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Robert W Pearce
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Mr. Pearce has tried, arbitrated and mediated numerous disputes involving complex securities, commodities, administrative, contract, commercial, business tort and employment law issues for over 30 years. He has represented hundreds of clients in Federal and state courts (trial and appellate) as... More
My company:
The Law Offices of Robert Wayne Pearce, P.A.
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The Investor's Rights Law Blog
  • CAPITOL SECURITIES MANAGEMENT CENSURED AND FINED FOR FAILURE TO DELIVER PROSPECTUSES TO INVESTORS 0 comments
    Aug 28, 2013 10:08 AM

    Capitol Securities Management, a firm based in Glenn Allen, Virginia, consented to the Financial Industry Regulatory Industry's (FINRA) findings that the firm did not have written procedures covering the delivery of exchange-traded fund (NYSEMKT:ETF) or unit investment trust (UIT) prospectuses. FINRA stated that the firm entered into an agreement with a company for delivery of ETF and UIT prospectuses, but it remained the firm's responsibility to review each transaction and verify that a prospectus was properly delivered when required. Capitol Securities Management submitted a letter of acceptance, waiver, and consent and paid $25,000 to put an end to FINRA's investigation.

    A prospectus is a document that discloses important information about an investment. It typically provides investors with material information about mutual funds, stocks, bonds, and other investments. Such information generally includes a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties, and any other material information. In the case of an initial public offering (NYSEARCA:IPO), a prospectus is required to be delivered by underwriters or brokerage firms to potential investors.

    ETFs are investment funds that are traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index and are attractive investments because of their low costs, tax efficiency, and stock-like features. By owning an ETF, investors benefit from the diversification of an index fund as well as the ability to purchase as little as one share. In addition, expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors pay the same commission to their brokers that they would pay on any regular stock order.

    UITs are one of three types of investment companies - the other two are mutual funds and closed-end funds - that offer a fixed, unmanaged portfolio, of stocks and bonds, as redeemable "units" to investors for a specific period of time. They are designed to provide capital appreciation and/or dividend income. Each unit typically costs $1,000 and can be resold in the secondary market. A UIT may be either a regulated investment corporation or a grantor trust. The former is a corporation in which the investors are joint owners, and the latter grants investors proportional ownership in the UIT's underlying securities.

    In this case, FINRA found that the delivery company made available daily and monthly exception reports through its online report center to help Capitol Securities Management with its delivery obligations. The reports listed all prospectuses not delivered on a trade date and the reason each prospectus was not delivered. However, Capitol Securities Management failed to review the exception reports the company provided and failed to review or monitor the functions it delegated to the company. Therefore the firm failed to deliver the required prospectuses in connection with the ETF and UIT purchases.

    The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.

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