Firm Settles FINRA Charges for Deficient Regulation S Procedures

A firm settled FINRA charges for supervisory failures concerning the offer and sale of unregistered debt securities distributed in reliance on Regulation S.

According to the AWC, the firm engaged in more than $650 million of customer transactions involving Regulation S securities—primarily structured products—from April 2022 through April 2024. FINRA found that during this period, the firm failed to establish, maintain, or enforce a supervisory system reasonably designed to achieve compliance with applicable Securities Act requirements. FINRA stated that the firm had no specific written supervisory procedures addressing Regulation S and lacked any surveillance or supervisory tools to review these transactions.

FINRA found that the firm relied solely on a risk disclosure signed by customers at account opening, which included a disclaimer of "U.S. person" status. FINRA determined this practice was, by itself, insufficient because the disclosures were not kept current, the firm did not have a process to review the disclosures' "U.S. person" disclaimer, and the disclosures did not address all relevant requirements of Regulation S. The firm also failed to investigate red flags indicating that customers might be located in the United States or that they may have met the definition of a "U.S. person." Despite these indicators, the firm sold more than $5.8 million of Regulation S debt securities to these customers during applicable "distribution compliance period[s]" without further review.

FINRA noted that by May 2024, in response to FINRA examination findings, the firm revised its written supervisory procedures and implemented new surveillance tools for Regulation S transactions.

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

The firm agreed to a censure and a $200,000 fine.