Bill Singer's CommentKnowlton was negligent in violating FINRA Rule 2210 because the "Projections/Allocations" presented to Bertoldi should not have been given to him and were misleading. These "Projections/Allocations" were a cause of Bertoldi buying the securities. Bertoldi was contributorily negligent at a percentage of 25% by his failure to investigate. The total damages is in the amount of $36,000.00 less 25% equals $27,000.00. IMS failed to supervise and train Knowlton, who was a broker with little experience when he was hired. The fault of Respondents is assessed at 75% to IMS and 25% to Knowlton.It is found that there was not a violation of the following rules by Respondents: FINRA Rules 2010, 2020, 2110, 2310, FINRA NTM 03-71, and FINRA RN 10-22.It is found that there was not a violation of suitability rules under FINRA Rule 2111 by Respondents.It is found that there was not an intentional misrepresentation by Respondents or a breach of fiduciary duty or breach of contract.The principle of promissory estoppel does not apply to give relief to Claimant.4. IMS Securities, Inc. and Steven Knowlton's requests for expungement of their CRD records are denied.5. Other than forum fees which are specified below, the parties shall each bear their own costs and expenses incurred in this matter.6. Any and all claims for relief not specifically addressed herein, including punitive damages and attorneys fees, are denied.
FINRA Regulatory Notice 10-22: Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings (April 2010) offers this synopsis in its "Executive Summary":In the aftermath of the recent downturn in the equity markets, NASD reviewed the services and products offered by members and observed that retail investors were being offered an array of different investments as alternatives to conventional equity and fixed-income investments. These alternative investments do not fall under a common category; the staff review indicates that brokers and retail investors have shown increased interest in products such as asset-backed securities, distressed debt, and derivative products (for ease of reference these products are collectively referred to as non-conventional investments or "NCIs"). NCIs often have complex terms and features that are not easily understood. NASD staff reminds members that the fact that an investment is an NCI does not in any way diminish a member's responsibility to ensure that such a product is offered and sold in a manner consistent with the member's general sales conduct obligations. This Notice to Members reminds members offering NCIs of their obligations to: (1) conduct adequate due diligence to understand the features of the product; (2) perform a reasonable-basis suitability analysis; (3) perform customer-specific suitability analysis in connection with any recommended transactions; (4) provide a balanced disclosure of both the risks and rewards associated with the particular product, especially when selling to retail investors; (5) implement appropriate internal controls;.and (6) train registered persons regarding the features, risks, and suitability of these products.
FINRA reminds broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings made under the Securities and Exchange Commission's Regulation D under the Securities Act of 1933-also known as private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Act. Regulation D transactions, however, are not exempt from the antifraud provisions of the federal securities laws. A broker-dealer has a duty-enforceable under federal securities laws and FINRA rules-to conduct a reasonable investigation of securities that it recommends, including those sold in a Regulation D offering. Moreover, any broker-dealer that recommends securities offered under Regulation D must meet its suitability requirements under NASD Rule 2310 (Suitability), and must comply with the advertising and supervisory rules of FINRA and the SEC
negligent in violating FINRA Rule 2210 because the "Projections/Allocations" presented to Bertoldi should not have been given to him and were misleading . . . . IMS failed to supervise and train Knowlton, who was a broker with little experience when he was hired.
What exactly should Bertoldi have investigated beyond what he did (or didn't)? Similarly, at what point do we place the blame for unsuitability upon a FINRA member firm that "failed to supervise and train" an inexperienced stockbroker? If nothing else, this case highlights the dramatic difference between an industry that is subject only to a "Suitability" standard and not a "Fiduciary" standard.Bertoldi was contributorily negligent at a percentage of 25% by his failure to investigate.