Broker-Dealer and CEO Settle FINRA Charges for Reg BI and Supervision Violations
A broker-dealer and its CEO settled separate FINRA charges (see here and here) for, among other things, misrepresenting and omitting information about the amount of compensation received from the sale of private placements.
In Letters of Acceptance, Waiver and Consent, FINRA stated that the CEO and broker-dealer deceived investors by claiming that they would receive a ten percent sales commission from the sale of private placement offerings of funds. FINRA found that the CEO and broker-dealer had entered into an agreement to be compensated an additional five percent plus half of any carried interest paid to the issuer.
FINRA said that the broker-dealer violated Regulation BI ("Regulation Best Interest,") in particular, Exchange Act Rule 15l-1(a)(2)(ii)(A) ("Care Obligation",) because it was unable to determine that the offerings were suitable for, or in the best interest of, its customers. In addition, FINRA stated that the broker-dealer engaged in "churning" that caused customers to incur more than $350,000 in trading costs and $465,000 in realized losses. FINRA found that the broker-dealer violated (i) Exchange Act Section 10(b) ("Regulation of the use of manipulative and deceptive devices") and Rule 10b-5 ("Employment of manipulative and deceptive devices") and (ii) FINRA Rule 2020 ("Use of Manipulative, Deceptive or Other Fraudulent Devices"), Rule 2111 ("Suitability") and Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
In addition, FINRA found that the CEO failed to (i) supervise the private placement offerings, (ii) perform reasonable due diligence, (iii) complete a due diligence checklist and (iv) ensure that the offering documents were accurate. As a result of his actions, FINRA stated the CEO violated FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade") and acted in contravention of Securities Act Sections 17(a)(2) and (3) ("Fraudulent Interstate Transactions"). As a result of these violations, the firm was expelled from FINRA membership and the firm's CEO was suspended.