Remote Office Supervision

This post is designed to provide a summary of various rules and regulations requiring the establishment and enforcement of supervisory responsibilities over remote activities of a firm’s business activities.  It is being presented for educational purposes only and thus, is not designed to be complete in all material respects.  If you have any questions, you should contact a qualified professional.

Introduction

Recently, the Financial Industry Regulatory Authority (FINRA) announced a settled enforcement action against Alan Scot Feigenbaum (CRD #3132230, Boca Raton, Florida).  In this action, an AWC was issued in which Feigenbaum was assessed a deferred fine of $15,000 and suspended from association with any FINRA member in all capacities for five months. Without admitting or denying the findings, Feigenbaum consented to the sanctions and to the entry of findings that he exercised discretion without written authority in customer accounts. The findings stated that Feigenbaum entered orders on a discretionary basis for trades in customer accounts, including those of senior customers. Although the customers permitted Feigenbaum to exercise discretion and had not complained, none of them had given him written authorization to do so and neither of his member firms had approved the accounts as discretionary. Feigenbaum exercised discretion without written authorization despite having previously received a written letter of caution from one of his supervisors for similar misconduct. In addition, Feigenbaum inaccurately stated that he had not exercised discretion in any customer account on compliance questionnaires. The findings also stated that Feigenbaum caused one of his firms to create and maintain inaccurate books and records through his use of an unauthorized email account and by mismarking orders as unsolicited. Feigenbaum had an approved outside business through which he provided accounting and tax services to clients. Feigenbaum communicated with certain of his brokerage customers, including seniors, regarding securities-related matters over the email account he used for his tax preparation business. The content of the communications included investment recommendations. Because the firm was unaware of and had not authorized use of the email account, it was unable to supervise, preserve, or retain the securities-related emails. Furthermore, Feigenbaum inaccurately stated on compliance questionnaires that he had conducted all business-related communication over his firm email account. Feigenbaum also marked trades in a particular exchange-traded product in customer accounts as unsolicited, when in fact he had solicited the transactions.  The suspension is in effect from December 6, 2021, through May 5, 2022. (FINRA Case #2019062006601)

At the Boca Raton Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

Recently, the Financial Industry Regulatory Authority (FINRA) issued an Order Accepting Offer of Settlement in which Della Rosa was barred from association with any FINRA member in all capacities.  Mr. Della Rosa’s last FINRA association was with Corinthian Partners, LLC.  Without admitting or denying the allegations, Della Rosa consented to the sanction and to the entry of findings that he failed to provide information and documents and also failed to appear for on-the-record testimony requested by FINRA in connection with its investigation of his sales practices. FINRA requested that Della Rosa provide certain information and documents relating to, inter alia, his responsibilities at his member firm, his customer accounts and communications with customers. (FINRA Case 2020065714602)

At the Boca Raton Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

The following post provides a general summary of what every investor needs to know about the liquidation of an investment fund. Please keep in mind that this information is being provided for educational purposes only and is not designed to be complete in all material respects. If you have any questions concerning this subject matter, you should contact a qualified professional.

What is a fund liquidation?

A fund liquidation occurs when a fund closes down its operations completely, sells off its assets and generally distributes substantially all of its assets in cash to its shareholders. Fund liquidations may occur for a variety of reasons, including poor performance, a decline in assets under management, lack of investor interest, and more.  A liquidation is different than a merger where one fund acquires the assets of another fund. In a merger, shareholders in the “acquired” fund receive shares of the new, “acquiring” fund rather than the proceeds from selling off fund assets.  During a liquidation, all fund assets are distributed to shareholders.

The below referenced FINRA Enforcement Action provides examples of what would constitute a negligent misrepresentations and omissions in any offering.  In this particular circumstance, it related to the offering of notes of the parent company of WestPark Capital.

