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Most financial industry professionals are familiar with the prohibition on “selling away,” the somewhat ambiguous term contemplated by FINRA Rule 3280.  FINRA Rule 3280 states that, “[n]o person associated with a member shall participate in any manner in a private securities transaction except in accordance with the requirements of this Rule.”  Among other things, the Rule requires a financial advisor to provide written notice prior to participating in a private securities transaction even when the financial adviser receives no compensation.

While it is generally understood that FAs cannot sell securities to customers that are not offered by their broker-dealer without first receiving permission from the broker-dealer, much of the guidance around this rule focuses on what qualifies as a private securities transaction (a term that is arguably poorly defined in the Rule).  Many financial advisers, however, are unaware of how broadly FINRA interprets what it means to “participate” in a private securities transaction.

FINRA recently made a determination (not yet publicly released) that a registered representative “participated” in a private securities transaction because he; a) set up a zoom conference call between the outside fund manager and the investor, b) forwarded the original offering materials to the investor, and c) forwarded amended offering materials approximately a year after the original investment.

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We are all painfully aware of the recent volatility in the markets, which has not gone unnoticed by the SEC.  On March 14, 2022, the Staff of the Division of Trading and Markets stated that “broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements.”  We shall see whether Wall Street acts upon the SEC’s guidance, and whether investors are caught flat-footed by stepped-up maintenance margin requirements.

Regulatory and Contractual Requirements

The regulatory requirements for margin are set forth in FINRA Rule 4210.  Although the rule is lengthy, and incorporates other rules including Federal Reserve Board Regulation T, the essence of the rule allows a broker-dealer to lend a customer up to 50% of the total purchase price of an eligible stock.  A margin call may be issued if the margin account falls beneath the maintenance margin requirements (generally 25% of the current market value of the securities in the account) or if the margin account falls below the firm’s “house” maintenance margin requirements (which can be substantially higher than 25%).   Brokerage firms can, and often do, upwardly adjust “house” maintenance margin requirements if the firm has risk concerns relating to outstanding margin loans.  Most margin account agreements specifically permit broker-dealers to increase maintenance margin requirements at the sole discretion of the firm.  In light of the SEC’s recent guidance, it seems likely that broker-dealers will act upon its contractual rights and demand enlarged collateral from customers to protect its margin loans.

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A New York couple, Ilya Lichtenstein, 34, and his wife, Heather Morgan, 31, were recently arrested in connection with the theft of approximately 120,000 Bitcoin from the Bitfinex exchange in 2016.  The couple was charged however, not with computer hacking and theft but of violating 18 U.S.C. § 1956(h) (Money Laundering Conspiracy) and 18 U.S.C. § 371 (Conspiracy to Defraud the United States).

Famously, in 2016 someone hacked into the Bitfinex platform and engaged in roughly 2000 unauthorized transactions by which they transferred the Bitcoin out of Bitfinex to a digital wallet.  Maybe it was Lichenstien and Morgan maybe not.  This is another example that shows that, despite the secure nature of the blockchain to prevent fraud and theft, any exchange where you can trade Bitcoin can be a weak link.  The 2016 heist was the largest but there have been a string of Cryptocurrency thefts from trading platforms that are just increasing in number each year.

See  https://techcrunch.com/2021/06/02/what-10m-in-daily-thefts-tells-us-about-crypto-security/

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