A broker-dealer and its principal settled FINRA charges for negligent misrepresentations, omissions and supervisory failures concerning the offering of promissory notes issued by its parent company.
In a Letter of Acceptance, Waiver, and Consent, FINRA found that the broker-dealer's principal made negligent misrepresentations and omissions in the sale of offerings in violation of FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"). The broker-dealer and its principal purportedly misled investors through (i) offering documents that failed to disclose defaults by the firm on certain lines of credit and forbearance agreements, (ii) a "Historical Analysis" document, (iii) incorrect details of investors' pro rata distributions of equity and profits, saying that they would come from the broker-dealer, rather than the parent company, and (iv) failure to disclose material conflicts of interest.
Additionally, FINRA determined that the broker-dealer and its principal made supervisory failures in violation of FINRA Rule 3110(a) ("Supervisory System"), Rule 2010, and Rule 3170 ("Tape Recording of Registered Persons by Certain Firms"). First, FINRA claimed that the broker-dealer failed to properly supervise its registered representatives and provide them with reasonable training. Second, FINRA found that the broker-dealer's telephone recording system was insufficient, given that (i) representatives could end recordings at any times, even before a call was over, (ii) there was no meaningful guidance for supervisors to review calls, and (iii) there was failure to enforce special written procedures requiring proper recordings.
To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $250,000 fine, (iii) an offer of rescission to the holders of the notes in controversy and (iv) review and revise its supervisory systems and procedures. The principal agreed to (i) a four-month suspension from association with any FINRA member, (ii) a 15-month suspension from association with any FINRA member in all principal capacities, and (iii) a $30,000 fine.
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