Monday, August 08, 2016

FINRA exam to target non-traded business development companies

By Kevin Kulling, J.D.

In connection with a FINRA targeted examination involving non-traded business development companies (BDCs), the regulator has published on its website the contents of an exam letter that will require certain firms to provide documents and information about BDCs for the period January 1, 2015 through June 30, 2016. Responses are due by September 9, 2016.

BDCs. BDCs were created by Congress as part of the Small Business Investment Incentive Act of 1980. BDCs were designed to facilitate access to capital and financing for small and growing companies. BDCs are closed-end funds that make investments in private or thinly-traded public companies in the form of long-term debt or equity capital, with the goal of generating capital appreciation and/or current income. Non-traded BDCs are not traded on a national securities exchange.

FINRA requests. The targeted exam letter requests that member firms who receive the letter provide:
  • A list of each BDC offered by the firm, including the name, SEC file number, date of offering and firm’s role in each offering;
  • For each BDC offered, a list of participating broker-dealers that have a selling agreement with the firm per each registration statement and sample copies representative of each type of selling agreement;
  • A list of all broker-dealers that sold the identified BDCs to its customers in initial or follow on offerings that includes the name of the participating broker-dealer, the total number of shares bought and sold, the total dollar value of proceeds and the number of customers purchasing the BDC; and
  • A copy of the firm’s due diligence procedures, a written description of the due diligence that the firm conducts of the BDC initially and on an ongoing basis, as well as a written description of the due diligence that the firm conducts of participating broker-dealers with which the firm has a selling agreement.
The FINRA website did not provide further details regarding which firms would receive the letter or what may have precipitated the targeted exam.

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