Firm Settles FINRA Charges for Supervisory Failures over Alternative Investment Sales
A broker-dealer settled FINRA charges for supervisory failures over the sale of speculative alternative investments and Reg BI violations.
According to the AWC, the firm failed to reasonably supervise the sale of high-risk, illiquid debt instruments that were marketed as alternative investments. FINRA said that firm representatives recommended these products to customers with moderate or moderately aggressive risk profiles, despite the investments' speculative nature, associated concentration risks and the customers' limited experience with alternative assets. FINRA said that in several cases, the investments accounted for as much as 72 percent of a customer's liquid net worth. FINRA found that the firm lacked process to ensure that its representatives exercised reasonable diligence when evaluating the risks of the alternative investments and when making recommendations to investors. FINRA also concluded the firm's supervisory procedures were not sufficiently detailed, offering no meaningful guidance for supervisors on how to evaluate recommendations or escalate concerns.
Further, FINRA found that the firm sold approximately $6 million in unregistered securities offerings without an applicable exemption under Rule 506(b) ("Exemptions") of Regulation D ("Rules Governing the Limited Offer and Sale of Securities Without Registration"). FINRA found that the firm's written supervisory procedures failed to address general solicitation, failed to define what constitutes a pre-existing relationship and failed to specify how such relationships should be documented or verified.
FINRA found that the firm failed to conduct background investigations for newly hired representatives. FINRA said this included lapses such as not verifying Form U4 data, failing to contact recent employers and neglecting to review public records. Further, FINRA said the firm failed to adequately review outside business activities and failed to inspect branch offices and offices of supervisory jurisdiction.
As a result, FINRA determined the firm violated Exchange Act Rule 15l-1 ("Regulation Best Interest") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3270 ("Outside Business Activities of Registered Persons") and 3110 ("Supervision").
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $100,000 fine, (iii) pay restitution of $166,000 to affected customers and (iv) retain an independent consultant to review and improve its supervisory system and compliance processes related to alternative investment recommendations, private placements, representative onboarding, outside business activity reviews and office inspections.