Firm Fined for Private Placement Marketing Violations
Commentary by Sebastian Souchet
A firm settled FINRA charges for sending misleading communications on private placements sold to retail investors and for failing to timely file private placement offering documents.
FINRA found that the firm helped prepare "communications that were distributed to more than 25 retail investors" that violated FINRA's content standards. FINRA said the communications included "two emails which discussed potential investment opportunities related to stock options owned by employees of pre-IPO stage companies, and which linked to news articles regarding those companies (for example, news that a telemedicine company had seen an increase in usage)." FINRA said these emails "failed to describe the features of this alternative investment structure and failed to prominently disclose the associated risks." FINRA also found that the firm prepared a slide deck that "failed to prominently disclose that private placement securities are speculative, illiquid, and carry a high degree of risk – including the loss of the entire investment." FINRA said the two slide decks contained the language "3rd Party FINRA Compliance Approval," which "improperly implied that FINRA endorsed the investment described in the communications."
In addition, FINRA found that the firm failed to timely file private placement documents which were, on average, 163 days late.
FINRA concluded that the broker-dealer violated FINRA Rules 5123 ("Private Placements of Securities"), 2210 ("Communications with the Public") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the broker-dealer agreed to (i) a censure and (ii) pay a $40,000 fine.
Commentary
In recent years, much of the focus on FINRA Rule 2210 has concerned the application of the rule with respect to advertising of predictions or projections of performance (e.g., target rates of return, internal rates of return, hypothetical and related performance information, etc.) in private fund sales material and offering documents distributed by broker-dealers (see, e.g., coverage here.)
However, this enforcement action serves as a reminder that broker-dealers are subject to principles-based, general content standards with respect to their communications, including with respect to distributions of sales material. While the enforcement action concerns "retail communications" (as that term is defined in FINRA Rule 2210(a)(5)), firms should be aware that the principles-based, general content standards of FINRA Rule 2210 (e.g., that communications be based on principles of fair dealing and good faith, be fair and balanced, and provide a sound basis for evaluating the facts in regard to any particular security, industry or service, etc.) apply to all communications (i.e., both retail communications and institutional communications). Firms should ensure that they have robust policies and procedures for review of their communications to ensure compliance with FINRA Rule 2210, including compliance with the principles-based, general content standards therein.