Pittsburgh, Pennsylvania based PNC Investments LLC submitted a Letter of Acceptance, Waiver and Consent in which the firm consented to, but did not admit to or deny, the described sanctions and to the entry of the Financial Industry Regulatory Authority's (FINRA) findings that it failed to establish and maintain a supervisory system and written supervisory procedures (WSPs) reasonably designed to achieve compliance with Section 5 of the Securities Act of 1933. FINRA's findings stated that the firm's WSPs for compliance with Section 5 were limited to a section on private placements and offerings, which addressed Regulation D, Rule 144 and private investments in public equity. The procedures restated the requirements, or exemptions, contained in the regulations but provided for no supervisory structure to ensure compliance with Section 5. The firm's procedures did not address compliance generally with Section 5, and they were inadequate in setting forth the circumstances under which the firm should inquire into the registration or exemption status of securities in customer accounts. The procedures then in place did not specifically list the factors that the firm was required to evaluate or consider in order to determine whether it needed to inquire further before allowing a customer to sell potentially unregistered securities. PNC Investments was censured and fined $100,000.
FINRA's findings also stated that a firm customer engaged in an unregistered distribution of Industrial Enterprises of America, Inc. (OTC:IEAM) shares, and PNC Investments' personnel incorrectly assumed that the shares were freely tradable without restriction. The firm's assumptions were based on, among other things, representations made by the customer in its account opening documentation and because the shares were received into the customer account directly from a transfer agent. In allowing the customer to sell its shares, the firm did not consider all of the factors relevant to a determination of whether the shares were unrestricted and eligible for resale. The findings also included that the customer and another individual sold a total of 1,099,900 shares of securities into the market, mostly by way of on-line trades, for proceeds of $4,292,210, which earned the firm $22,747 in commissions. The one exception from the customer's account selling securities was a single day in which it bought 5,000 shares. The purchase triggered an exception report, which resulted in the firm prohibiting purchases by the customer of more than 5,000 shares without a principal's approval, but the customer's selling activity generated no exception reports.
Regulation D private placements are sophisticated investments, which are sold to a small number of chosen, accredited investors. Generally, accredited investors are those with a net worth in excess of $1 million or annual income exceeding $200,000 or $300,000 combined with a spouse. No more than 35 non-accredited investors may participate in a private placement. The Securities Act of 1933 provides several exemptions to the securities registration requirements of Section 5 of the Act. Therefore, broker-dealers must establish and implement a reasonable supervisory system and WSPs governing compliance with federal securities related to private placements in order to protect investors. If broker-dealers do not establish such systems and procedures, they may be liable to investors for damages.
Therefore, investors who have suffered damages in IEAM and/or any other private placement can bring forth claims to recover losses against PNC Investments, which should have had specific guidelines governing Regulation D offerings in place.
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.