Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, April 20, 2010

FINRA Releases Guidance on Reg D Offering Duties

FINRA announced the publication of guidance for FINRA-registered firms about their obligations regarding customer suitability, disclosures and other requirements for selling private placements to customers.  FINRA Regulatory Notice 10-22 reinforces and details a broker-dealer's obligation to conduct a reasonable investigation of an issuer and its securities that it recommends in offerings made pursuant to Regulation D under the Securities Act of 1933, also known as "private placements." The Notice also highlights private placement red flags and supervisory requirements, and suggests practices to help ensure that firms adequately investigate the private placements that they recommend.

 According to a recent estimate by the Securities and Exchange Commission (SEC), in 2008, companies intended to issue approximately $609 billion of securities in Regulation D offerings.  Private placements under Regulation D are usually sold to "accredited" investors and a limited number of non-accredited investors. While accredited investors must meet certain income or asset tests, the Notice emphasizes that a broker-dealer's suitability obligations require it to conduct a reasonable investigation whenever it makes a recommendation in a private placement under Regulation D.

Recent problems uncovered by FINRA in Regulation D offerings have resulted in firms being sanctioned for providing private placement memoranda and sales materials to investors that contained inaccurate statements or omitted information necessary to make informed investment decisions.

 FINRA has brought three enforcement actions in recent months involving private placement offering violations. They include a complaint charging McGinn, Smith & Co. of Albany and its president with securities fraud in the sales of tens of millions of dollars in unregistered securities; the expulsion of Dallas-based Provident Asset Management for marketing a series of fraudulent private placement offered by an affiliate in a massive Ponzi scheme; and, fines totaling $750,000 against Pacific Cornerstone Capital, Inc. of Irvine, CA, and its former CEO for failing to include complete information in private placement offering documents and marketing material, as well as for advertising violations and supervisory failures.

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