Finra to get tough on Reg D offerings

Finra expects to bring cases against brokerage firms involved in selling private-placement offerings next year, its head of enforcement said last week.

“We have a number of investigations under way involving allegations of wrongdoing arising from the sales of these Regulation D private placements,” James Shorris, executive vice president and executive director of enforcement at the Financial Industry Regulatory Authority Inc., said in an interview.

Finra expects to bring enforcement cases on private placements next year, he said.

Reg D refers to the securities regulations that govern the sale of private-placement investments, which are generally exempt from having to be registered with regulators. The investments usually are made in small companies.

The self-regulatory organization has been receiving an increasing number of complaints from investors in recent months concerning sales of private placements, Mr. Shorris said. Finra is looking at misrepresentations made by brokers in connection with the sale of the products, as well as whether sales made to customers were suitable.

Finra has been increasing the resources it devotes to investigations of private placements throughout the year, and it expects to begin bringing cases “soon,” he said.

The industry regulator also is questioning whether brokerage firms and registered representatives who sold the private placements did due diligence on the products they sold, as well as whether some brokerage firms had a conflict of interest with the issuers, Mr. Shorris said.

Among the allegations Finra is looking into is whether private-placement sales were made with only a single source of due-diligence information and whether the due-diligence provider was independent of the company issuing private-placement securities.

“If the due-diligence report was paid for by the issuer, there’s clearly a potential conflict,” Mr. Shorris said.

Finra is also examining whether brokerage firms that sold the products were affiliated with companies that issued the securities, as opposed to sales made by brokerage firms that were independent of the issuers.

“If it turned out the issuer was engaged in wrongdoing or fraud and the firm had a captive entity wholesaling the product, we have more questions about the access [the brokerage firm] may have had to information about potential wrongdoing about the issuer,” Mr. Shorris said.

E-mail Sara Hansard at [email protected].