by Howard Haykin

Reef Securities and its president were sanctioned by FINRA for failing to notify investors in a timely manner of their right to rescind (cancel) their participation in an oil and gas ("O&G") limited partnership, following the update and revision of the general partners’ audited balance sheet and the fund prospectus.

FINRA FINDINGS.    As the broker-dealer selling this O&G drilling and income fund limited partnership, Reef Securities was obligated to provide all fund investors with any revised prospectus, accompanied by a notice offering each investor an opportunity to confirm or rescind his or her investment decision.

Yet, when the general partners’ balance sheet was updated and the prospectus was revised, the firm, acting through its president and the issuer, decided not to send the revised prospectus and notice to the vast majority of fund investors. It was only when FINRA discovered the ‘oversight’ and raised the issue, did the firm proceed to send the revised prospectus and notice to the remaining investors - as required by the original prospectus. Several of those remaining 127 investors opted to rescind their investments.

To settle FINRA charges, the firm agreed to pay a $40K fine; the firm president agreed to pay a $5K fine and to not serve in a principal capacity for 4 months.

FINANCIALISH TAKE AWAY.    Without knowing the size of the fund offering or the commissions generated by its sales, it's difficult to gauge whether FINRA's sanctions fit the "crime." Yet, in some ways I'm tempted to say the respondents got off relatively easy. Why? Because if we take FINRA’s statement of the facts and circumstances in this case at face value, it would appear that the actions of the respondents were:

• deliberate; 
• in blatant violation of (the terms and conditions) of the prospectus; and,
• in violation of their obligations to their customers, the fund investors.

Some people might argue that investors don't bother to read the financial statements or fund prospectuses - original,revised or otherwise. Nevertheless, the broker-dealer has an obligation - no, a requirement - to provide all relevant and material information. Who's to say whether an astute investor might 'stand up and take notice', promting him or her to ask what's new or changed about the updated balance sheet and revised prospectus? But if they are never provided copies - or even know that there are new documents - then that investor would not even know to ask.

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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015043469001.