Broker-dealer Ordered to Pay Restitution for Sale of Unregistered Securities
Yoomi Lee | Bloomberg Law
The Financial Industry Regulatory Authority (FINRA) announced that broker-dealer Equity Services, Inc. (ESI) submitted a Letter of Acceptance, Waiver and Consent to settle charges that it sold unregistered and unsuitable securities to five retail investors. FINRA asserted that ESI violated NASD Rules 2310(Suitability), 3010 (Supervision), 2110 (Standards of Commercial Honor and Principles of Trade), and IM-2310-2 (Fair Dealing with Customers). Without admitting or denying the allegations, ESI accepted censure and consented to pay a $50,000 fine and $163,815 in restitution.
According to FINRA, ESI participated in a private offering of certain corporate notes, which were not registered with the Securities and Exchange Commission, but were sold pursuant to the private placement exemption provided by Rule 506 of the Securities Act of 1933 (Securities Act). One of ESI’s registered representatives, however, allegedly sold the unregistered notes totaling $251,000 in six private placement transactions to five investors who did not meet the definition of an “accredited investor,” as defined by Regulation D, or capable of evaluating the risks and merits of the prospective investment. This was based on the information that the customers’ filled out on ESI’s New Business Forms, which included, net worth, annual income, investment objectives, risk tolerance, and the source of funds for the purchase of a particular security. Moreover, FINRA charged that because the securities at issue also were not exempt under Securities Act Section 3(a), ESI acted in contravention of Section 5 thereunder. Finally, FINRA alleged that ESI failed to enforce its supervisory procedures as its registered principals did not closely scrutinize the proposed private placement transactions to ensure suitability.
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