Transactions, Records and Complaints

Processing and settling a subscription

The sequence in a typical best efforts private placement runs like this.

The investor executes the SUBSCRIPTION AGREEMENT and the investor questionnaire, and delivers funds. The subscription is an OFFER to buy; it is not a completed transaction until the issuer accepts and countersigns. This is the single most important structural point in Function 4, and it explains the rest: the customer's money is committed before there is a binding trade.

Funds go where the offering documents say. In a non-contingent offering they are promptly transmitted to the issuer. In an all-or-none or mini-max offering, Rule 15c2-4 requires them to be promptly deposited in a separate bank account held as agent or trustee for the beneficial owners, or promptly transmitted to a bank that has agreed in writing to hold them in escrow, until the contingency occurs — and then promptly transmitted to the issuer or returned to the investors.

The issuer ACCEPTS or REJECTS. An issuer may reject a subscription in whole or in part, and oversubscribed offerings routinely scale investors back. Rejected funds are returned.

At CLOSING, the accepted subscriptions become issued securities. The issuer or its transfer agent records the holder, and the certificate — or the book entry — carries the restrictive legend required by Rule 502(d)(3), stating that the securities have not been registered and setting out the restrictions on transfer.

The securities are then typically held DIRECTLY by the investor on the issuer's books, not in street name in a brokerage account. That surprises customers, and it has consequences: the position may not appear on the firm's account statement, transfers require the issuer's involvement, and the investor deals with the issuer or its agent for everything afterwards.

The firm must retain the executed subscription agreement. It is the evidence of the investor's representations, and therefore part of the evidence that the exemption was available.

On handling money and securities generally, Function 2.4 asks about the physical receipt, delivery and safeguarding of cash or cash equivalents, checks and securities. The safe posture is the simple one: checks are made payable to the issuer or the escrow agent, never to the representative; a member that is not permitted to hold customer funds must promptly transmit them; and anything received is logged on receipt.

Confirmations

FINRA Rule 2232 requires a member to give or send to the customer written notification — the confirmation — at or before the COMPLETION of any transaction in any security effected for or with the account of a customer, and requires it to conform to Exchange Act Rule 10b-10.

Rule 10b-10 sets out what the notification must disclose: the date and time of the transaction or a statement that the time will be furnished on written request; the identity, price and number of shares or units; whether the member acted as AGENT for the customer, as agent for another person, as agent for both, or as PRINCIPAL for its own account; the amount of any remuneration received from the customer; and the source and amount of any other remuneration received in connection with the transaction, or for an agency trade a statement that it will be furnished on written request.

That capacity disclosure is the point of the rule and it matters in a private placement, where the member is normally acting as agent for the issuer and receiving its compensation from the issuer rather than from the customer. The confirmation is where the customer learns that.

Rule 2232 also carries obligations that are not usually engaged by a private placement — the settlement-date disclosure for NMS stocks, the callable equity security notice, and the TRACE reference and mark-up disclosure for corporate and agency debt sold to retail customers. Know what they are and know that they attach to the instruments they name.

For a private placement the practical questions are what date the confirmation carries and what it says about capacity and compensation, and the answer to the second is: everything the customer needs to understand who paid the firm and how much.

Books and records

Two regimes run in parallel. Exchange Act Rule 17a-3 says what records must be MADE. Rule 17a-4 says how long they must be PRESERVED. The FINRA 4510 series adds requirements on top and, for the most part, points back at the SEC rules.

The retention periods are the tested content.

Three years, the first two in an easily accessible place, is the general period under Rule 17a-4(b) — covering blotters, communications received and sent relating to the business, trial balances, order tickets and confirmations, and much else.

Six years after the closing of the account for account cards or records relating to the terms and conditions of the opening and maintenance of the account, under Rule 17a-4(c). FINRA Rule 4512 separately requires updated account information to be preserved six years from the update.

The LIFE OF THE ENTERPRISE, and of any successor, for the constitutional documents under Rule 17a-4(d) — partnership articles or articles of incorporation, minute books, stock certificate books, Forms BD and BDW and their amendments, and the licences or documentation showing the firm's registration.

Three years after an associated person's employment and any other connection with the firm has terminated, for that person's associated-person records.

