Broker-Dealer Settles FINRA Charges for Reg BI and OBA Violations
Commentary by Jeff Ziesman
A broker-dealer settled FINRA charges for violating Regulation Best Interest and for failing to supervise outside business activity of its registered representatives.
According to the AWC, the firm failed to conduct adequate due diligence on private placement offerings, relying solely on information provided by issuers without independently verifying material representations. As a result, FINRA determined that the firm's policies and procedures were insufficient to ensure that recommendations made to retail investors were suitable in violation of Reg BI. FINRA also found that the firm failed to deliver customer relationship summaries ("Form CRS") to existing customers.
In addition, FINRA found that the firm failed to adequately review its registered representatives for outside business activities, which created potential conflicts of interest that went unaddressed. FINRA concluded that the firm failed to provide adequate guidance to its supervisory personnel regarding compliance with outside business activity regulations.
FINRA also found that the firm exhibited slow responsiveness to FINRA's inquiries, frequently providing incomplete documentation and failing to cooperate fully during the investigation process.
FINRA determined that the broker-dealer violated Section 17(a)(1) ("Records and Reports") and Rules 17a-14 ("Form CRS, for preparation, filing and delivery of Form CRS") and 15l-1 ("Regulation Best Interest") as well as FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3110 ("Supervision") and 3270.01 ("Outside Business Activities of Registered Persons").
To settle the charges, the broker-dealer agreed to (i) a censure, (ii) pay a $100,000 fine and (iii) undertake to improve its supervisory systems and procedures to ensure compliance with applicable regulations.
Commentary
This matter involved a Firm with 18 registered representatives, and whose business (since 2020) was primarily the sale of private placement securities offerings to customers including retail investors. FINRA charged the Firm with "willful" violations of Regulation BI, with the crux of the matter being the recommendation to investors to purchase $140 million in 13 Regulation D private placement offerings. FINRA determined that the Firm's due diligence for some of the private placement offerings was not reasonable, based on findings that: (1) all 13 offerings were sold by affiliates of a commercial real estate investment company, and (2) the Firm's diligence review was purportedly limited to documents provided by the issuer.
FINRA does not state—or even imply—what level of due diligence would be adequate under the circumstances. Nor does it suggest what the additional purported due diligence would have identified, that would have been a "but for" barrier for investors to purchase these private offerings.
This outcome is particularly problematic because FINRA made "willful" findings in the AWC, and expressly stated that such findings "make [the Firm] subject to a statutory disqualification with respect to membership…." which will require the Firm to go through FINRA's Continuing Membership process. That outcome is potentially far more draconian than the $100,000 fine imposed.