What are Some of FINRA’s Disciplinary Actions?
When the broker dealer fails to meet the requirements of a reasonable investigation, they are subject to disciplinary action. That is not to say that they have failed to do any type of investigation. In fact, many perform a general or cursory investigation, but it is not deemed adequate enough by the FINRA.
What is an Inadequate Investigation?
One of the most common issues resulting in disciplinary action is reliance on the accuracy of information provided in a PPM or other offering documents. Additional actions that typically give rise to disciplinary action may include broker dealers’ failure to review issuer financial statements and their failure to conduct site visits or to interview key personnel to ask pivotal questions.
Other examples of failure to perform an adequate investigation include the following:
- No background information on the officers;
- No third party due diligence was used in the investigation;
- Red flags were not investigated and documented;
- No written policies were in place to organize the investigation;
- No person was specified to carry out the investigation;
- Lack of oversight for the investigation;
- Too many aspects of the investigation were delegated to one person.
One example of a red flag would be an issuer who is experiencing financial problems or a high default rate on the loan portfolio.
Disciplinary Actions by FINRA
Whenever there is a report from an investor or other concerned party, FINRA will conduct its own investigation into allegations to determine if due diligence was performed before the offering was recommended. If the due diligence is deemed to be inadequate, the agency will usually be fined, in addition to paying restitution to the affected client. The president of the firm may even be barred from association with a broker dealer.
There have been many such disciplinary cases from FINRA resulting from allegations of due diligence rules violations. In many cases, the broker dealers simply read the issuer’s PPM and conducted very limited internal due diligence without input or evaluation from outside due diligence experts.
Broker dealers can avoid having allegations of an inadequate investigation before recommending an offering by utilizing third party due diligence or by a very thorough and careful internal due diligence. Failure to conduct a reasonable investigation can result in large fines and an inability to act as a broker dealer for a certain period.