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Regulatory Sanctions

Private Placements: Flunking the Basics

December 6, 2018

By Howard Haykin


Conducting due diligence and verifying the accreditation of every participating customer are basic obligations of a placement agent for a Regulation D offering.


A Minnetonka, MN-based firm agreed to pay a nominal fee and certify that it has enhanced its deficient supervisory system to settle FINRA charges that it failed to fulfill its regulatory and supervisory obligations pertaining to private placements by ... (i) not conducting and documenting reasonable due diligence; and, (ii) not obtaining and recording required customer information. 


DUE DILIGENCE FAILURES.    Between March 2015 and December 2015, the broker-dealer served as a placement agent for a Regulation D private placement offering of securities that raised $2,516,000 – most of which was sold by one of the firm’s registered reps to 24 accredited investors. Yet, after agreeing to participate as a placement agent in the offering, the firm failed to conduct and document a reasonable due diligence investigation. In particular, the firm failed to recognize and investigate contradictory and potentially confusing statements made in the Private Offering Memorandum about material terms of the offering.


Based on the above, the firm violated FINRA Rule 3110 (Supervision). 


CUSTOMER ACCOUNT INFORMATION.    Between June 2012 and October 2015, the firm used a New Account Form that requested each of the required items listed in SEC Rule 17a-3(a)(17) and gathered other specific information with respect to customers' investment profiles. However, the firm failed to obtain and record required information for many of the customers who purchased interests in private placements. Making matters worse, the firm was cited in 2013 for customer account information deficiencies - as a result of a previous FINRA examination.


Based on the above, the firm violated SEC Rule 17a-3 and FINRA Rule 4511 (Books and Records), and  FINRA Rule 3110 (Supervision).



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

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043584501.