SEC Warns Broker Dealers About Due Diligence

SEC Warns Broker-Dealers About Due Diligence, Asks “Do You Know What You’re Selling?”

We've been writing quite a bit lately about the SEC and it's broker fraud enforcement efforts. The latest move from the SEC stands to bear influence on greater detection of investment fraud and hopefully ensure a greater broker knowledge of the products he or she represents.

The SEC announced that it is looking into several “high risk” areas in the securities industry in order to pinpoint investor fraud, according to a May 21 InvestmentNews article.

These “high risk” areas include due diligence, net capital levels, “dark pools” of liquidity, and “the division between the investment adviser and broker-dealer sides” of dual-registered firms. In particular, the SEC wants to ensure broker-dealer firms and their representatives know the ins and outs of the products they’re selling.

The SEC's focus on increasing due diligence is nothing new.

In March, the SEC issued a risk alert to broker-dealers designed to help them comply with due diligence requirements when underwriting municipal securities. More than a year earlier, in January of 2011, the SEC adopted new rules that increased due diligence requirements for brokers dealing with the asset-backed securities market. And, for the past few years, the SEC has filed a number of Complaints and Cease and Desist Orders against broker-dealers and other financial firms for failure to conduct proper due diligence before offering high-risk securities, such as private placements.

Broker-dealer firms sanctioned by the SEC and/or other regulators for failure to conduct proper due diligence over the past few years include:

  • Securities America;
  • Next Financial Group, Inc.;
  • Capital Financial Services Inc.;
  • WFP Securities;
  • AFA Financial Group;
  • QA3 Financial;
  • National Securities;
  • CapWest Securities;
  • Independent Financial Group;
  • Investors Capital; and
  • Centaurus Financial.

While this is certainly a positive step, an investor still must perform his or her own due diligence in researching both the proposed investment products and the broker to ensure a successful investing experience. If you suspect broker misconduct, think your investment losses might the result of stock broker fraud, or are thinking about contacting an investment fraud attorney, you might want to reveiw five basic ways to spot investment misconduct.


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