Wednesday, December 15, 2010


A recent enforcement action and consent order highlights the broker-dealer community's ongoing struggle with FINRA Rule 3040. Huntleigh Securities Corp. was fined $300,000 by the Missouri Securities Division for failing to supervise a broker that engaged in over $4 million of private securities transactions. In most instances, the broker simply fails or ignores the need to obtain his or her broker-dealer's approval for the transactions. In the Huntleigh matter, as was the case with certain broker-dealers approving the sale of non-registered but securitized 1031 exchanges, the broker-dealer approved the transactions but failed to supervise them. They also failed to even recognize that the broker was selling unregistered securities.

To simplify a very simple rule, Rule 3040 requires a broker to submit a detailed written request to engage in the sale of a product that is outside the scope of his or her broker-dealer's normal course of business. If the broker is receiving any kind of compensation for the transaction – even a finder's fee – the broker-dealer is required to supervise the transactions and carry it on it's book and records as if it were a non-private securities transaction. That means, among other things, that the broker-dealer is required to engage in a reasonable-basis product suitability analysis and provide the broker the training necessary to conduct a thorough customer-specific suitability analysis. And as part of the reasonable-basis analysis, the broker-dealer must conduct a due diligence analysis which goes beyond a mere spoon-feeding by the third-party product sponsor.

As part of the consent order with the Securities Division, Huntleigh “agreed” to – among other onerous measures – retain at its expense an outside consultant to review and report back on its compliance and supervisory policies and procedures relating to the outside business activities of its agents.

Cosgrove Law, LLC provides consulting and auditing services and works in tandem with other industry experts to assist securities and commodities broker-dealers in achieving compliance with rules such as FINRA 3040. We also represent investors that suffer severe consequences when they are persuaded to participate in unsuitable private securities transactions. But, when it's all said and done, it doesn't matter who you hire for assistance if you remain ignorant of Rule 3040 and its mandates.

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