Are you wondering what is a registered FINRA broker-dealer? A registered FINRA broker-dealer simply has a higher standard of doing business than non-broker dealers. Therefore, as an investor, you should seek to do business with registered broker-dealers.
Purchasing securities through a broker-dealer can help alleviate many concerns revolving around due diligence, compliance, and suitability. Broker-dealers are required to review such matters closely — and to keep records on their findings.
Why Are Securities Offerings So Regulated?
After the stock market crash of 1929, many firms were exposed for their unscrupulous schemes of promoting stocks and other securities. As Warren Buffet has said, “You only know who's swimming naked when the tide goes out.”
The basic securities laws in place today were largely implemented during the ensuing Great Depression. These laws are aimed at (among other things) improving the disclosures to investors in offering materials and creating rules around how stock exchanges and other securities markets function.
The FINRA broker-dealer rules are focused on regulating the activities of the people who actually effect the securities transactions.
FINRA Broker-Dealers Provide A Human To Talk To
In addition to the record-keeping responsibilities of FINRA broker-dealers, they are responsible for overseeing the people who may discuss investment opportunities with investors.
The broker-dealer rules make it clear that only licensed representatives of a broker-dealer can speak with investors with respect to most financial securities offerings.
These “registered representatives” are required to rigorous licensing exams (e.g. Series 7, Series 63), so that authorities have some assurance that they are reasonably qualified to talk to you about an investment opportunity.
I studied for months for my Series 7 back in 1999 when I first joined Goldman Sachs in their Equities division. Trust me, it was the most rigorous exam I have ever taken. Further, I had to continue studying for update exams during my 13 year career in investment banking.
When you are going to make a significant investment, it's good to have an experienced professional to talk to, to understand the pros and cons.
Why You Should Do Business With A FINRA Broker-Dealer
But here’s why you should put your investment business with a marketplace that is associated with a FINRA broker-dealer.
Deal diligence. Real estate crowdfunding due diligence is vital. A broker-dealer is charged with ensuring that all of the required information is available and in good order, and with verifying a reasonable amount of the information provided by the sponsoring real estate company. It’s important that this role be filled by people who are assigned to do real diligence – i.e., with a view to safeguarding investors and ensuring regulatory compliance.
Offering materials. As with deal diligence, the offering materials are reviewed by the FINRA broker-dealer with a view to assuring that the offering materials reasonably describe the investment opportunity, are balanced and include an appropriate discussion of risks, and that no material misrepresentations are being made.
Advertising reviews. Most private investment opportunities are not publicly advertised. But other advertising and publicity efforts are reviewed in an effort to try to assure that it complies with advertising rules (such as FINRA Rule 2210) and that no exaggerated or unwarranted statements are made. These reviews extend to marketing campaigns, the public portion of websites, webinars, and other materials outside of any official offering materials.
Payments and money flows. The careful handling of customer funds is a key element of a broker-dealer’s responsibilities. Checks and controls around diligence and investor approvals must be satisfied prior to disbursing funds – and often, third-party escrow agents are employed.
Investor approvals. Registrants on an investment platform must confirm that they qualify as “accredited” investors. Broker-dealers take things a step further and run basic identity confirmations, and check investors against national security or financial fraud watchlists. They also put much more effort into the “know your customer” exercise, probing investors for information about their portfolio allocations and risk appetites.
This last practice is aimed at better determining whether an investment is suitable for a particular investor. For example, if an investor indicates that he needs the investment funds returned within a couple of years, then a longer-term investment probably isn’t suitable for him.
A FINRA Broker-Dealer Is There to Protect You
Broker-dealers do diligence on proposed deals and the related offering materials, keep advertising materials from making exaggerated statements, confirm that investments are suitable for particular investors, and help to put controls around the flow of investor funds.
The sector is closely monitored and broker-dealers must go through extensive periodic audits to confirm their practices.
A broker-dealer's ultimate objective is to make money for their clients with suitable investments, so that the broker-dealer themselves can continue to make money and grow. In other words, the incentives are aligned.
Registered FINRA broker-dealers can be found on the FINRA website. At the end of the day, nobody cares more about your money than you. As a result, please do as much due diligence as possible before making any investment.
Risk Factors with Respect to FINRA Broker-Dealers
The involvement of a broker-dealer does not serve to eliminate regulatory or transaction risk. All of the investments offered by many real estate investment platforms are private offerings, exempt from registration with the SEC, and the disclosures are less detailed than would be expected from a registered public offering.
The investments are also illiquid, with undetermined holding periods and no real preset liquidity terms.
These offerings are also only available to accredited investors, so the illiquid nature of any investment is heightened – further emphasizing the differences of these securities compared to registered, publicly-traded securities.
The real estate crowdfunding industry is a movement that's here to stay. Technology and the JOBS Act has allowed investors to invest in commercial real estate and multifamily properties that were once reserved for institutional investors and high net worth individuals.
Related Post: DIY Investing: An Easy Guide To Investing Your Own Money
About the Author:
Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $310,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.