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Managing Broker-Dealers: Benefits to Investment Sponsors with Selling Syndicates

Post on: July 29, 2019 | Chris Rohde | 0

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A managing broker-dealer (also known as a dealer-manager) can provide significant value to its sponsor partners by bringing a wealth of experience managing investments in order to make sponsors’ efforts more efficient and compliant. Additionally, an experienced back office takes over the more tedious aspects of managing a syndicate of financial intermediaries so sponsors can focus on their core business.

Here are 4 potential benefits of utilizing a managing broker-dealer:

Syndicate Management

A managing broker-dealer handles the management of a sponsor’s selling syndicate. First, they screen all potential syndicate members for previous bad acts to ensure that none of the intermediaries are bad actors that could threaten the validity of an offering’s exemption. Second, they do further due diligence to ensure that syndicate members are properly licensed or registered in all of the states in which they are selling, thus protecting the sponsor from any state claim that the individual broker selling was not properly registered. Third, the dealer-manager, along with the sponsor, helps facilitate prompt payment of commissions to broker-dealer members of the syndicate. This includes monitoring which investors came from which selling group member, any sales concession, and the actual calculation and payment of the commission, all of which is tedious work that, absent a managing broker-dealer, must be handled by the sponsor’s staff.

Offering Diligence

A broker-dealer, managing or otherwise, is required to perform due diligence on all offerings, conducted through its firm. This includes doing diligence on the sponsor, its control people, and the offering itself. For diligence on the sponsor and its control persons, a broker-dealer runs bad actor checks on all covered people, looks for negative news about either the company or its people, and reviews public corporate records to ensure all entities involved are properly registered and in good standing with their states. As part of its review of the offering, a broker-dealer will review any offering documents, including the subscription agreement and disclosure document, such as a PPM. Specifically, broker-dealers are looking to determine if all of the disclosures are current and adequate. They will then detail all of their findings or concerns to the sponsor so any appropriate changes can be made.

A broker-dealer will also review all advertising for the offering to ensure it complies with FINRA Rule 2210. This is an area where working with a broker-dealer that uses technology can make it more efficient and expedient process. With a technology system in place, sponsors should receive feedback in a 1-3 days after a document is submitted, whereas more manual systems can take longer and delay the launch of the offering or any related advertising. Once a piece is approved it may be distributed to other registered representatives or advisors who are selling the deal.

Investor Diligence and Management of Funds

Once an offering is live, a managing broker-dealer will handle investor diligence and the management of funds. The managing broker-dealer will review investors to ensure that they pass FINRA’s know your customer (KYC) rules and are not on the OFAC list. A good managing broker-dealer will also take steps to identify if any of the investors failed to fill out the subscription agreement correctly. If the investment is not in good order, the managing broker-dealer can reach out to the investor to ensure the paperwork gets filled out properly.

Once funds arrive into the offering bank account, a managing broker-dealer may then conduct an anti-money laundering program to ensure they are good funds. Once money starts coming in the managing broker-dealer will monitor the account until the final closing. If an escrow account is required due to the offering having a contingency, or when one is preferred, the broker-dealer may help the sponsor set up that account. In the case the offering has a contingency, the broker-dealer will help monitor the offering until the time the contingency is met, and then confirm with the escrow agent that funds may be distributed in accordance with the offering documents.

Filings and Record Retention

Finally, a managing broker-dealer will handle most of the regulatory filings, including Form D, the 5123 with FINRA, and any Blue-Sky notices that need to be filed. Filing these incorrectly or forgetting about them all together is easy to do, but an experienced managing broker-dealer will have handled all of these filings previously. Lastly, a managing broker-dealer must, at all times, maintain copies of all customer data and documents during and after the offering in accordance with SEC requirements.

 

When you engage WealthForge as your managing broker-dealer, you receive service that is backed by years of experience.* When WealthForge’s managing broker-dealer services are paired with the Altigo technology, your offering becomes more efficient, transparent, and reliable.

*Past performance is not indicative of future results


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About author

Chris Rohde

Chris serves as Associate Corporate Counsel at WealthForge where he advises on an array of areas, including both federal and state securities laws, broker-dealer law, general corporate law matters, and cybersecurity.
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