This May the Financial Industry Regulatory Authority (“FINRA”) made revisions to its Sanction Guidelines pertaining to misrepresentations and suitability. The Sanction Guidelines were developed for FINRA by The National Adjudicatory Council (“NAC”) to assist Hearing Panels and the NAC (collectively, the “Adjudicators”) to determine appropriate disciplinary sanctions. Periodically, the NAC reviews the Sanction Guidelines to determine whether current sanctions “are sufficient to achieve deterrence and reflect sanction trends in litigated and settled cases.”

While the NAC did not cite examples of violations as an impetus for the changes, a review of the Sanction Guidelines found that current sanctions were not sufficient to achieve deterrence. Below are highlights of the NAC’s revisions to the Sanction Guidelines from FINRA’s Regulatory Notice 15-15:

• Revisions to the Sanction Guideline Related to Fraud, Misrepresentations or Material Omissions of Fact

For reckless or intentional fraud the new Sanction Guidelines “eliminates the guidance that individuals should merely be “considered” for a bar in egregious cases. The revision states Adjudicators should “strongly consider” barring an individual”. Similar amendments were made addressing firms.

• Revisions to the Sanction Guideline Related to Suitability – Unsuitable Recommendations

The guideline was amended to “increase the high-end of the suspension from one year to two years and to “strongly consider” barring an individual respondent where aggravating factors predominate the respondent’s misconduct” for unsuitable recommendations by individuals.

• Revisions to the General Principles Applicable to All Sanction Determinations, Nos. 1 and 2

The amended General Principle No. 1 advised Adjudicators to consider imposing higher sanctions than recommended to “achieve deterrence, and not a mere cost of doing business.” General Principle No. 2 has been amended to advise adjudicators to impose “progressively escalating sanctions” on individuals and firms with disciplinary history.

These changes reflect the predominant mentality among Adjudicators that harder penalties are required to deter wrongdoing. It is strongly recommended that firms examine their Written Supervisory Procedures in light of these revisions to ensure compliance and avoid harsh penalties.

For more information on this and other related subjects, please contact us at info@jackolg.com

or (619) 298-2880.

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Last September, Houston-based Investment Advisory Firm, Robare Group Ltd. (“Robare”), was charged with violating Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 by the Securities and Exchange Commission (“SEC”). The SEC’s enforcement division discovered an undisclosed revenue sharing agreement between Robare and its custodian Fidelity Institutional (“Fidelity”). According to the SEC, Robare made mutual fund recommendations to its clients without properly disclosing the agreement. The arrangement resulted in payments of $440,000 over eight (8) years.

The SEC alleged that Robare did not disclose this potential conflict of interest on its Form ADV Part 2. According to Judge Grimes, “Fidelity would remit payments to the Robare Group when the Robare Group’s clients invested on Fidelity’s platform in certain “eligible” non-Fidelity non-transaction fee funds.” Under the agreement Robare would receive between two (2) and twelve (12) basis points based on eligible assets under management.

Last week one of the SEC’s own administrative law judges, James Grimes, dismissed the charges against Robare and its co-owners Mr. Mark L. Robare, and Jack L. Jones, Jr in a 44-page decision. Judge Grimes stated that while the firm didn’t disclose the relationship in its Form ADV “The form itself says that a firm ‘may disclose this additional information to client in [the firm’s] brochure or by some other means.” The “other means” in this case were a brochure, fee agreement, new account agreement and disclosure documents.

Judge Grimes also argued that Robare’s use of out outside compliance firms “to ensure the Robare Group was compliant with its disclosure obligations belies any argument that Mr. Robare or Mr. Jones acted with intent to deceive, manipulate, or defraud anyone.” This may be reason for advisers to seek counsel when evaluating existing disclosures or creating new ones.

Jacko Law Group, PC (“JLG”) creates, analyzes and revises client disclosure documents on behalf of broker-dealers, investment advisory firms, investment companies, hedge fund managers, private equity firms, and other financial, securities and corporate law clients throughout the United States and internationally.

JLG can assist you with evaluating disclosure documents and assess how you may wish to enhance them.

For more information on this and other related subjects, please contact us at info@jackolg.com

or (619) 298-2880.

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