[ by Howard Haykin ]

A Houston-based full service broker-dealer, with 340 registered individuals, was charged by FINRA with distributing incomplete and misleading sales material related to investing in hedge funds. 

Relevant Disciplinary History. In early 2008, Sanders Morris Harris, Inc. accepted an AWC and agreed to a $450,000 fine in connection with its now former prime brokerage operations.  The firm also agreed to retain the services of an outside consultant to review its systems and procedures applicable to its prime brokerage operations. Among other things, FINRA charged the firm with: 

• inadequate systems and procedures re: its hedge fund, prime brokerage services, and soft dollar activities;
• improper soft dollar payments of $325K; 
• inadequate supervision of certain employees;
• disseminating hedge fund sales materials that were either not approved or did not include proper risk disclosures;  
• email and IM retention violations; and,
• for permitting an employee to act in a capacity for which he lacked proper registration.

Current FINRA Findings and Allegations. Sanders Morris Harris, Inc. allegedly supplied its Registered Reps ("RRs") with 9 pieces of hedge fund advertising material that they distributed to retail customers.  But the information in the material was deficient:

• it failed to disclose risks associated with investing in hedge funds.
• it contained charts or graphs that were unclear and omitted material information.
• it contained misleading statements that were promissory of positive future returns.
• it implied that negative returns could be avoided and/or implied that past performance is indicative of future positive returns.

Further, 2 of the 9 advertising pieces were distributed to retail customers without principal review.

FINRA Sanctions. For having allegedly violated NASD Conduct Rules 2210 and 2110 (before 12/15/08) and and FINRA Rule 2010 (after 12/14/08), Sanders Morris agreed to a $75K fine.  This case was reported in Disciplinary and Other FINRA Actions for September 2012.

For further details, go to:   [FINRA AWC #2009018184601].