The Financial Industry Regulatory Authority (FINRA) has issued Regulatory Notice 09-05 to remind member firms of their responsibility to avoid becoming participants in the illegal, unregistered resale of restricted securities into public markets. Firms that accept delivery of large quantities of low-priced over-the-counter securities, in either certificate form or by electronic transfer, and effect sales in these securities, should have written procedures and controls in place to prevent participation in an illegal, unregistered distribution of securities. Recent FINRA investigations and enforcement actions have shown that problems can arise when firms fail to recognize or take appropriate steps when confronted with “red flags” that signal the possibility of an illegal, unregistered distribution.
Before reselling restricted securities, firms must take reasonable steps to ensure that the transaction complies with SEC Rule 144 (which was recently the subject of substantial changes by the Securities and Exchange Commission) or another available exemption. There are several SEC Rule 144 factors a member firm should consider in determining what questions to ask its customers before engaging in an unregistered resale of securities. Firms should be aware that there are limitations on their ability to discharge their obligations by relying on others, and also must ensure that anti-money laundering compliance programs adequately address red flags that may be associated with unregistered resales conducted through the firm.