WestPark Capital, Inc. (CRD #39914, Los Angeles, California) and Richard Alyn Rappaport (CRD #1885122, Los Angeles, California) November 22, 2021 – An AWC was issued in which the firm was censured, fined $250,000, ordered to offer rescission to customers who invested in notes of the firm’s parent company and have not yet been repaid the full amount of their outstanding principal investment that totaled $1,777,316, required to review and revise, as necessary, its policies, procedures, processes, controls and systems concerning FINRA Rule 3170, and required to extend the time during which it will comply with the requirements of FINRA Rule 3170 for an additional six months. Rappaport was fined $30,000, suspended from associating with any FINRA member in all capacities for four months and suspended from associating with any FINRA in any principal capacity for 15 months. The suspensions are to run concurrently.  Without admitting or denying the findings, the firm and Rappaport consented to the sanctions and to the entry of findings that they made negligent misrepresentations and omissions of material facts in offering documents provided to customers in connection with the sale of promissory notes issued by the firm’s parent company. The findings stated that the offering documents failed to disclose that the parent company had defaulted on a $1 million line of credit and had defaulted on successive forbearance agreements with a bank, or that the bank had sued the parent company and Rappaport. Similarly, the offering documents failed to disclose that the parent company had net operating losses each year from 2012 through 2016. In addition, the firm sent prospective investors a misleading historical analysis document, created by Rappaport, that claimed to show investors what they would have received as a return on the notes if the notes had been purchased in 2006 and held through 2010. In fact, the return displayed did not explain that the calculation was based upon hypothetical returns from distinct investments and not any actual return from the notes. The firm, through Rappaport and other firm representatives, also represented to prospective investors that they would be entitled to share in pro-rata distributions of equity and profits from the firm. In fact, the noteholders were entitled to share in pro-rata distributions of equity and profits from the parent company, not the firm, which at times had higher profits and greater equity producing opportunities than the parent company. Moreover, the firm, through Rappaport and other firm representatives, failed to disclose material conflicts of interest. The firm and Rappaport failed to disclose to prospective investors that Rappaport had sole discretion as to whether the parent company’s subsidiaries would make distributions to the parent. By virtue of the foregoing, the firm acted in contravention of Sections 17(a)(2) and (3) of the Securities Act of 1933. The findings also stated that the firm and Rappaport failed to supervise the parent company offerings. The firm, acting through Rappaport, failed to take reasonable steps to ensure that firm representatives who solicited investments in the notes understood the terms of the notes. The firm and Rappaport did not provide reasonable training to registered representatives about the notes and did not respond reasonably to questions from customers that raised red flags that customers lacked accurate information about the notes. The findings also included that the firm violated FINRA Rule 3170 (the “Taping Rule”). The firm’s recording system allowed representatives, at their discretion, to end recording at any time, including before a call was complete.  The firm became aware that a representative who sold the parent company offerings terminated at least three recordings before the calls were completed, including a recording of a call with a noteholder, yet the firm did not take any action to ensure that the representative at issue, or other firm representatives, recorded future calls in their entirety. In addition, the firm’s special written procedures concerning the Taping Rule were not reasonably designed. The special written procedures for supervisory review of calls provided no meaningful guidance regarding the review process, frequency of review, or methods of escalating information identified during review. The firm also failed to enforce the provision in its special written procedures requiring the firm to test its taping system to ensure that recordings were properly made and retained. As a result, the firm failed to detect that recordings were deleted prematurely.  The suspension in all capacities is in effect from December 20, 2021, through April19, 2022, and the suspension in any principal capacity is in effect from December 20, 2021, through March 19, 2023. (FINRA Case #2017054381603)

CONTINGENCY OR BEST EFFORTS OFFERING:

Securities and Exchange Act Rules 10-b9 and 15c2-4 contain requirements that must be satisfied in “Contingency” or “Best Efforts” offerings.  FINRA (the Financial Industry Regulatory Authority) has provided guidance to broker/dealers regarding the requirements of these rules and to remind broker-dealers of their responsibility to have procedures reasonably designed to achieve compliance with these rules.

Broker-dealers that participate in best efforts public and private securities offerings that have a contingency (i.e., an underlying condition or qualification that must take place by a specified date prior to the issuer taking possession of the offering proceeds) must safeguard investors’ funds they receive until the contingency is satisfied. If the contingency is not met, broker-dealers must ensure that investors’ funds are promptly refunded.  There are various contingencies that might need to be satisfied in addition to meeting a subscription amount.

The below FINRA Enforcement Action provides a summary of certain issues that broker/dealers must take into consideration when involved in a contingency or best efforts offering.

Newbridge Securities Corporation (CRD #104065, Boca Raton, Florida) and Bruce Howard Jordan (CRD #1223556, Boca Raton, Florida):

Recently, FINRA announced that a Letter of Acceptance, Waiver and Consent (AWC) was issued in which the Newbridge Securities Corporation was censured and fined $30,000 and Mr. Jordan was fined $5,000 and suspended from association with any FINRA member in any principal capacity for one month.

The Neverending Story of Fraudulent Precious Metals Scams

For quite sometime, we have attempted to bring to the attention of the investing public, especially seniors, the pitfalls that an investor is exposed to when investing in precious metals of all kinds.  The primary area of abuse that retail investors is exposed relates to the sale and purchase of gold and silver bullion and coins.  This post relates to a case involving bullion.  On September 25, 2020, the Commodity Futures Trading Commission (CFTC) and 30 state regulators that are members of the North American Securities Administrators Association filed a joint civil enforcement action against two precious metals dealers and their companies for perpetrating an alleged $185 million fraudulent scheme.

The complaint charges TMTE, Inc., d/b/a Metals.com, Chase Metals, LLC., Chase Metals, Inc. (collectively Metals.com) Barrick Capital, Inc. and its principals, Lucas Asher a/k/a Lucas Thomas Erb a/k/a Luke Asher and Simon Batashvilli with an ongoing nationwide fraud.  According to the complaint, from at least September 1, 2017 to the date of the filing of the action, the defendants fraudulently solicited and received over $185 million in customer funds, including more than $140 million in retirement savings, from at least 1,600 persons throughout the United States for the purpose of purchasing precious metals bullion.

In our digital era, many tasks that used to require face-to-face interaction have moved online. Take banking. Driving to the bank and waiting in line to speak to a teller is no longer necessary for many transactions.

Online banking is the way of the future, and many senior citizens are following suit. However, our elderly loved ones face a higher risk of suffering online scams. If your mother, father or another relative who is a senior citizen has made the jump to online banking, this is how you can help them avoid fraud.

Why seniors are at risk

When your stockbroker takes your money to invest on your behalf, he or she must follow certain rules and regulations. Investments have regular ups and downs as the market fluctuates. Therefore, you may have to look very closely at your portfolio’s performance, along with charges and fees, to determine that your stockbroker has done anything wrong. The bottom line is that your broker owes you a fiduciary duty.

What is a fiduciary duty?

You may have heard the term fiduciary duty used in many different contexts. Many people who act in a role where other people entrust them with their assets or funds must abide by a fiduciary duty. Examples include trustees of a trust, the personal representative of a probated estate and officers of a corporation. All of these people owe a duty of loyalty and care to the people or entities they represent. They are supposed to act in a reasonable manner on behalf of the entity, treating the assets the way the owner would treat them.

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