large investment bank. However, regardless of a broker-dealer’s size, they are in the business of buying or selling securities. In this sense, whenever a broker-dealer executes orders for clients, they act as a broker, while trading for its own account means they are acting as a dealer.
In the United States, Congress has granted the Financial Industry Regulatory Authority (FINRA) authorization to protect American investors by ensuring that brokers operate fairly and honestly. The organization is non-governmental and non-profit, acting independently to ensure that the rules governing brokers are adhered to. The organization states: “Every investor in America relies on one thing: fair financial markets.” FINRA oversees over 624,000 brokers across the country, ensuring that their activities adhere to all necessary rules.
As a company engaged in capital market activities, choosing a broker-dealer to work with is critical to your success. For example, under Regulation A+, some states require issuers to work with a broker-dealer to offer securities in that jurisdiction. This allows issuers to maintain compliance with the SEC and other regulatory entities. Additionally, working with a FINRA-registered broker-dealer will give potential investors more confidence in the compliance of your operations. FINRA registration ensures that your broker-dealer partner has:
- Been tested, qualified, and licensed;
- Every securities product is listed truthfully;
- Securities are suitable for an investor;
- And investors receive complete disclosure.
This information ensures that broker-dealers are operating in the best interests of the investors, ensuring that the issuer provides all necessary and required information to make good investment decisions. In addition, investors (and issuers) can verify a broker-dealer’s status through BrokerCheck, a service provided by FINRA. BrokerCheck gives information on a broker-dealer’s licensing status, whether they are registered to give investment advice or registered to sell securities. Additionally, the service allows people to see regulatory actions against brokers, complaints, and employment history. Through this information, investors can validate the status of a broker to ensure they are dealing with legitimate firms.
As an issuer, a FINRA broker-dealer improves compliance measures. The broker-dealer will be required to perform regulatory checks on investors such as KYC, AML, and investor suitability to ensure investors are appropriate for the company. Additionally, they will perform due diligence on you so that they can be assured that your company is operating in a manner compliant with securities laws so that they do not present false information to investors. Failing to meet compliance standards can result in the issuer being left responsible for severe penalties, such as returning all money raised to investors.
Working with a FINRA-registered broker-dealer ensures that, as a company, you are meeting all legal requirements when offering securities for sales. FINRA makes sure that broker-dealers, and the issuers they work with, act transparently and honestly to keep the private capital market fair for investors.