FINRA, SEC Targeting EB-5 Immigrant Investor Program

“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.