Friday, December 23, 2011

Who Wouldn’t Want a Licensed Broker-dealer?©

Unlicensed investment brokers across the country are scurrying to Kaplan review courses and Sylvan Learning Centers in order to pass required license exams and become registered with the FINRA.  Those who, for years, have said that they didn’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 FINRA ( and SEC (  can 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, bans from working with any other broker-dealers, and public disclosure of their actions and sanctions.  (See and 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? 

1)            Right of rescission:  Melinda LeGaye, President of MGL Consulting Corporation in The Woodlands, TX, provides FINRA 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 FINRA, 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.

2)            No back end fees:  According to the SEC and FINRA, unlicensed fundraisers (who therefore 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.     

3)            Deal transparency:  Licensed broker-dealers and their representatives swear to interact with clients according to a code of ethics outlined for the public on  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)!

4)            Public records: The public can check for free the professional background of any FINRA licensed representatives or broker-dealers (  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?

5)            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 over the last decade, clients (and investors) are turning to FINRA arbitration.  (See 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 FINRA licensed?  Consider the following prices to become a registered representative in Texas:  $235: each licensing exam (#63 – state, #7 or 79 – national, #24 -supervisory); $150 – 500: each study guide or class; $200 - 400: to register with the state: annual continued education courses ($100 – 500), and $20 to be fingerprinted.  Cost: about $800- 4000.00.  Why wouldn’t someone do this to protect himself, his clients, and the deal! 

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 representative’s correspondence, accounts, sales, contracts, 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 , an internal or external Financial Operations officer ($10,000 part time +), FINRA fees ($3-5,000), fidelity bond ($250+), SIPC fees ($1000), and a net capital requirement ( $5,000 - $250,000).  Additional fees for firms that want to protect their clients and investors 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 $60,000 the first year (not including normal office expenses) and three months to be approved by FINRA.

 These costs and delays might provide a disincentive for many unlicensed people to embark on this path mid-career.  But as an investor or an entrepreneur, why on earth wouldn’t you find one who has already done so?  Why wouldn’t you want deal transparency, public records, arbitration services, professional exams, and a published code of ethics? 

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