Series LLCs and the Securities Industry

Securities Industry Practice Alert

Securities Regulatory Practice Alert

In response to a request by FINRA, the SEC provided interpretive guidance as to its financial responsibility rules’ application to a broker-dealer that is formed and operated as a series limited liability company (LLC) under state law.

The SEC staff described a Series LLC structure as consisting of a Master LLC and a series of ownership classes within that Master LLC. The structure of this entity operates as the Master LLC being the only formal legal entity to be registered as a broker-dealer. Other than the registration, the entity would have no business operations while the various Series LLC, under the aegis of the Master LLC, would operate the broker-dealer operations as well as other institutional activities. There would be separate assets and liabilities for each of the entities but all would be reported in a consolidated financial statement when filing financial reports with the SEC.

When assessing FINRA’s request, the SEC reviewed three sets of its rules: the Net Capital Rules, Exchange Act Rule 15c3-1; the Financial Reporting Rules, Exchange Act Rule 17a-5; and the Customer Protection Rules, Exchange Act Rule 15c3-3. For example, the SEC stated that the Net Capital Rules required any capital contribution to be “subject to the risks of the business.” Essentially, these risks could not be transferred between the entities. Further, all the liabilities would be recognized when computing the broker-dealer’s net capital, and thus the assets would not be available for treatment as non-allowable. Additionally, all liabilities would be deducted from allowable assets when computing the firm’s net capital.

Additionally, the SEC staff reviewed the effect of the Series LLCs on the Financial Reporting Rules. The SEC staff stated that, if these Series LLCs reported financial positions on a consolidated basis, the ability to effectively supervise its financial position would be greatly diminished. The SEC staff would not be able to determine the controlling series specific assets or obligations to pay specific liabilities.

The SEC staff also said that the Series LLCs would not be able to comply with the requirements of the Consumer Protection Rules since those Rules require the broker-dealer to carry the customer account positions and customer reserves. The SEC staff believes Series LLCs would make it difficult because the assets and liabilities of each series would be in separate entities. Finally, the SEC staff also determined that, under the Securities Investor Protection Act, if there were to be a liquidation, it would be difficult to find the entities that actually controlled the assets.

January 2010 – FINRA’s Guide to Social Media

FINRA’s Guidance on Social Media Web Sites

Securities Industry Practice Alert

Facebook, Twitter and personal blogs have become staples of American life over the past five years. Studies show that businesses have also increasingly turned to these social media outlets to communicate with customers, advertise and conduct business.

Social media outlets have not escaped the notice of FINRA. FINRA previously promulgated Rule 2210 to regulate electronic communications in the form of Internet chat rooms. Specifically, Rule 2210 does not require a registered principal to approve in advance the extemporaneous communications of personnel who are engaging in this practice. However, it does provide supervisory and content requirements for interactive electronic forums. Nonetheless, as broker-dealers venture into social media, FINRA recently issued Regulatory Notice 10-06 as guidance to firms on applying the communication rules to social media sites.

Supervision of Interactive Electronic Media

Firms should be aware that the treatment of communications on social media sites under Rule 2210 depends on whether the communications are static content or interactive content. Static content is treated as “advertisements,” and if the firm or registered representative sponsors a social media site, the associated person or broker-dealer must obtain approval from the registered principal prior to any posting. on the other hand, if the social media site is used for real-time interactive communications, FINRA would consider the posting to be an interactive communication that does not require prior approval of the registered principal.

Under Rule 3010, firms are required to supervise interactive electronic communications in a manner reasonably designed to ensure that the communications do not violate the content requirements of FINRA’s communication rules. Firms may adopt supervisory procedures similar to those outlined in Regulatory Notice 07-59 (FINRA Guidance Regarding Review and supervision of electronic communications). FINRA recommends that firms consider supervising interactive electronic communication by the following methods:

  1. A lexicon based review where the firm randomly searches sensitive words or phrases that could signal a problematic communication;
  2. A random review of electronic correspondence where the firm chooses a reasonable percentage of posts and reviews the content; or
  3. A combination of a lexicon based review and random review.

FINRA also recommends that firms adopt policies and procedures reasonably designed to ensure that their associated persons and broker-dealers, who participate in social media sites for business purposes, are properly supervised. In particular, firms should have a general policy prohibiting any associated person from engaging in business communications without the firm’s supervision. Firms must also provide adequate training for their associated persons regarding interactive electronic communications.

Importantly, FINRA does not treat posts by customers or other third parties as the firm’s communications. Under certain circumstances, however, third-party posts may be attributable to the firm where the firm is: (1) involved in the preparation of the content; or (2) explicitly or implicitly endorses or approves the content. Firms are responsible for monitoring third-party posts to the extent that the communications can become attributable to the firm.

Recordkeeping Responsibilities

FINRA requires that firms retain records of communications related to the broker-dealer’s business that are made through social media sites. Although FINRA is aware that certain technology providers are developing systems that allow firms to retain such records, FINRA does not endorse a particular method or manner of recordkeeping.

Suitability Responsibilities

If a firm or its personnel recommend a security through a social media site, the particular communication will be considered a “recommendation” under NAsd Rule 2310. since social media sites allow the content to be viewable by all or some of the public, Rule 2310 requires a broker-dealer to first make a determination that the recommendation is suitable for every investor to whom it is made. As such, communications through social media sites may trigger suitability rules, substantive liability for the firm or registered representative and other requirements under the federal securities laws and FINRA Rules.

FINRA recommends that firms prohibit all interactive electronic communications that recommend a specific investment unless the registered principal has approved the content. If the firm does allow specific investment recommendations through social media sites, FINRA recommends that firms maintain databases of pre-approved communications that personnel may access as templates. At the very least, firms must adopt policies and procedures reasonably designed to address communications that recommend specific investments through social media sites.


While electronic media continues to expand the manner and method in which firms can reach potential customers, each firm must continue to comply with federal law and regulatory policy developed through FINRA.