Brokers Barred for Misleading PPM Statements
FINRA barred two brokers from the industry for making misleading statements in connection with selling a hedge fund. FINRA alleges the brokers misled retail investors about fund risks and used a PPM that they knew inflated the credentials of the fund’s portfolio manager. FINRA asserts that the brokers had previously worked with the PM and were “well-aware” of his lack of experience. Moreover, FINRA argues that the brokers failed to disclose the limits of the backtested performance data used to market the funds. FINRA took action against the brokers even though they were no longer registered with any firm because FINRA filed the complaint within 2 years of termination and because the conduct occurred while they were registered.
OUR TAKE: Since the Madoff scandal, both the SEC and FINRA have brought actions against distributors for misleading statements about the underlying products. Here, FINRA asserts actual knowledge that the PPM contained misleading statements. A thornier question is how much due diligence a third party distributor must conduct to avoid liability.