Firm Settles FINRA Charges for Reg BI and Form CRS Supervisory Deficiencies
Commentary by Steven Lofchie
A broker-dealer settled FINRA charges for supervisory failures relating to Regulation Best Interest ("Reg BI"), Form CRS obligations, and supervisory control testing.
According to the AWC, the firm failed to establish, maintain, or enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. Although the firm eventually adopted procedures, FINRA found they were not reasonably tailored to the firm’s business model. In particular, the firm’s procedures largely recited the rule’s conflict-of-interest language without addressing the firm’s capital-raising activities, where associated persons frequently owned interests in issuers whose securities they recommended, or served on the board of directors of such issuers.
FINRA also found that the firm failed to deliver Form CRS to certain retail investors who participated in "private placement offerings through the firm" but did not maintain accounts at the firm. FINRA determined that the firm lacked written supervisory procedures reasonably designed to comply with Form CRS requirements during the relevant period.
In addition, FINRA found that the firm failed to conduct supervisory control testing or submit annual reports to senior management concerning its supervisory control system.
Accordingly, FINRA determined that the firm violated Exchange Act Rule 15l-1(a)(1) ("Reg Best Interest"), Exchange Act Section 17(a) ("Records and Reports"), and Rule 17a-14 ("Form CRS, for preparation, filing and delivery of Form CRS"), and FINRA Rules 3110 ("Supervision"), 3120 ("Supervisory Control System"), and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle these charges, the firm agreed to a censure, a $60,000 fine, and an undertaking to certify the remediation of its supervisory systems.
Commentary
One compliance point of which to take particular note: the failure of the firm to provide disclosure documents to customers to whom it did not provide custody. Worthwhile points for other firms to check: (i) whether their provisions of Form CRS are tied to their custodial accounts; and (ii) whether their offering procedures mandate the provision of Form CRS to investors who may not have received the Form previously.