FINRA has fined and censured a broker-dealer for failing to establish, maintain, and enforce a supervisory system—along with written supervisory procedures (WSPs) reasonably designed to comply with securities laws governing the general solicitation of private placement offerings.

The violations occurred between September 2019 and January 2020 and involved inadequate supervision of a registered representative who, in connection with two private offerings, cold-called more than 40 prospective investors without having substantive pre-existing relationships with them. This activity constituted a prohibited general solicitation.

These failures led to violations of FINRA Rules 3110 (Supervision) and 2010 (Standards of Commercial Honor and Principles of Trade), resulting in a $45,000 fine and formal censure.

Why This Matters for Compliance Teams
Private placements are often high-risk from a compliance standpoint due to their limited disclosure requirements and regulatory exemptions. Any solicitation activity that doesn’t meet the “pre-existing substantive relationship” standard can expose a firm to regulatory action—especially if supervisory systems and WSPs don’t clearly define acceptable practices.

In this case, the lack of a properly designed supervisory framework allowed prohibited solicitation practices to occur, underscoring how critical it is to build preventive controls rather than rely solely on post-activity reviews.

Compliance Takeaway: Strengthening Oversight in Private Offerings
To avoid similar issues, firms should:

  • Review and update WSPs to clearly address general solicitation rules, particularly for private placements under Regulation D.
  • Define “pre-existing substantive relationship” within policy manuals and train representatives on acceptable methods of establishing such relationships.
  • Implement pre-approval requirements for all outreach lists related to private offerings.
  • Conduct targeted supervision when representatives are involved in private placement sales, including call monitoring and documentation checks.
  • Use surveillance tools to flag outreach to prospects not in the firm’s CRM or lacking documented relationships.
  • Provide regular training to ensure reps understand solicitation limits and the potential consequences of non-compliance.

This case is a reminder that in the eyes of regulators, supervision is more than a policy; it’s the active, documented enforcement of that policy.