FINRA Fines Firm for Private Placement and Telemarketing Failures
Commentary by Steven Lofchie
A firm settled FINRA charges for failing to supervise solicitations of private placements and for failing to comply with FINRA telemarketing rules.
According to the AWC, over a two-plus-year period, the firm raised approximately $24 million through 14 private placements relying on an exemption from registration pursuant to Rule 506(b) ("Exemption for limited offers and sales without regard to dollar amount of offering") of Regulation D ("Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933").
FINRA found that during the relevant period, registered representatives made hundreds of thousands of calls without a system in place to ensure "substantive relationships" were established before solicitation as required. FINRA highlighted that as a result, the firm was unable to "reasonably verify" that a "pre-existing, substantive relationship" existed before solicitation for certain investors. FINRA found that the firm’s written procedures did not prohibit general solicitation or provide guidance on what qualified as a "pre-existing, substantive relationship."
In addition, FINRA found that the firm had no system to monitor outbound calls against the national do-not-call list, and while a principal "occasionally checked" calling times, the firm did not specify "when, or how often" such reviews occurred. FINRA found that over the same two-plus-year period, the firm failed to establish, maintain, and enforce a system "designed to achieve compliance" with FINRA’s telemarketing rules.
FINRA determined that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision") and 3230(d) ("Telemarketing"). FINRA highlighted that following the relevant period, the firm adopted a "pre-existing relationship form," updated its procedures to address general solicitation, and ceased cold calling.
To resolve the matter, the firm agreed to (i) a censure and (ii) a $50,000 fine.
Commentary
The failures to monitor for "pre-existing relationships," in order for sales to qualify as good private placements, were particularly egregious in the current instance. Nonetheless, the case is a good reminder of the need for firms to have procedures in this regard. (See also; e.g., Firm Settles FINRA Charges for Supervisory Failures over Alternative Investment Sales, where the firm's written supervisory procedures failed to define what constitutes a pre-existing relationship and failed to specify how such relationships should be documented or verified).