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FINRA Enforcement: 3 Firms Fined for Failures in Research Disclosure

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Among recent enforcement actions, the Financial Industry Regulatory Authority went after failures in research report disclosures. It censured and fined JMP Securities, Pacific Crest Securities and William Blair & Co. individually for various failures in research reports the firms issued. Each of the firms consented to FINRA’s sanctions while neither admitting nor denying the agency’s findings.

William Blair & Co.Censured, Fined on Disclosure Failures

FINRA censured Chicago-based William Blair & Co. and fined the firm $350,000 after it found that the firm failed in several respects to make clear, comprehensive and prominent disclosures in its research reports.

According to the agency, the firm used an indefinite or conditional statement in certain research reports that was not specific enough to satisfy regulations, and was not clear, comprehensive and prominent. In addition to the disclosure required by Rule 2711(h)(8), the firm also included a conditional statement in certain research reports; the firm’s disclosures were not clearly identified or sufficiently prominent to satisfy regulations. The firm also commingled required disclosures with other disclosures and disclaimers that were not required by the rule. During one specific period of time, these deficiencies were present in most of the research reports the firm published.

In addition, the firm omitted from four of its research reports disclosures regarding if the firm managed or comanaged a public offering of securities for the subject company in the past 12 months and, in two of its research reports, it failed to adequately define research ratings. It did not did not disclose its relevant relationship to the companies covered in the compendium research reports, and did not direct readers in a clear manner to where applicable disclosures could be found. And it improperly published two research reports during the quiet period after a secondary offering.

JMP Securities Censured, Fined on Disclosure Failures

FINRA has censured and fined San Francisco-based JMP Securities $125,000 for failing to adequately disclose information in research reports.

According to the agency, the firm sought investment banking business from each company covered by its research at least once a quarter. But instead of complying with a specific disclosure requirement, the firm used a much less specific boilerplate statement that not only failed to be comprehensive but also was not prominently featured in the reports.

In addition, it omitted conflict of interest disclosures. In at least eight research reports, the firm failed to disclose that it managed or comanaged a public offering of securities for the subject company in the past 12 months. It also failed to disclose in one research report that it received compensation for investment banking services from the subject company in the past 12 months, and failed to disclose in eight research reports that it made a market in the securities of the subject company.

FINRA also noted that the firm had no written procedures to cover its compliance regarding the prohibition of compensation to research analysts based on a specific investment banking services transaction. While the analyst’s contributions to the firm’s investment banking business may not be considered as a factor in reviewing and approving research analyst compensation, JMP’s written supervisory procedures did include among factors that should be considered the number of times the firm is selected by its corporate customers to render advisory, underwriting and other financial services.

Pacific Crest Securities Censured, Fined on Disclosure Failures

FINRA also censured and fined Pacific Crest Securities (nka KeyBanc Capital Markets Inc.) $225,000 for failing in multiple respects to make clear, comprehensive and prominent disclosures in its research reports. The firm included in the same research report both research disclosures and certain boilerplate disclosures that contained conditional language. The research disclosures were not sufficiently prominent. FINRA also said that the firm omitted from some research reports information that it was required to disclose concerning conflicts of interest.

In addition, in one instance a member of the firm’s sales force was provided the entire draft of a research report prior to publication. The firm did not establish that the sales person was reviewing the research report for factual accuracy, and no authorized legal or compliance personnel were copied on the communication transmitting the research report.

Pacific Crest’s procedures didn’t have controls in place to ensure the accuracy of the manual process it used to input disclosures into its disclosure database. While the firm identified defects with its research publication program, including in both automated and manual processes, it failed to resolve the defects in a timely manner; that resulted in the disclosure problems.

The firm also failed to have in place supervisory procedures to limit the transmission of prepublication research to the firm’s trading personnel, to review communications between research and trading personnel to identify potential trading ahead of research or to review e-mails so as to identify or limit the transmission of prepublication research reports to the firm’s trading personnel.

Check out last week’s enforcement actions regarding the Salsa-Dancing Couple.