Investor complaints regarding private placements – including those linked to Medical Capital Holdings – have prompted several state and federal investigations into the private placement sales practices of broker/dealers across the country. In many instances, the investigations have revealed a significant lack of regulatory compliance.
In response, the Financial Industry Regulatory Authority (FINRA) has published new guidance for FINRA-registered firms about their obligations when it comes to customer suitability, disclosures and other requirements for selling private placements to customers. Specifically, FINRA Regulatory Notice 10-22 reinforces and details a broker/dealer’s obligation to conduct a reasonable investigation of an issuer and the securities that are recommended in its offerings.
The Notice also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that firms adequately investigate the private placements that they recommend.
Private placements under Regulation D are usually sold to “accredited” investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, the Notice emphasizes that a broker/dealer’s suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D.
“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,” said FINRA Chairman and CEO Rick Ketchum, 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,” he said.
FINRA has brought three enforcement actions in recent months involving private placement offering violations. The actions include a complaint charging McGinn, Smith & Co. 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 for marketing a series of fraudulent private placement offered by an affiliate in a massive Ponzi scheme; and fines totaling $750,000 against Pacific Cornerstone Capital 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.