Four years for customer complaint records under FINRA Rule 4513, which is the odd one out and is therefore reliably tested.

Also in this area: Rule 17a-8 requires compliance with the recordkeeping and reporting requirements of the Bank Secrecy Act — currency transaction reports, suspicious activity reports and the associated records.

And FINRA Rule 2273 requires that, where a registered representative moves firms and contacts a former customer to transfer their account, the member deliver an EDUCATIONAL COMMUNICATION highlighting the questions the customer should consider — costs of transferring, whether their assets can move, differences in products and services, and how the representative's compensation may have changed. It is delivered with the first individualised contact about transferring, and the obligation runs for three months from the representative's association with the new firm. FINRA Rule 2140 sits alongside it, prohibiting a member or associated person from interfering with a customer's request to transfer their account in connection with an employment dispute.

Regulation FD belongs here because the content outline lists it. It requires an ISSUER that is an Exchange Act reporting company, and persons acting on its behalf, to disclose material non-public information publicly when it has been disclosed selectively to securities professionals or holders likely to trade — simultaneously if the selective disclosure was intentional, and promptly if not. The critical point for this exam is that Regulation FD applies to REPORTING issuers. A private company conducting a Regulation D offering is not one, so Regulation FD does not reach it. Where it does matter is a PIPE: the issuer is public, the private placement necessarily involves telling prospective investors material non-public information, and the standard mechanism is a confidentiality agreement and a public cleansing announcement. And note Regulation FD's own exclusion for persons who owe a duty of trust or confidence and for those who expressly agree to keep the information confidential, which is why the confidentiality agreement is the answer rather than a workaround.

Complaints, reporting and the forums

When a customer complains, four obligations engage in sequence.

ESCALATE. The complaint goes to the supervisor. A representative may not handle a complaint about their own conduct, and settling one privately with a customer is itself a serious violation — it conceals the complaint from the firm's supervisory system and from the reporting obligations below.

RECORD. FINRA Rule 4513 requires each member to keep in each office of supervisory jurisdiction a separate file of all written customer complaints relating to that office and the action taken by the member, if any, or a separate record of such complaints with a clear reference to the correspondence files. Complaint records must be preserved for at least FOUR YEARS. The rule defines a complaint as any grievance by a customer, or a person authorised to act for the customer, involving the activities of the member or an associated person in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer.

REPORT. FINRA Rule 4530(a) requires a member to report specified events within 30 CALENDAR DAYS after the member knows or should have known of them — including written customer complaints alleging theft, misappropriation of funds or securities, or forgery. Rule 4530(b) requires a member to report within 30 calendar days when it has concluded, or reasonably should have concluded, that the member or an associated person has violated a securities law, rule or regulation. Rule 4530(d) requires quarterly statistical and summary information about written customer complaints, due by the 15th day of the month following the calendar quarter. Rule 4530(f) requires copies of specified criminal indictments, civil complaints and arbitration claims to be filed.

Separately, certain customer complaints and their dispositions are reportable on the representative's FORM U4, and become visible through BrokerCheck.

RESOLVE. Most customer disputes in this industry are resolved in FINRA's arbitration forum rather than in court, because the account agreement contains the predispute arbitration clause covered in lesson 4.1.

The 12000 Series is the Code of Arbitration Procedure for Customer Disputes; the 13000 Series is the Code for Industry Disputes, which is where a representative's dispute with their own firm goes; and the 14000 Series is the Code of Mediation Procedure.

Three features to know. There is a SIX-YEAR ELIGIBILITY rule: a claim is not eligible for submission to arbitration where six years have elapsed from the occurrence or event giving rise to the claim. Arbitration awards are FINAL AND BINDING, with only very limited grounds for a court to vacate or modify — which is one of the seven things Rule 2268 requires the customer to be told before they sign. And MEDIATION is fundamentally different: it is voluntary, the mediator has no power to impose an outcome, and either party may withdraw. Mediation may run alongside an arbitration.

Behind all of it is the 8000 Series, on investigations and sanctions. FINRA Rule 8210 gives FINRA the power to require a member or associated person to provide information, documents and testimony, and to inspect and copy books and records. Failure to comply is itself a violation, and it is the most common route to a bar — not because the underlying conduct was always the worst, but because there is no defence to simply not answering.