FINRA Action Requires Discretionary BDs to Disclose All Material Facts
FINRA has fined a broker-dealer $1.5 Million and forced disgorgement of an additional $425,000 in commissions and fees for failing to disclose compensation received from the issuer when recommending the issuer’s securities to customers for whom the BD exercised investment discretion. FINRA asserts that when a BD exercises investment discretion, it is obligated to disclose all compensation and that the customers could have bought similar securities with higher yields. Brad Bennett, FINRA’s enforcement chief, said that exercising investment discretion requires a BD to disclose all material facts about a transaction including additional compensation received from the issuer. The action involved sales of auction-rate securities to corporate customers in a cash management program.
OUR TAKE: Who says that FINRA does not have a fiduciary standard? FINRA makes pretty clear (without using the “f” word”) that BDs who have investment discretion must disclose all material facts about the transaction including similar product offerings. This standard is much higher that the suitability obligation imposed on brokers..