FINRA to firm: Get out!

A broker dealer is being expelled by the U.S. Financial Industry Regulatory Authority Inc. (FINRA) for violating best interest standards and making misrepresentations to investors.

FINRA ejected a New York-based firm, SW Financial, from the self-regulatory organization for a variety of violations, including breaches of disclosure and product due diligence obligations under best interest rules (known as Reg BI), making misrepresentations in private placements, churning client accounts, and failing to properly supervise its reps.

The firm settled the allegations, without admitting or denying the SRO’s findings.

“The serious misconduct in this case exposed customers to significant risk of harm and necessitated expulsion of SW Financial from FINRA membership,” said Christopher Kelly, senior vice president and acting head of FINRA’s enforcement department, in a release.

“Firms cannot make material misstatements or omissions when they sell securities to customers. Firms also must reasonably surveil for, and respond to, red flags of excessive trading and churning. When firms, particularly those with significant disciplinary histories, commit egregious sales practice and supervisory violations, expulsion from FINRA membership may be warranted,” he added.

At the same time, the SRO also settled with the firm’s co-owner and CEO, Thomas Diamante, who was suspended for nine months, fined US$50,000 and is required to re-qualify for registration to re-enter the industry.

He also settled the regulator’s allegations against him without admitting or denying them.

Among other things, FINRA said that SW Financial told potential investors that it was receiving a 10% sales commission for selling certain pre-IPO securities when, “in fact, Diamante had entered into an undisclosed agreement with the issuer under which SW Financial would receive an additional 5% in selling compensation and half of any carried interest.”

As result, the firm received approximately US$2 million in undisclosed compensation.

The SRO also found that two former reps at the firm churned nine customer accounts, generating more than US$350,000 in total trading costs and more than US$465,000 in realized losses.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.