FINRA recently censured and fined a broker-dealer $175,000.00 for failing to perform appropriate due diligence and supervision regarding private placements that the firm and its registered representatives offered. This penalty should serve as a wake-up call that FINRA is taking a sharp look at the due diligence that firms perform before and after offering a private placement to its clients.

The firm had a number of missteps regarding a handful of private placements that FINRA discovered during a routine examination, which included the following:

  1. The firm approved an offering even though the firm highlighted shortcomings in the offering such as a failure to describe the company’s business; FINRA found the firm providing additional disclosures did not satisfy Rule 2111.
  2. The firm distributed a private placement memorandum to potential investors even though it did not include certain material facts and relied on flawed methodology for projecting ROI.pointing.jpg
  3. The firm sold an offering in which one of its associated persons was affiliated without adequate supervision of that person.
  4. The firm failed to confirm that certain offering documents were filed with FINRA.
  5. Another associated person participated in an offering away from the company without supervision.
  6. The firm allowed associated persons to send consolidated reports to its customers, but failed to adequately supervise these reports.

This conduct implicates a number of FINRA Rules (i.e., 2010, 3010, 3040 and 5122), and demonstrates that FINRA is looking at many different kinds of conduct when it comes to private placements. Although these types of investments offer firms diverse investment options for their clients, firms must take a step back before taking three forward.

FINRA’s sanction highlights that firms must fully review offerings before approving them and then properly supervise the sale of the offerings and those persons selling the offerings. Otherwise, you will likely get stung for not doing so in your next examination.

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