FINRA Expels First Broker Dealer Under Regulation BI
FINRA
Brief Introduction
A New York Firm was expelled by FINRA on May 12th related to multiple Regulation BI violations. This would be the first time FINRA has expelled a Firm based on violations of Regulation BI. The Firm’s CEO and Co-Owner was suspended for nine months, with an additional three-month suspension from principal capacities, and fined $50,000.
What Happened?
- Between January 2018 and December 2021, the Firm omitted material information and made multiple material misrepresentations involving the sale of private placement offerings for risky pre-IPO securities.
- The Firm also reported inaccurate information to customers about the amount of compensation through commissions the Firm received, failing to disclose almost $2 million in compensation.
- FINRA argues that the Firm had absolutely no reasonable basis to offer these securities to customers.
- Between 2016 and May 2019, the Firm churned nine accounts causing losses of over $465,000 and more than $350,000 in fees. One customer had a cost-to-equity ratio of more than 103%.
Vigilant’s Conclusion
It is vital that Firms have proper supervision that identifies red flag behavior and takes prompt action.
FINRA emphasized that material misstatements and omissions when selling securities can have significant consequences, especially if FINRA finds a history of egregious sales practices. Disclosures to customers should be both complete and fair, but also transparent about conflicts of interest.
If you have any questions about this recent FINRA action, or would like to learn more about our Broker Dealer Solutions, please reach out to us for further assistance.