On October 9, 2014, the Securities and Exchange Commission (the
"SEC") published a Risk Alert and FAQs to remind
broker-dealers of their obligations when they engage in
unregistered sales of securities on behalf of their customers. The
SEC also announced an enforcement action against current and former
brokerage subsidiaries of E*TRADE Financial Corporation that failed
in their gatekeeper roles and improperly engaged in unregistered
sales of microcap stocks on behalf of their customers.
Section 4(a)(4) of the Securities Act of 1933 provides
a registration exemption for broker-dealers when executing
customers' unregistered sales of securities if, after
reasonable inquiry, the broker-dealer is not aware of circumstances
indicating that the customer would be violating the registration
requirements of Section 5 of the Securities Act of
The Risk Alert summarizes deficiencies that were discovered by
the SEC's Office of Compliance Inspections and Examinations
("OCIE") during a targeted examination of 22
broker-dealers frequently involved in the sale of the securities of
microcap companies. Specifically, the OCIE staff evaluated
compliance with the firms' obligations to (1) perform a
"reasonable inquiry" in connection with customers'
unregistered sales of securities when the firms are relying on the
exemption set forth in Section 4(a)(4) of the Securities Act of
1933, and (2) file suspicious activity reports, as required
under the Bank Secrecy Act and the Securities Exchange
Act of 1934, in response to "red flags" related to
The examination uncovered widespread deficiencies including:
Insufficient policies and procedures to monitor for and
identify potential red flags in customer-initiated sales.
Inadequate controls to evaluate how customers acquired the
securities and whether they could be lawfully resold without
Failure to file suspicious activity reports, as required by the
Bank Secrecy Act, when encountering unusual or suspicious
activity in connection with customers' sales of microcap
The SEC stated that broker-dealers "are key gatekeepers in
addressing potential violations of the securities laws by
customers," and the SEC "will continue to assess the
controls that firms in this business have in place to monitor for
and report any suspicious activities."
The SEC's Division of Trading and Markets also published
FAQs to remind broker-dealers of the requirements for complying
with the Section 4(a)(4) exemption. The FAQs can be found here.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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