The Financial Industry Regulatory Authority (FINRA) recently fined Colorado Financial Service Corporation (Colorado Financial) concerning allegations that the firm violated NASD Rule 3010, and FINRA Rule 2010, among other violations, by failing to establish, maintain, and enforce supervisory procedures reasonably designed to ensure compliance with the securities rules pertaining to the supervision of electronic communications and due diligence review of new private placement offerings.
Colorado Financial is based in Centennial and became a FINRA member in 2000. Currently, there are approximately 82 persons registered with Colorado Financial in thirty six branches. The firm’s primary lines of business include investment banking, private placements, mutual funds, and variable life insurance or annuities.
FINRA alleged that Colorado Financial did not establish, maintain, and enforce adequate procedures to supervise and review electronic communications for the period of February 2009 to September 2012. According to FINRA, Colorado Financial only manually reviewed between .1% and 1.5% out of approximately 325,900 archived e-mails during the period of January 2012 to September 2012. FINRA found that Colorado Financial’s written supervisory procedures relating to electronic communications did not indicate who at the firm was responsible for the supervisory review, how the review would be conducted and documented, or establish protocols for escalating regulatory issues in e-mails.
Brokerage firms are responsible for conducting due diligence securities recommended by the firm. The due diligence rule is heightened when the investment is a private placement or other type of non-public offering. In the context of a Regulation D offering, FINRA has stated that a critical part of determining suitability is the obligation to conduct a reasonable investigation of the issuer. That is, brokerage firms are required to exercise a high degree of care in investigating and independently verifying an issuer’s representations and claims before recommending the investment to clients.
Here, FINRA found that between February 2009, and September 2012, the Colorado Financial did not establish, maintain, and enforce adequate systems to conduct due diligence into private placements and non-traded REITS. FINRA found that Colorado Financial’s written supervisory procedures did not describe the steps to be taken to conduct due diligence or the records to be created in order to meet their due diligence obligations.
The attorneys at Gana LLP are experienced in representing investors concerning unsuitable investments in private placements and non-traded REITs. Our consultations are free of charge and the firm is only compensated if you recover.