The Financial Industry Regulatory Authority Inc. said Thursday it had expelled a small broker-dealer from operating in the securities industry for a variety of industry rules violations and failures, including monkeying around with private placement offerings of pre-initial public offering funds.
The firm, SW Financial of Melville, New York, lacked a reasonable basis to believe that the private placement IPOs were suitable for, or in the best interests of, at least some customers, violating the industry rule known as Regulation Best Interest. Brokers can only sell high-risk private placements to wealthy or accredited investors.
SW Financial had 38 reps and four branches and had been open since 2007, according to its profile on Finra's BrokerCheck.
At the same time, Finra said it had suspended the firm's co-owner and CEO, Thomas Diamante, for nine months in all capacities, with an additional three months of suspension as a principal. Diamante was also fined $50,000, and he must retake exams if he wants to work again in the securities industry, according to Finra.
Both SW Financial and Diamante agreed to the settlements with Finra without admitting to or denying its findings. Charles O'Rourke, an attorney for the firm and Diamante, declined to comment.
The firm cleared through Axos Clearing, so clients can contact Axos about their accounts, according to a statement on SW Financial's website.
SW Financial also churned customer accounts and failed to supervise its representatives, according to Finra.
The firm harmed customers in two ways, Finra said. The first was telling investors it was getting a 10% commission on the sale of private placement IPOs, but not informing them it had an agreement with issuer to get an additional 5% in selling compensation plus half of any carried interest, according to Finra. That occurred from January 2018 through December 2021, with Reg BI going into effect in June 2020, according to Finra.
By industry rules, the top commission to brokers who sell securities is 10%.
Carried interest is industry shorthand for profits payable to the issuer’s investment manager. In total, SW Financial sold the private offerings to 171 investors, including 163 retail customers, and the firm and its owners received approximately $2 million in undisclosed compensation, according to Finra.
In a statement, Finra called this "a serious potential conflict of interest that could have influenced SW Financial’s recommendations and should have been fully disclosed."
"Diamante and SW Financial also failed to conduct reasonable due diligence on the private offerings and did not confirm that the issuer actually held or had access to the shares it purported to sell," according to Finra. "As a result, SW Financial had no reasonable basis to recommend the offerings to customers, in violation of both Finra's suitability rule and Reg BI’s Care Obligation."
Next, between January 2016 and May 2019, two former SW Financial registered representatives churned nine customer accounts, causing the customers more than $350,000 in total trading costs and realized losses of more than $465,000, Finra said.
In connection with both issues, SW Financial also violated industry rules that require broker-dealers to establish and enforce supervisory systems and procedures with respect to the firm’s sale of private placement offerings, according to Finra.
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