FINRA Enforcement Hits Investors Capital Corporation with Big Fines

By David Meyer

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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 about ETFs.

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 the package.

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 (800) 738-1960. We have recovered millions of dollars on behalf of our clients.


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