Who Wouldn't Want a Licensed Broker-Dealer?
NASD and SEC registered investment broker-dealers protect both investors and entrepreneurs (and the broker-dealers themselves) in five important ways before, during and after a deal that unlicensed "financial advisors" do not.
(PRWEB) March 1, 2005
Who Wouldn’t Want a Licensed Broker-dealer?©
Unlicensed investment brokers across the country are scurrying to Dearborn review courses and Sylvan Learning Centers in order to pass required license exams and become registered with the NASD. Those who, for years, have said that they didnÂ’t need the license in order to get clients, fund deals, and collect commissions have concluded that now, they do. Why? Certainly, in the wake of financial scandals and investor mistrust, both public and private companies are undergoing more rigorous scrutiny.
In addition, both investors and entrepreneurs have become much more savvy about the protection that policing organizations like the NASD and SEC afford them, and those organizations are vigorously pursuing complaints, perhaps in part to rebuild public trust. The resulting penalties for offending investment bankers include fines, jail time, and bans from working with any other broker-dealers. (See www. nasd. org and www. sec. gov for details of recent judgments).
What is the value of a license? Perhaps a better question is, what are the dangers for any or all parties (the investor, entrepreneur, and investment banker) if the latter is not licensed?
Danger #1: Right of rescission: Melinda LeGaye, President of MGL Consulting Corporation in The Woodlands, TX, provides NASD required compliance auditing services for broker-dealers. She recommends that "entrepreneurs seeking equity capital in the form of a private placement “…”utilize the services of a broker-dealer firm that is registered with the NASD, the SEC, and with the states where the offers will be made. Otherwise," she warns, "There are potential rescission issues associated with sales by non-registered dealers.” In other words, a deal can be revoked and funds returned, even after it has closed.
Danger #2: No back end fees: According to the SEC and NASD, unlicensed fundraisers (who have not agreed to be bound by the code of ethical conduct) are not allowed to be paid a percentage of funds raised from accredited investors. They can be paid a retainer or a consulting fee, but not a “back end fee” or commission. In the past, many entrepreneurs did not know this, so they paid the successful, unlicensed fundraisers anyway, pleased to have the capital. Now, however, the word is out. An unlicensed money raiser could walk away from a closing with no commission at all.
Danger #3: Tricky Deal Terms: Licensed broker-dealers and their representatives swear to interact with clients according to a code of ethics outlined for the public on www. nasd. org. These rules pertain to both internal and external conduct. For example, the list addresses what can/cannot be promised verbally or in writing, reasonable fees, what services can and cannot be rendered, and full disclosure of deal terms, personal involvement, and timely introduction to “promised” investors. At the office, all records must be accessible and audited, and even a complaint book must be kept available for any clients who request it. Unlicensed money raisers may determine their own higher or lower standards of ethics. Warning: If a fundraiser sounds too good to be true, s/he probably is (unlicensed)!
Danger #4: No Public records: Unlike unlicensed broker-dealers, the public can check for free the professional background of any NASD licensed representatives or broker-dealers (www. nasdbrokercheck. com). This resource includes such information as prior employers, number of licenses, and any sanctions or complaints. All entrepreneurs and investors should check out all investment bankers they consider. If the names are not on “Broker Check,” the people are not licensed. Why hire them?
Danger #5: Expensive Recourse: If disgruntled investors or entrepreneurs seek recourse against an unlicensed investment banker, they have access to the court system of course, but that process is often expensive and time consuming. Sometimes the legal fees alone are larger than the amount disputed. In increasing numbers (almost 9,000 in 2003), clients (and investors) are turning to NASD arbitration. (See www. nasdadr. com for statistics and information.) Clients have access to 1-3 arbitrators in a binding process that is very reasonably priced from the very agency authorized to punish, ban, and publicize the offenses of the broker-dealer – a powerful ally.
How much does it cost to become a licensed broker or registered representative? Are financial considerations alone prohibitive enough to discourage ethical fundraisers from becoming NASD licensed? Consider the following prices to become a registered representative in Texas: $150: each licensing exam (#63 – state, #7 – national); $150 – 500: each study guide or class; $235: to register with the state: annual continued education courses ($100 – 500), and $20 to be fingerprinted. Cost: about $655- 2000.00. Why wouldn’t someone do this to protect himself, his clients, and the deal!
Now, just as in the real estate profession, a newly registered representative cannot work alone, but must affiliate with a supervising broker. This is a firm which assumes liability for supervision of the representatives by experienced professionals with more licenses (at least a Series 24). This supervision includes the representativeÂ’s correspondence, accounts, sales, and fees.
A broker-dealer firm must conform to additional requirements designed to protect clients which cost money that unlicensed fund-raisers do not incur. For example, registered broker-dealers must have independent audits ($5,000+), an internal or external compliance officer ($10,000+), NASD fees ($3-5,000), fidelity bond ($250+), SIPC fees ($150+), and a net capital requirement ( $5,000 - $250,000). Additional fees for firms that want to dot every I and cross every T include those for e-mail supervision and background checks of employees, potential investors, and entrepreneurs. The range of fees reflects the number and types of investment banking services and transactions. To open a minimal service, two person broker-dealer requires an initial cost of $30,000 the first year (not including normal office expenses) and three months to a year for processing.
These costs and delays might provide a disincentive for many fundraisers to embark on this path mid-career. But as an investor or an entrepreneur, why on earth wouldnÂ’t you find one who has already done so, and thereby secure deal transparency, public records, arbitration services, and a published code of ethics?
Laura Emerson is a Houston based business writer (www. greatc. net) with Series 63 and 7 licenses, who works with both entrepreneurs and investment bankers throughout the US and in four other countries.
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