by Howard Haykin

VFG Securities agreed to a $75K fine to settle FINRA charges that it failed to supervise as “private securities transactions” the investment advisory activities of 2 registered representatives who were dually registered with the firm and an affiliated registered investment advisor. The firm also failed to maintain these transactions on its books and records.

BACKGROUND.    Culver City, CA-based VFG Securities has been a FINRA member since August 1985. The firm conducts a general securities business, with 12 registered reps and 6 registered branch offices.

FINRA FINDINGS.    Two VFG registered reps participated in approximately 150 private securities transactions (“PST’s”) through a registered investment advisor (“RIA”) that was affiliated with VFG. The registered reps had previously disclosed to VFG their association with the RIA, which the firm approved. All told, the 150 PST’s totaled around $9.6 million, and the registered reps received advisory fees from the RIA for these investments.

Unfortunately, VFG Securities treated investment advisory activities through its affiliated RIA as outside business activities and not as PST’s. As a result, VFG did not supervise these transactions as PST’s; nor did it maintain these transactions on its books and records.

Also, by treating the registered reps’ investment activities through the RIA as outside business activities rather than as PST’s, VFG failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with NASD Rule 3040, and thereby violated NASD Rule 3010(a).

NASD Rule 3040(c) provided that if an associated person "has received or may receive selling compensation" in connection with the sale of a [PST], and the member firm approves the transaction, then the member firm must supervise the transaction and record it on its own books and records "as if the transaction were executed on behalf of the member.''

As explained in NASD Notice to Members 94-44, these requirements apply "to all investment advisory activities conducted by [individuals dually registered as registered representatives and registered investment advisors] that result in the purchase or sale of securities by the associated person's advisory clients, with the exception of their activities on behalf of the member."

NASD Rule 3010(a) required member firms to establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations.

FINANCIALISH TAKE AWAYS.    So, VFG Securities overlooked its obligations to supervise and maintain records on the private securities transactions handled by its 2 registered reps. While there’s some logic to this position - because the PST’s were conducted through an affiliated RIA, and the reps were dually registered with the affiliated RIA - FINRA is quick to point out that, in NtM 94-44, PST requirements apply to investment advisory activities.

To date, countless numbers of broker-dealers and their registered principals have been dinged by FINRA for failing to properly supervise PST’s. And the list continues to grow because firms seemed stumped by the rules.

Here are some cases recently posted to Financialish.com (hope they're of help):

• Another B/D Sanctioned for Not Knowing an 'OBA’ from a ‘PST’  (6/28/17)
• Another Registered Principal Gets Dinged, Takes Reputational Hit Over Private Securities Transactions  (7/13/17)
• FINRA Sanctions for Undisclosed OBA’s and PSTs  (6/28/17)

This case was reported in FINRA Disciplinary Actions for August 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014038997601.