by Howard Haykin

A New Lenox, IL-based broker-dealer (with just 2 registered persons) agreed to pay a $15K fine to settle FINRA charges that it failed to make required disclosures (financial interest and beneficial ownership) in research reports. 

Between September 2012 and November 2015, the broker-dealer published 79 research reports, that were prepared by the firm’s CEO/CCO.

• In 14 initial research reports, the firm included only a generic disclaimer as to who at the firm might hold, or transact in, securities or derivatives of covered companies referred to in its research reports.
• In 65 “updates” to these 14 initial research reports, the firm did not include any financial interest disclosures because it did not regard the "updates" as research reports. However, FINRA disagreed with the firm's stance, and noted that the "updates" were, in fact, "research reports."
• During the period, the CEO/CCO held long positions in each of the 14 companies in accounts held at the broker-dealer.

As required by NASD Rule 2711(h)(1)(A), … the firm should have disclosed in each of its published research reports: (i) the CEO/CCO’s financial interest, if any, in the equity securities of the company that was the subject of the report; and, (ii) the nature of the CEO/CCO’s financial interest (including, without limitation, whether it consisted of any option, right, warrant, future, long or short position).

Between November 2012 and May 2015, the broker-dealer failed to prevent the CEO/CCO from effecting 8 purchases in research analyst accounts of securities of companies that were the subject of his research reports, during the applicable restricted period.

As required by NASD Rule 2711(h)(1)(B), … the firm should have disclosed in each of its published research reports: (i) if the firm or its affiliates beneficially owned 1% or more of any class of common equity securities of the subject of the report; and, (ii) this beneficial ownership as of the end of the month immediately preceding the date of publication (or the end of the second most recent month if the publication date was less than 10 calendar days after the end of the most recent month).

Based on the foregoing violations, the broker-dealer also failed to establish, maintain and enforce adequate Written Supervisory Procedures (WSPs) to supervise the activities of its associated persons as it pertained to the firm’s compliance with NASD Rule 2711 (Research Analysts and Research Reports), which was superseded by FINRA Rule 2241.

This case was reported in FINRA Disciplinary Actions for December 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016047929401.