By David Meyer
Investors have a right to be informed by their broker about the investments
they are buying. In addition to having the broker provide a full and fair
explanation about the investment, the brokerage firm is required to supplement
its explanation by providing a prospectus, which provides additional details
about the investment's objectives, strategy, performance, risks, and so forth.
When you buy a stock, bond,
mutual fund, exchange-traded fund (ETF) or other investment, you're supposed to
receive a prospectus. If the firm that handles your trade fails to provide
one, it has breached securities laws.
The Financial Industry Regulatory Authority (FINRA, an independent regulatory
body monitoring securities firms and brokers) found that Investors Capital
Corporation (ICC) had failed to provide prospectuses to customers who
purchased ETFs for nearly two years.
According to a
Letter of Acceptance, Waiver and Consent (AWC) signed by FINRA's department of enforcement on March 7, 2014,
not only did ICC not provide the appropriate documentation to its customers
about these ETFs, it even allowed some of its investment representatives
to start selling them before they had completed any company-mandated training
FINRA charged that ICC did not have an adequate supervisory system in place
and it did not have a written supervisory procedure (WSP) governing the
sale of ETFs or the requirement to deliver prospectuses to customers.
And the scale of the breach was significant: ICC sold approximately 64,400
ETFs to 7,300 customers during the period in question.
This pattern of behavior violated FINRA Rule 2010, Section 5(b)(2) of the
Securities Act of 1933, and NASD Conduct Rule 3010 (Case #2009018609501).
ICC agreed to a censure and it paid a $100,000 fine.
You'd Think ICC Would Learn
This isn't ICC's first run-in with FINRA. In October 2011, ICC
entered into an AWC with FINRA in which it agreed to a censure and $400,115
in restitution to customers for selling
private placement offerings without having a reasonable supervisory system and WSP. Private
placement offerings give an entity a means of raising capital by reaching
out to a small group of investors. They are not offered publicly and are
not registered with the SEC. Usually they are offered to a small group
of investors, typically institutions such as banks, mutual funds or pension
funds. Individuals can purchase private placements if they are determined
to have adequate assets, income, and investment knowledge.
Collateralized mortgage obligations (CMOs) were a huge factor in the recent
economic crisis. Essentially they are packages of mortgages separated
into various levels of risk. Money flows into a CMO as mortgage payments
are made, and that money is distributed to the investors. The issue, of
course, is what happens when payments are not made on the mortgages in
In June 2011, ICC entered into an AWC with FINRA agreeing to a censure
and a $200,000 fine for failing to establish a reasonable supervisory
system and WSPs regarding the sale of CMOs and for failing to provide
educational materials to customers about these complex investments.
If you are an investor who feels that you have suffered losses because
you did not receive adequate information about ETFs, private placements,
or CMOs before investing in them, please contact the investment fraud
attorneys at Meyer Wilson by calling call (888) 390-6491. We have recovered
millions of dollars on behalf of our clients.