FINRA Rule 2040 expressly authorizes the payment of research fees to unregistered foreign researchers, whose only participation of the Finder is the initial referral to the member company of non-U.S. countries. Clients and certain conditions are met, including, but not only, that (i) the person is not required to be registered as a broker-dealer in the United States; (ii) compensation is not contrary to foreign law; (iii) the finder is a foreign resident living abroad; (iv) clients are foreigners residing abroad; (v) the payment of the research fee to the client is disclosed; (vi) customers confirm in writing that they have received notification of payment of the levy; (vii) keep proper payment records; and (viii) each transaction confirms that the research fee is paid. A related topic with parallel analysis is the use of finder for investors and investor groups, a widespread activity in today`s market. In this case, the investor group uses the services of a finder to encourage issuers to sell securities (usually convertible bonds) to the investment group. These researchers may also encourage current shareholders or holders of convertible bonds to sell such shares to a new investor or group of investors. If an agreement with a foreign person goes beyond the first references, the member company may register that person as a foreign associate person in accordance with NASD 1100. Foreign associate companies must conduct all activities outside the United States and must not engage in securities activities with U.S. persons. Although a foreign staff member is not required to pass an aptitude test, he or she is considered an associate person for whom a U4 form must be submitted.
In the case of agreements with foreign groups whose activities for foreign clients go beyond the initial referral to the member, registration of a foreign branch may be an alternative. Entering into a 15a-6 agreement may be a viable alternative as a foreign discoverer requests or negotiates with the United States. The SEC Advisory Committee on Small and Emerging Companies (Advisory Committee) has again made recommendations to the SEC regarding the regulation of investigators and other intermediaries in transactions with small businesses. The Advisory Committee had already made recommendations to the SEC on September 23, 2015. I even advocate a possible general review of the securities industry for individuals as a precondition for findinger activity without a licensing requirement. For example, finra, in collaboration with the SEC Division of Trading and Markets, could hold an audit similar to FINRA`s new security industry assessment (see HERE) for discoverers who are otherwise exempt from the full registration requirements for brokers. The new FINRA 2040 rule came into effect late last month, requiring brokers to sell EB-5 securities, to disclose to investors the amount of research fees paid to unregistered foreign nationals and to demonstrate in writing to investors that they are aware of the fees paid. As a reference, previous blogs relating to registration requirements for brokers and traders (i) include the action-based exemption for molten brokers (ii) exceptions for websites limited to accredited investors and crowdfunding portals under the JOBS Act; (iii) the legal exemption from registration requirements for brokers and traders, which are set out in Rule 3a4-1 of the Securities Exchange Act, including for senior executives, directors and key employees of an issuer; and (iv) the recommendations of the American Bar Association to codify a derogation from registration requirements for the registration of private locators.