Latest Disciplinary Actions Show FINRA is Serious

Posted on October 16th, 2014 at 10:55 AM

From the Desk of Jim Eccleston at Eccleston Law Offices:

New rules relating to communications with the public became effective in 2013.  Recent disciplinary actions show that FINRA (the Financial Industry Regulatory Authority) is serious about enforcing them.  Let’s examine what the rule requires and how FINRA is applying the rule in its enforcement cases.

FINRA Rule 2210 requires all firm communications to be based on principles of fair dealing and good faith, to be fair and balanced, and to provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service.  The rule prohibits a firm from omitting any material fact or qualification if the omissions, in light of the context of the material presented, would cause the communication to be misleading.

 FINRA Rule 2210 likewise prohibits a firm from making any false, exaggerated, unwarranted or misleading statement or claim in any communication, and prohibits the publication, circulation or distribution of any communication that the firm knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading. The rule expressly prohibits promissory statements or claims.  FINRA requires firms to ensure that statements are not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits.  Further, FINRA also requires that all communications must be consistent with the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield inherent in investments.

Finally, and importantly, FINRA requires firms to consider the nature of the audience to which a communication will be directed, and to provide details and explanations appropriate to the audience.

Recent disciplinary actions show that FINRA is serious about enforcing new Rule 2210.  For example, in a settled matter involving Bruce A. Lefavi Securities, Inc. and Bruce A. Lefavi, FINRA disciplined the firm and the individual for several radio show, book, website, Facebook page and billboard advertising and communications violations.  Among other things, all of the radio shows “contained exaggerated, misleading, promissory and/or unwarranted statements, and failed to provide any discussion of the associated risks, limitations, or costs of the products or strategies discussed.”  Some of the radio shows contained improper performance projections. 

FINRA also faulted certain handouts that were posted to a website and sent to individuals who called into the radio show.  The handouts provided exaggerated, misleading, promissory and/or unwarranted statements.  One handout failed to provide a complete comparison between public real estate investment trusts (REITs) and non-traded REITS.

Turning to the book authored by Lefavi, FINRA found that copies of the book were given to clients, prospective clients, callers to the radio show, visitors to Lefavi’s Facebook page and sold to the general public.  The problem was that certain chapters of the book discussed registered investments, both generally and specifically.  That meant that those chapters should have been filed with FINRA’s advertising department, which they were not.  Moreover, the book contained exaggerated, misleading, promissory and/or unwarranted statements and claims, omissions of material information, and incomplete comparisons. 

Finally, FINRA took issue with the Facebook page and billboard advertising.  FINRA determined that the Facebook page was not approved prior to use.  Two billboards failed to disclose the firm name and the relationship between the firm and the registered representative, Lefavi.  Additionally, both billboards used false, exaggerated, unwarranted and/or misleading statements and claims.

Two other disciplinary actions demonstrate similar resolve.  In a settled matter involving Source Capital Group, Inc. and Russell William Newton, FINRA found that the firm, through its branch office manager whom Russell Newton was responsible for supervising, sold or caused the sale of investments managed by an entity without adequately disclosing material information to investors.  The findings were that at times, the entity gave money to the branch office manager, which he then used to pay the firm’s brokers a $2,000 monthly salary in advance of their salary draws.  The entity’s offering documents did not adequately disclose this indirect compensation of the firm’s brokers, which was found to be a material omission.

In another settled case, FINRA barred Jay John Soojian from the securities industry.  FINRA determined that Soojian “fraudulently omitted material facts in connection with” his sales of $775,000 of an entity’s limited partnership interests to investors.  In soliciting investors and in referring them to the entity to invest, Soojian failed to disclose material facts to those investors concerning the civil disciplinary and criminal history of one of the entity’s principals.  Soojian also failed to disclose material facts relating to his compensation for those referrals.

FINRA’s recent disciplinary actions to enforce the rules relating to communications with the public are welcome news for investors.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston


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