This was yesterday. $609 BBBillion
FINRA Issues Guidelines Detailing Broker-Deal Obligations Ahead of PIPEs
Posted April 20, 2010 3:20PM PST
The Financial Industry Regulatory Authority issued guidance for FINRA-registered firms about their obligations regarding customer suitability, disclosures, and other requirements for selling private placements. Recent examinations and enforcement actions have revealed a "significant" lack of compliance with such rules, the agency said.
Under FINRA Regulatory Notice 10-22, broker-dealers are required to conduct a reasonable investigation of an issuer and its securities before recommending private placements made under Regulation D of the Securities Act.
In discussing the guidelines, FINRA cited an estimate by the Securities and Exchange Commission that in 2008 companies intended to issue about $609 billion of securities in Regulation D offerings. Reg D offerings are an important source of capital for U.S. businesses, particularly for small ones, FINRA said.
"An increase in investor complaints regarding private placements, as well as SEC actions halting sales of certain private placement offerings, led FINRA to launch a nationwide initiative that involves active examinations and investigations of broker-dealers engaged in retail sales of private placement interests," FINRA CEO Rick Ketchum said in a statement. "That initiative has uncovered misconduct, including fraud and sales practice abuses. While several enforcement actions have been taken and additional investigations are underway, FINRA is taking this opportunity to remind firms of their substantial duties when engaging in the sale of private placement offerings."
Recent problems uncovered by FINRA in Reg D offerings have resulted in firms being sanctioned for providing private placement memoranda and sales materials to investors that contained inaccurate statements or omitted information necessary to make informed investment decisions.
Private placements under Reg D are mostly sold to accredited investors. Investors must have high enough incomes or enough assets to qualify as accredited. But FINRA emphasized that, beyond the asset and income tests, broker-dealers are required to conduct reasonable investigations into whether private placements they recommend are suitable investments for a particular client.
In addition, FINRA said that broker-dealer must ensure that the customer fully understands the risks involved in the investment.
While private placements are exempt from registration requirements, they are governed by the antifraud provisions of federal securities laws, FINRA said.
Broker-dealers offering securities in private placements also must comply with FINRA advertising, supervisory, and record-keeping rules.
Finally, broker-dealers offering securities in Regulation D private placements must adhere to FINRA Rule 2010, requiring just and equitable principles of trade, and FINRA Rule 2020, which prohibits manipulative and fraudulent devices.
FINRA said it has brought three enforcement actions in recent months involving private placement offering violations. Those include a complaint charging McGinn Smith & Co. of Albany, N.Y., and its president with securities fraud in the sales of tens of millions of dollars in unregistered securities; the expulsion of Dallas-based Provident Asset Management from the securities industry for marketing a series of fraudulent private placements in a Ponzi scheme; and fines totaling $750,000 against Pacific Cornerstone Capital of Irvine, Calif., and its former CEO for failing to include complete information in private placement offering documents and marketing material, as well as for advertising violations and supervisory failures.
Source: Press Release
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