Broker-Dealer Settles FINRA Charges for Unregistered Distributions
An investment firm settled FINRA charges relating to the unregistered distributions of securities.
According to the FINRA Letter of Acceptance, Waiver and Consent, from December 2020 to December 2021, the firm participated in three offerings purporting to rely on SA Rule 506(b) ("Exemption for limited offers and sales; Conditions") of Regulation D ("Rules Governing the Limited Offer and Sale of Securities without Registration"). FINRA determined that in violation of the Rule, the firm relied on the exemption without first establishing a "pre-existing, substantive relationship" with 45 of the prospective investors to whom it sold such unregistered securities. FINRA said that the private placement sales in question totaled approximately $5.5 million, for which the firm received $58,278 in commissions. FINRA said that the resulting violations of Section 5 of the Securities Act also violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
In addition, FINRA found that the firm did not have adequate supervisory procedures in place to comply with applicable securities laws, in violation of FINRA Rules 3110 and 2010.
To settle the charges, the firm agreed to (i) a censure, (ii) a fine of $175,000, (iii) a disgorgement of $58,278 plus interest and (iv) the implementation of an adequate supervisory system created to achieve compliance with the Securities Act and FINRA rules related to general solicitation of private placement offerings.
Commentary
The amazing flexibility of FINRA Rule 2010 is on display in this decision. First, the rule provides a basis for FINRA to enforce an entire body of law, along with a vast potential of other matters, beyond the statute that created it. Litigants recently unsuccessfully attempted to challenge this authority. See, e.g., Scottsdale Capital Advisors Corp., SEC Release 34-93052 at n. 11 & accompanying text. Second, as is customary, FINRA highlights that violating Rule 3110 is also an automatic violation of Rule 2010. It is not obvious if there is any FINRA rule a person could violate without per se violating Rule 2010.
This is not to say that FINRA isn't well-positioned to police misconduct of this nature - i.e., improper general solicitations by broker-dealers. But the incomprehensible vagueness of the rule highlights an advantage FINRA retains as a not-quite-governmental actor that possesses very government-like powers.