Broker-Dealer Fined for Due Diligence Failures
Commentary by Steven Lofchie
A broker-dealer settled charges with FINRA for failing to conduct due diligence on private placements where the firm acted as a "finder" and not as a placement agent.
In a Letter of Acceptance, Waiver and Consent ("AWC"), FINRA found that the broker-dealer did not conduct due diligence for 134 sales to U.S. customers of 53 different private placements, in which the firm raised almost $11 million. According to FINRA, the firm's investigation of the issuer was limited to a review of the issuer's recent public filings and did not include a review of other publicly available information, even though the firm's supervisory procedures called for such a review. FINRA stated that the broker-dealer also failed to file offering documents with FINRA for 236 Canadian private placement offerings.
As a result, FINRA determined that the broker-dealer violated FINRA Rule 2111 ("Suitability"), 3110 ("Supervision"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 5123 ("Private Placements of Securities") and Regulation Best Interest.
To settle the charges, the broker-dealer agreed to (i) a censure, (ii) pay a $175,000 fine and (iii) compliance with the additional undertakings set forth in the AWC.
Commentary
At least when selling to individual investors, this case may serve as something of a warning that a firm is not able to avoid a due diligence obligation by labelling itself as a "finder," rather than as a placement agent.
FINRA's adding the Reg BI charge to the suitability charge is the wave of the future. It means that there is a violation of the federal securities laws, as well as a violation of FINRA Rules.