FINRA Issues Guidance on Suitability Rule for EB-5 Securities Transactions

09.23.13 | Archived

FINRA EB-5 securities

By Jackie G. Prester, Shareholder, & Robert C. Divine (IIUSA Vice President), Head of Global Immigration Practice

Baker Donelson, Bearman, Caldwell & Berkowitz, P.C.

FINRA has clarified that its Suitability Rule applies to broker dealers’ assessment of EB-5 transactions, but that the broker can and should assess the immigration benefit among the economic interests of the investor.

By letter dated August 26, 2013, FINRA issued guidance as to whether registered broker-dealers are required to comply with FINRA Rule 2111 in connection with private placements of securities in EB-5 Program transactions. Rule 2111, commonly referred to as the Suitability Rule, requires broker-dealers to have a reasonable basis to believe that a recommended securities transaction is suitable for a customer. This rule requires a broker-dealer to conduct a certain amount of diligence on the issuer to confirm that the securities may be suitable for some investors, and to evaluate each investor’s risk profile to confirm that the securities are suitable for a particular investor.

FINRA issued the guidance in response to a letter from Trustmont Financial Group, Inc. requesting that FINRA take the position that the Suitability Rule shouldn’t apply since the primary motivation for investors in EB-5 Securities Transactions is not to obtain investment returns, but to obtain the right of residence in the United States. FINRA disagreed with Trustmont’s position, stating that EB-5 Securities Transactions are essentially the same as other private offering transactions.

After clearly stating that the Suitability Rule does apply in connection with EB-5 securities offerings, FINRA provided specific guidance as to how broker-dealers should take into account aspects of the EB-5 Program when determining whether an investment is suitable. For example, FINRA expects broker-dealers to conduct a reasonable investigation as to whether the proposed transaction complies with EB-5 Program requirements, such as whether the proposed investment is a qualifying project that will create the requisite number of jobs for U.S. workers. FINRA clarified that in evaluating whether the investment would be suitable for a particular investor, the broker-dealer may consider the investor’s motive to obtain U.S. residency as a factor in the analysis. FINRA’s letter essentially implies that a broker dealer can balance the EB-5 investor’s expected financial return (which typically is lower than in non-EB-5 offerings) with the immigration benefit, but then some due diligence about the immigration benefit is required.

FINRA’s guidance impacts both issuers of securities in EB-5 transactions as well as broker-dealers engaged to assist participants in these transactions. For issuers and sponsors of EB-5 Projects, engaging a broker-dealer may help with the diligence expectations of foreign investors and their agents, as well as impose a certain discipline in the offering process. Of course, this assistance comes with a price in the form of the fees charged by the broker-dealer. Prior to accepting an engagement for an EB-5 securities offering, broker-dealers should consider the unique aspects of the EB-5 Program, and whether it is prepared to conduct the necessary immigration-related diligence and investigation necessary to meet FINRA’s expectations with respect to the Suitability Rule.



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