What does it take to make the SEC happy? SEC criticism of broker-dealers’ due diligence for sales of unregistered securities leaves more questions than answers

Abstract

Purpose

To highlight the insufficient guidance offered by a recent Securities and Exchange Commission settlement regarding a broker-dealer’s obligation to inquire into its customers’ sales of unregistered securities.

Design/methodology/approach

Discusses the traditional interpretation of Section 4(a)(4) of the Securities Act of 1933, which requires broker-dealers to conduct a reasonable inquiry into the basis for their customers’ proposed sales of unregistered securities. Then reviews a recent SEC settlement that appears to suggest the SEC believes there is a more stringent obligation on broker-dealers to inquire into their customers’ proposed sales of unregistered securities.

Findings

The SEC’s recent settlement states that various inquiries conducted by a broker-dealer into its customers’ claimed registration exemptions were insufficient to satisfy the broker-dealer’s obligation under Section 4(a)(4). However, the settlement does not address why these inquiries were insufficient or what inquiries, if any, would have satisfied the broker-dealer’s obligations under Section 4(a)(4).

Originality/value

This article analyses an SEC settlement that may, either intentionally or inadvertently, have used an enforcement action to attempt to heighten broker-dealers’ obligations under Section 4(a)(4).

Citation

Bettigole, B. and Kruly, C. (2015), "What does it take to make the SEC happy? SEC criticism of broker-dealers’ due diligence for sales of unregistered securities leaves more questions than answers", Journal of Investment Compliance, Vol. 16 No. 1, pp. 52-58. https://doi.org/10.1108/JOIC-01-2015-0007