- in United States
A Financial Industry Regulatory Authority, Inc. (“FINRA”) member (the “broker-dealer”) recently entered into a settlement with FINRA in connection with failing to establish and maintain a supervisory system to comply with the requirements for the exclusion from registration under the Securities Act of 1933 (the “Securities Act”) provided by Regulation S thereunder (“Regulation S”) for the offer and sale of unregistered debt securities, primarily structured products.
FINRA and the broker-dealer executed a Letter of Acceptance, Waiver and Consent (the “AWC”) on March 16, 2026.1 According to the AWC, the broker-dealer offered and sold debt securities in reliance on Regulation S without having written supervisory procedures for Regulation S offers and sales, surveillance systems to monitor such Regulation S transactions, or established supervisory practices to ensure compliance with Regulation S. Instead, the broker-dealer relied solely on signed risk disclosures from its customers, ignoring “red flags” indicating that the customers might actually be “U.S. persons,” as that term is defined in Regulation S. The broker-dealer’s overall failure to supervise these Regulation S transactions amounted to a violation of FINRA’s rules on maintaining effective supervisory systems, FINRA Rule 3110, and maintaining high standards of commercial conduct, FINRA Rule 2010.
Between at least April 2022 and April 2024, the broker-dealer engaged in more than $650 million of customer transactions involving Regulation S securities. It also offered and sold more than $5.8 million of debt securities distributed in reliance on Regulation S to customers whose account records indicated that they were potentially located in the United States or that they may have met the definition of a “U.S. person.”
According to FINRA, during a FINRA cycle examination of the broker-dealer, it was discovered that with respect to Regulation S transactions the broker-dealer failed to have: (1) specific written supervisory policies or procedures, (2) surveillance or other supervisory tools, and (3) supervisory practices. Additionally, the broker- dealer’s sole compliance practice of having customers sign a risk disclosure that included a disclaimer of “U.S. person” status before being allowed to purchase structured products was not reasonably designed to achieve compliance with the registration requirements of the Securities Act. FINRA also found that the broker-dealer failed to keep these same risk disclosures current after initial collection. Furthermore, the broker-dealer did not have a process to review the disclosures once collected and did not follow up on “red flag” instances where there were indications from customer account records that a customer may have had a U.S. residential or tax address and permitted the offer and sale of debt securities to such customers in reliance on Regulation S. The broker-dealer also permitted sales that may not have qualified for a safe harbor to occur during the 40-day distribution compliance period.
FINRA members and any entity engaging in the offer and sale of securities in reliance on Regulation S should ensure that they establish and maintain supervisory systems reasonably designed to achieve compliance with applicable securities laws and FINRA rules, particularly adopting formal written policies, implementing such policies into routine practices, and actively verifying, monitoring and addressing any potential compliance risks or deficiencies. This AWC action also makes it clear that FINRA members should not rely on customer disclaimers and attestations alone as a securities law compliance measure. Careful initial collection of customer information and review of such data, supervision, ongoing verification and proactive investigation of potential non-compliance are all necessary to meet FINRA and other regulatory requirements.
Originally published in REVERSEinquiries: Volume 7, Issue 2.
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