Thursday, March 27th, 2014 and is filed under AI Insight News
In the 2013:2 edition of the Ohio Securities Bulletin, the Division published an article entitled “Suitability Requirements in Direct Participation Programs.” One section of that article under the heading “A Word About DRIPs” generated comments from Direct Participation Program (“DPP”) sponsors and broker-dealers. The Division believes that providing additional clarification regarding the article and suitability obligations related to DPP Distribution Reinvestment Plans (“DRIPs”) may be beneficial for DPP market participants.
The 2013:2 Bulletin article stated that “each distribution reinvestment triggers a broker-dealer’s obligation to determine that the purchase of additional shares is suitable and appropriate for the participating shareholder.”1 This statement is in reference to Ohio Administrative Code section 1301:6-3-19(A)(5).2 The Division would like to offer the following clarification. OAC 1301:6-3-19(A)(5) applies only to dealers and salespersons. To the extent that a dealer or salesperson does not recommend the initial enrollment or continued participation in a DRIP, or participate in the sale or purchase of additional shares through a DRIP, then OAC 1301:6-3-19(A)(5) would not apply.3 The Division understands that the immediately preceding interpretation of OAC 1301:6-3-19(A)(5) should cover the substantial majority of distribution reinvestments that follow the customer’s initial enrollment. However, where a dealer or salesperson makes an affirmative recommendation to a customer regarding his or her participation in a DRIP, or is significantly involved in the sale or purchase of additional shares through a DRIP, the Division believes that OAC 1301:6-3-19(A)(5) and FINRA Rule 2111 would apply. For example, these provisions would apply where a shareholder calls the dealer or salesperson and asks “should I enroll in the DRIP?” or “should I remain in the DRIP?”, and when the initial subscription for shares and enrollment in the DRIP occur simultaneously.
If you have specific questions regarding any of the topics discussed in this article, please contact Seth Hertlein in the Registration Section at 614-466-4375or seth.hertlein@com.ohio.gov.
Editor’s Note: The Ohio Bulletin has not yet been distributed by the Ohio Division of Securities. However, AI Insight, Inc. obtained permission from Mark R. Heuerman Registration Chief Counsel, Division of Securities Ohio Department of Commerce, to distribute to our subscribers.
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1 Ohio Securities Bulletin 2013:2, p.5.
2 OAC 1301:6-3-19(A)(5) requires that “No dealer or salesperson shall . . . sell, purchase, or recommend the sale or purchase of any security without reasonable grounds to believe that the transaction or recommendation is suitable for the customer, based upon reasonable inquiry concerning the customer’s investment objectives, financial situation and needs, and any other relevant information known to dealer or salesperson.”
3 The Division does not consider the reporting of distribution reinvestments by the issuer to the dealer for purposes of accurately reflecting such purchases on the customer account statement to be participation sufficient to trigger OAC 1301:6-3-19(A)(5).
