New York, New York based HKC Securities, Inc., now known as ACGM, Inc., and Harold Kenneth Cohen, of Palm Beach, Florida, submitted a Letter of Acceptance, Waiver and Consent in which the firm and Mr. Cohen consented to the described sanctions and to the entry of the Financial Industry Regulatory Authority's (FINRA) findings that the firm's hedge fund sales material failed to fairly present the risks and potential disadvantages of hedge fund investing, highlighting only the fund's positive features and not providing a sound basis for evaluating the investment, included exaggerated language, failed to identify the basis for factual statements made, and contained an inadequate discussion of the performance of the funds.
FINRA's findings stated that while the firm was engaged in marketing hedge funds, the firm's written supervisory procedures (WSPs) provided insufficient guidance with respect to FINRA's content standards for hedge fund advertising and did not discuss required risk disclosures specific to hedge fund investing. Mr. Cohen, as the firm's chief compliance officer (NYSE:CCO), was responsible for the establishment of such procedures. The findings also stated that the firm failed to adequately supervise its registered representatives' use of institutional sales material. Mr. Cohen was the supervisor responsible for reviewing and approving communications with the public but did not follow the firm's written procedures, which required post-hoc review of institutional sales material and a written notation of approval. Mr. Cohen's review was limited, in that his review was not focused on compliance with FINRA's content standards, such as whether the documents contained exaggerated statements, had sufficient risk disclosures, or identified the factual basis for the statements made. Mr. Cohen's review was also limited to the summary document the firm prepared, and did not extend to the materials the firm sent that the funds themselves had prepared.
FINRA's findings also included that the firm did not maintain a complete file of institutional sales material used and did not notate the sales material with the name of the person who prepared the document and the date that the document was first circulated. Mr. Cohen was responsible for ensuring the firm's compliance with these recordkeeping requirements. The firm was censured and fined $50,000, and Cohen was censured and fined $10,000.
Broker-dealers must establish and implement a reasonable supervisory system to protect customers from broker misconduct. If broker-dealers do not establish and implement a reasonable supervisory system, they may be liable to investors for damages flowing from the misconduct. Therefore, investors who have suffered damages due to their reliance on insufficient and/or misleading sales materials can bring forth claims to recover losses against broker-dealers like HKC Securities, Inc. or ACGM, Inc., which should have adequately informed its investors of the risks and performance of the subject hedge funds.
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.