It's no secret that investments in private equity have gone ballistic over the last few years. And rather than crashing and burning, as many expected was just about to happen, and despite a lackluster market, commitment are hitting all-time record levels.
Advisors are becoming increasingly involved in private deals. Reasons include a diminishing commission environment, the lackluster real estate market, remembrance of bubble days, and the largest transfer of wealth in history. Client demand is at an all time high; with baby boomers contributing an increasing allocation to deals where they can feel that they are real stakeholders - and if the deal is green, all the better. Advisors who can get deals done are becoming hot commodities.
But this all creates a dangerous situation - both for the Advisors wading into this business and for their firms. Deals in this space have often been done in the shadows of the Old Boy network - and access to quality deal flow has always been an issue. Unregistered gray area finders have complicated the situation. Until very recently, it was still the belief of many reps that all the good deals are spoken for - and as for all the others, well, you wouldn't touch them with a barge pole. Which was just how the Old Boyz wanted it to be.
But then came the PPX (
www.ppxonline.com) - the first electronic platform introducing entrepreneurs to funding sources while embracing the role of Financial Professionals. Suddenly, Advisors had access to quality products, on their terms, at their convenience. And the gray area finders had no access (they are not allowed to be members). Suddenly the playing field had changed. Advisors found that even the quality deals take time to arrange - and were able to find deals custom suited to the investment objectives of clients.
But this has created a raft of new concerns. As Advisors are taking an increased interest in Private Deals, there are concerns that the deals be handled correctly, and that the firm maintain compliance at all times. Though the PPX is designed not to increase the compliance burden on investment firms or entrepreneurs, these concerns are real - as many firms had not adequately updated their supervisory procedures with regard to private transactions, and specifically outside business activities and selling away.
Indeed, since many firms had not previously engaged in these transactions in a meaningful way, there was confusion at the firm level. Often the firm simply made the choice not to engage in these activities, since it didn't really understand them. The NASD even put out a special bulletin regarding the necessity for compliance with the relevant regs, and has created some video tutorials regarding the salient issues. In fact, compliance with the regs is not terribly difficult to despite the perceived difficulty. So many firms have recently ramped up procedures to make sure that these issues are covered. And those firms are supporting their reps, and taking in new business. The growth of the PPX is a clear indicator of this.
But what is the bottom line to compliance in this space? At the individual Advisor level - and that is what this article is concerned with - the burden is not onerously heavy, despite the old fears. It all comes down to
notification and documentation.
As a registered rep, you MUST notify your firm of all "Outside Business Activity". This goes from selling cars to breeding cats; whatever it is, even if you are NOT being compensated, you must notify your firm. But to be safe don't stop there; get something in writing from the firm acknowledging your activity. But there is a more serious issue; the dread "Selling Away" violation. You will be deemed to have engaged in Selling Away if you engage in any securities transaction (whether paid or not) OR any transaction that is contrary to the interest of your firm. As a rep you might think this is not fair; essentially the firm gets a right to veto your participation in any business that it sees as contrary to the interest of the firm - even if you are not getting paid. Well, that's exactly what it is, and get used to it. In the same way that if you ran a business, you would want to know what else your employees were doing. But the solution is simple: notify and document. Let your firm know in advance in writing that you plan to engage in an activity. Then, get acknowledgement back from the firm.
Sound Easy? It is! Of course, common sense would dictate this as well. But be on the safe side: always notify and get documentation to protect yourself downstream. This is not to say your firm will automatically approve; and your firm may have procedures in place that are more restrictive than those required by the FINRA. Make yourself secure. Protect yourself and your firm. And be your client's Hero.
Note* Most firms have boilerplate notification forms. If not, tell them they should get one; makes life easier. Check into the PPX's "Document Library" for a free boilerplate version to download. But consult with qualified legal counsel prior to use.
The PPX (www.ppxonline.com) is a web based set of tools designed to facilitate capital formation. It enables Advisors to access private dealfow. Membership is free to qualified individuals. If you have been visiting another planet and are not a member yet, now would be a good time to sign up.