As this is the last issue of the DLA Piper Financial Report for 2015, it might have been appropriate for us to do one of those year-in-review summaries. But an SEC enforcement action announced earlier this week probably makes that unnecessary because that action itself is a mash-up of several of the most interesting financial and social issues of the past year.
In the wake of recent terrorist attacks, there are renewed calls for immigration reform. Presidential candidate Donald Trump has inflamed the debate, even among those in his own party, by calling for a temporary ban on all Muslims from entering the US. These are very serious and complicated issues, indeed, but what is the relevance to the financial services industry?
On Monday, the Securities and Exchange Commission announced a series of enforcement actions against lawyers across the country, who are charged with offering EB-5 investments while not registered to act as brokers. The allegations stem from the EB-5 Immigration Investor Program that offers a path to US residency for persons who invest between $500,000 and $1 million in a specific project that creates or preserves U.S. jobs. The investments are typically administered by regional centers in the US and made through limited partnerships managed by people other than the foreign investors. Critics of the program contend, of course, that it is wrong to allow certain persons to buy their way into the US.
Interestingly, without focusing on the central policy debate, the SEC (i.e., the federal securities regulator and not an agency charged with protecting national security or dealing with immigration issues) apparently has been increasing its focus on those who sell EB-5 investments and has indicated that it will maintain its focus on the program going forward. (We note that there has been no allegation, as far as we know, that persons investing in EB-5 investments were responsible for any of the recent terrorist attacks in the U.S.)
SEC Enforcement Director Andrew Ceresney stated that the allegations were the first against attorneys for allegedly acting as unregistered brokers in the context of the EB-5 program. He said the cases underscore the fact that attorneys “need to be cognizant of, and need to comply with, securities laws and regulations” that govern the sale of securities.
And there it is. With all the potential issues embedded in the EB-5 Immigration Investor Program, the issue that is under focus is who must be registered as brokers or dealers in connection with the sale of securities—an issue we have commented about frequently on these pages.
Lawyers are not immune here. Mr. Ceresney explained: “The lawyers in these cases allegedly received commissions for selling, recommending, and facilitating EB-5 investments, and they are being held accountable for disregarding the relevant securities laws and regulations.” Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office, stated in the SEC’s press release: “We allege that [one named attorney] abused his role as an immigration attorney to illicitly operate as a broker and engage in a scheme to secretly receive commissions for selling EB-5 securities.”
The SEC contended that various EB-5 regional centers or their managers paid commissions to an attorney or law firm for each new investor to whom they successfully sold limited partnership interests. Significantly, those payments were separate from the legal fees received by the attorneys for the provision of legal services to the same clients. Therefore, the SEC believed that the lawyers and firms acted as unregistered brokers in violation of the Securities Exchange Act of 1934 by engaging in activities necessary to effectuate the transactions, such as recommending one or more EB-5 investments, acting as a liaison between the regional center and the investor, or facilitating the transfer or documentation of investment funds to the regional center.
In view of these actions, it probably makes sense to reevaluate, yet again, what activities may subject persons (including attorneys) to broker-dealer regulatory requirements. We are available to assist with that analysis.