Securities Lawyers Blog
This article continues the findings of The Financial Industry Regulatory Authority (FINRA) that led to sanctions against Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas. FINRA found that from 2009 through 2011, Royal Securities failed to establish adequate supervisory systems to ensure due diligence, training, and fair pricing of church bonds and funds sold by its representatives.
FINRA alleged that Royal Securities acted as the lead underwriter for three churches who were issuing church bonds. From May 2009, through October 2011, according to FINRA Royal Securities sold approximately $4.3 million in church bonds to customers. FINRA also found that Royal Securities was also involved in the sale of secured certificates of participation in a fund that raised capital for Christian churches. The church fund was sold primarily by another broker-dealer but FINRA found that Royal Securities had a secondary clearing arrangement with the broker-dealer where 151 church fund sales occurred in 65 accounts with a total of approximately $2,908,000 in sales.
FINRA found that Royal Securities failed to adopt reasonable written supervisory procedures and supervisory controls to govern church bonds and church funds lines of business. Specifically, FINRA found that Royal Securities procedures did not address specific suitability considerations, particularly supervision of issues, or any required due diligence of church bonds underwritten.
In addition, under FINRA rules a broker-dealer may lack a reasonable basis to recommend a security to its customers if it or its representatives fail to investigate the security’s characteristics sufficiently to understand the investment’s potential risks and rewards. FINRA found that Royal Securities failed to conduct adequate initial and ongoing due diligence regarding the church bonds and the church fund before allowing its representatives to sell them to Royal Securities customers. FINRA alleged that conducting due diligence on the church bonds, Royal Securities relied exclusively on documentation and information provided by the churches themselves and failed to conduct independent due diligence.
FINRA concluded that Royal Securities conducted no ongoing diligence on the church bonds except for confirming that the churches were making scheduled payments. FINRA alleged a similar lack of due diligence with respect to the church fund. Finally, FINRA alleged that Royal Securities failed to provide training to its representatives before allowing them to sell church bonds and church fund. FINRA concluded that, through the foregoing conduct, Royal Securities and its representatives lacked a reasonable basis to recommend the sale of church bonds and the church fund in violation of NASD Rule 2310 and FINRA Rule 2010.
FINRA also found that Royal Securities’ pricing for the church bonds listed in the customers’ account statements was flawed and inaccurate. FINRA alleged that all of the church bonds were initially priced at par but were never altered for changes in issuer risk, interest rate risk, or any other factor. As a result, FINRA found that Royal Securities’ pricing of the church bonds was in violation of FINRA Rule 2010.
The attorneys at Gana Weinstein LLP are experienced in investigating claims concerning the failure of brokerage firms to conduct proper due diligence on issues. Our consultations are free of charge and the firm is only compensated if you recover.