FINRA Sanctions Firm Over Private Placement Cold Calling

A firm settled FINRA charges for failing to supervise private placement general solicitations.

According to the AWC, the firm failed to respond to red flags that a representative was engaging in "impermissible general solicitations" for two offerings under Rule 506(b) ("Exemption for limited offers and sales without regard to dollar amount of offering") of Regulation D ("Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933"). FINRA stated that the firm was aware that a representative was "cold calling" prospective investors using information from "public and third-party sources." FINRA determined the representative cold-called "over 40 prospective investors" with no prior relationship to the firm, resulting in seven investments totaling $775,000.

FINRA found that the firm’s supervisory system and procedures were not reasonably designed to comply with Rule 506(b) and improperly permitted "general solicitation" based solely on investor suitability. FINRA stated the firm also failed to provide guidance on establishing a "pre-existing, substantive relationship" or to instruct supervisors on how to verify such relationships. FINRA highlighted that the firm lacked any process to verify pre-existing, substantive relationships with private placement investors, including those who opened accounts after the firm joined the offering.

FINRA concluded that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision"). 

To resolve the matter, the firm agreed to (i) a censure and (ii) a $45,000 fine.