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FINRA, SEC Targeting EB-5 Immigrant Investor Program

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An immigration program designed to stimulate foreign investment in U.S. businesses is under regulatory scrutiny. The EB-5 program, so named for the employment-based fifth-preference visa it provides, gives foreign investors resident status in the United States if they invest at least $500,000 in a business that creates or preserves at least 10 jobs.

The program was created in 1990 and is administered by U.S. Citizenship and Immigration Services. A later program created regional centers where foreign investors can invest the minimum $500,000 in creating a new commercial enterprise that employs at least 10 full-time workers. Investments in other areas require a minimum investment of $1 million to qualify for the visa.

There are 796 regional centers as of February, according to Nicholas Colucci, chief of the Immigrant Investor Program Office for USCIS, up from just 11 in 2007. As of March 30, 43 regional centers in 21 states have been terminated.

Colucci said in written testimony that since October 2012, $8.7 billion has been invested in the U.S. economy through the EB-5 program, with an estimated 35,140 jobs. Colucci noted these are rough estimates; USCIS has partnered with the Commerce Department to conduct a valuation study on the program’s performance, the results of which are expected in the second quarter of fiscal 2016.

Investments in these EB-5 regional centers are considered securities as defined by the Securities Act of 1933. In order for advisors to receive compensation for helping EB-5 applicants, they must be registered with a broker-dealer, and the investments must be made in accordance with Financial Industry Regulatory Authority regulations.

Both FINRA and the Securities and Exchange Commission have said the EB-5 program is an area of focus this year.

Advisors who work with foreign investors on EB-5 visas need to have a “fairly strong background” on private placements and how to identify accredited investors, according to Kurt Nuñez, a compliance consultant at Core Compliance & Legal Services.

He acknowledged that some advisors run into trouble handling their anti-money laundering and client identification responsibilities, “because of course the EB-5 applicants will be from foreign countries,” but other than that “from an investment point of view, it’s not particularly esoteric.”

FINRA noted in its 2016 exam priorities letter that it is considering EB-5 investments as one of its areas of focus regarding the suitability, disclosure and due diligence of private placements. The SEC’s Office of Compliance Inspections and Examinations will also focus on private placements, including the EB-5 program, to evaluate whether legal requirements are being met.

EB-5 applicants start by working with an immigration attorney, Nuñez said, who helps the applicant file an I-526 petition with USCIS for the visa. USCIS screens the investor, including background checks and the source of his or her funds, and approves or denies the application.

That’s where the broker comes in. Once an application is approved, the visa holder has to place the investment, either in an approved regional center or elsewhere with the higher $1 million minimum.

“That is a very difficult thing for most foreign investors to do,” Nuñez said. “You can imagine how difficult that is if you were going to do a due diligence on a company in China, for instance, where you didn’t have the language capabilities and things, so normally they look for help. Traditionally that help will come from somebody who is a registered representative of a broker-dealer who will assist in doing the due diligence on a project and finding the correct project that works as a regional center and so forth, and help the client place the assets.”

What has put the EB-5 program on FINRA’s and the SEC’s radar is that sometimes unregistered professionals have helped the foreign investor place those assets.

“Getting compensated for helping that client, and getting compensated by the regional center for referring that client is considered by the SEC and FINRA to be a securities transaction,” Nuñez said. “That has been a source of confusion for the referring professionals such as immigration attorneys, who previously have interpreted that law to not believe that to be the case. But the SEC has taken several enforcement actions recently in establishing that this is a securities transaction and you need to be properly registered to get compensated for doing it.”

In December, the SEC announced a series of enforcement actions against attorneys charged with offering EB-5 investments without being registered to act as brokers, as well as failing to disclose commission arrangements. Nuñez said those sorts of cases with disgorgement and fines are very common.

“Normally, the attorney will get compensated on one side for assisting with the filing of the I-526 petition. The broker-dealer will get compensated for placing the investment. In certain cases those people are the same,” he said. “You have attorneys out there who have become registered representatives of broker-dealers or have in fact formed their own broker-dealer for the purpose of processing this work.”

Registered reps should report to FINRA that they are expanding their product line to include EB-5 investments, Nuñez said. “What’s very important is that they update their written supervisory procedures to ensure they have ways to meet their responsibilities regarding anti-money laundering and client identification,” he said. That’s important because “since these are foreign investors, the standards that we hold here with U.S. investors might not be easy to apply” to investors outside the U.S. They might not “have the same types of identification or the same types of ways of verifying their income, all those things you need to do to verify an accredited investor, or just verify their identification.”

The written supervisory procedures should outline how broker-dealers will manage that process and meet the requirements, Nuñez said.

“Right now the SEC is doing a sweep of firms that have been compensated by regional centers that may not be registered,” he said. “There’s actually SEC investigations taking place on this right now.”

The authorization for the EB-5 program is on an extension right now, Nuñez noted. “The actual requirements on EB-5 may change after the reauthorization by Congress. One thing that I’ve been particularly hearing is that the minimum investments might be raised.”

 — Read Why Immigrants Are the New Clients You Need on ThinkAdvisor.