Articles Posted in Broker/Dealer

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) 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 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.

Nathanial Ponn – South Florida Common and Preferred Stock Fraud and Misrepresentation Litigation and Arbitration Attorney

Securities and Exchange Commission v. Nathanial D. Ponn, Civil Action No. 16-10624-GAO (D. Mass. filed March 31, 2016)

The Securities and Exchange Commission recently announced fraud charges against Massachusetts resident Nathanial D. Ponn for engaging in a scheme to defraud numerous broker-dealers over more than seven years.

Market Volatility – Margin Accounts – Margin Calls, Margin Abuse and Account Deficits Especially Relating to Option Transactions – Boca Raton, Florida Margin Deficit FINRA Arbitration Attorney:

There is a substantial difference between the risks and rewards arising from the use of a margin account as opposed to a cash account. This is especially true when one is exposed to the type of volatility that the markets have recently experienced. It is not uncommon in these types of volatile and fast moving markets, especially when one is on the wrong side of a option position, that all of the account’s equity is lost but that an account deficit might result. In such a situation, it is important to immediately consult with an experienced attorney in such matters. This is especially true if your broker is demanding that the client payoff a deficit in the account.

For the notice investor, the below discussion generally describes the difference between a cash and margin account.

Popular Securities, Inc. n/k/a Popular Securities, LLC – Boca Raton, Florida Puerto Rico Bond and Closed-End-Fund Over Concentration and Unsuitablity FINRA Arbitration Attorney:

The Financial Industry Regulatory Authority, Inc. (FINRA) is a self-regulatory authority assigned the responsibility, by the Securities and Exchange Commission, to license, regulate and discipline securities broker/dealers and their employees, including account executives. In the event that FINRA elects to institute an enforcement action, firms and licensed individuals have the responsibility to reflect such action on their U-4 and/or U-5 filings, which can be viewed on the FINRA website under the broker-check section of the site or by viewing the monthly disciplinary information also provided on the FINRA site.

The monthly disciplinary information is referenced on the FINRA site generally in alphabetical order. This post relates to the following company or individuals. If the reader would like to review the entire FINRA release or the broker-check information concerning this matter, you can follow these highlighted links:

Oriental Financial Services Corp. – South Florida Unsuitable Puerto Rico Bond Investment FINRA Arbitration Attorney:

The Financial Industry Regulatory Authority, Inc. (FINRA) is a self-regulatory authority assigned the responsibility, by the Securities and Exchange Commission, to license, regulate and discipline securities broker/dealers and their employees, including account executives. In the event that FINRA elects to institute an enforcement action, firms and licensed individuals have the responsibility to reflect such action on their U-4 and/or U-5 filings, which can be viewed on the FINRA website under the broker-check section of the site or by viewing the monthly disciplinary information also provided on the FINRA site.

The monthly disciplinary information is referenced on the FINRA site generally in alphabetical order. This post relates to the following company or individuals. If the reader would like to review the entire FINRA release or the broker-check information concerning this matter, you can follow these highlighted links:

Citigroup Global Markets Inc. – South Florida Broker/Dealer and Account Executive Breach of Fiduciary Duty FINRA Arbitration Attorney

The Financial Industry Regulatory Authority, Inc. (FINRA) is a self-regulatory authority assigned the responsibility, by the Securities and Exchange Commission, to license, regulate and discipline securities broker/dealers and their employees, including account executives. In the event that FINRA elects to institute an enforcement action, firms and licensed individuals have the responsibility to reflect such action on their U-4 and/or U-5 filings, which can be viewed on the FINRA website under the broker-check section of the site or by viewing the monthly disciplinary information also provided on the FINRA site.

The monthly disciplinary information is referenced on the FINRA site generally in alphabetical order. This post relates to the following company or individuals. If the reader would like to review the entire FINRA release or the broker-check information concerning this matter, you can follow these highlighted links:

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