Firm Settles FINRA Charges for Supervisory Failures over Private Placement Offerings
Commentary by Glen Barrentine
A firm settled multiple FINRA charges in connection with its sale of private placements, including for failing to maintain adequate supervisory systems to ensure compliance with the firm's suitability and best interest obligations.
According to the AWC, the firm failed to: (i) establish and maintain an adequate supervisory system to ensure compliance with its suitability and Reg BI obligations for private placement recommendations; (ii) prevent the misuse of material non-public information by failing to implement an adequate system for maintaining a restricted list and for monitoring employee trading; and (iii) fingerprint 45 non-registered associated persons. In addition, FINRA found that the firm approved the release of investor funds in a private offering before the required minimum contingency was met; and failed to report, or to timely report on Form U4, the outside business activities of ten of its registered representatives.
FINRA also found that the firm violated content standards in retail communications by making unwarranted claims and performance projections on websites and video content promoting the private offerings. FINRA said these communications failed to disclose key risks and included exaggerated statements, such as promising specific returns without a sound basis for evaluation.
As a result, FINRA found that the firm violated: SEA Rules 15l-1(a)(1) ("Regulation Best Interest") and 10b-9 ("Prohibited representations in connection with certain offerings"); SEA Section 17(f) ("Records and Reports") and Rule 17f(2) ("Fingerprinting"); FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision"), 5123 ("Private Placements of Securities"),1122 ("Filing of Misleading Information as to Membership or Registration") and 8210 ("Provision of Information and Testimony and Inspection and Copying of Books"); and Article V, Section 2(c) ("Application for Registration") of FINRA's By-Laws
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $375,000 fine and (iii) an undertaking to remediate its supervisory and compliance systems, including its WSPs.
FINRA noted that the firm had prior disciplinary history for similar supervisory failures.
Commentary
There are several items that seemed noteworthy here. First, this is at least the second AWC in recent months that referenced Regulatory Notice 10-22 (April 20, 2010) and the obligation, in connection with private placements, to conduct a reasonable investigation of the issue and the recommended securities. (See AWC No. 2021071695501.) More importantly, as pointed out by FINRA, this investigation cannot rely solely upon the issuer for information but must include an investigation that independently verifies the issue's material representation and claims.
Second, the AWC reminds firms that, pursuant to Notice to Members 91-45 (NASD NYSE Joint Memo) (June 21,1991), firms that conduct investment banking "are required to maintain a restricted list, to maintain a watch list, and to conduct reviews of employee and proprietary trading in securities appearing on those lists." (Emphasis added).
Third, in connection with a private placement structured on an "all-or-none" or "part-or-none" basis, the AWC reminds us that Exchange Act Rule 10b-9 requires a prompt return of investor funds in the event the requisite contingency is not met by a certain date. The failure to state a date by which the contingency must be met violates Rule 10b-9. Interestingly, this is the second Rule 10b-9 AWC this month. (See related coverage.) Whether this is a trend or a coincidence remains to be seen.