A broker-dealer settled FINRA charges for failing to adequately supervise a registered representative's participation in private securities transactions ("PSTs").
According to FINRA, CV Brokerage, Inc. ("CV Brokerage") failed to approve a representative's participation in PSTs, but instead allowed the representative to supervise her own compliance with the firm's PST procedures. As a result, the firm failed to record the transactions, or supervise the individual's participation in the transactions, as required by FINRA Rule 3280 ("Private Securities Transactions of an Associated Person"). Among the PSTs, the representative formed an investment fund that was managed by the representative's advisory firm. The fund "traded hundreds of millions of dollars at multiple financial institutions" for which the representative received "substantial selling compensation related to her participation in the fund."
CV Brokerage agreed to a censure and a $100,000 fine.
Commentary / Mark Highman
One issue raised by this enforcement action is the extent to which a broker-dealer is required to approve and supervise outside investment advisory activities conducted by its registered representatives. In line with the enforcement action, FINRA's 2018 Request for Comment on outside business activities and private securities transactions noted that: "Under Rule 3280 and related guidance, members must supervise and record on the members' books and records the transactions resulting from most outside IA activities of their associated persons.' See FINRA Reg. Notice 18-08. That said, FINRA acknowledged that "[t]his approach has caused significant confusion and practical challenges. . . ." In order to address these challenges, FINRA proposed to (i) retain the requirement that a broker-dealer pre-approve a representative's outside investment advisory activities (other than investment advisory activity conducted on behalf of an affiliate), but (ii) eliminate the requirement that a broker-dealer supervise outside investment advisory activities, or record on its books transactions resulting from those activities. FINRA has not yet issued a follow-up notice in response to the 2018 Request for Comment.
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