Massachusetts Sues Large BD for Failing to Verify QIB Reps
The Enforcement Section of the Massachusetts Securities Division has filed a complaint against a large broker-dealer for relying on Rule 144A without properly verifying that the buyers were Qualified Institutional Buyers. Instead, the BD relied on a certificate provided by the buyers’ investment adviser. The MSD charges that the BD should have reviewed the buyers’ financial statements or obtained a direct certification. The buyers, two Massachusetts banks, purchased unregistered auction rate securities, which declined in value. The MSD seeks rescission.
OUR TAKE: It is unclear why the BD was not entitled to rely on the investment adviser’s representation letter that the buyers were QIBs. It is also unclear whether Massachusetts has jurisdiction to monitor QIB status. Nevertheless, firms should consider their due diligence with respect to purchaser representations. This type of case will also make life difficult for investment advisers seeking to place trades on behalf of clients.