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Arizona BD Sues FINRA for 'Choking' Microcap Markets

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A broker-dealer in Scottsdale, Arizona, is taking the Financial Industry Regulatory Authority to federal court for exerting “irrational and unfounded positions that are ‘choking’ the microcap markets and preventing smaller and startup issuers from being able to finance the operation and growth of their businesses.”

In a Monday lawsuit filed in the U.S. District Court for the District of Columbia, Scottsdale Capital Advisors states that FINRA’s “crusade against the microcap and low-priced securities market has directly impacted Scottsdale, which engages primarily in that industry.”

FINRA has targeted Scottsdale Capital Advisors “for exams, extensive document requests, and prosecutions, and sought to levy fines against it for its day-to-day business activities,” the lawsuit states.

The broker-dealer self-regulator “has aggressively sought to use guidance to render microcap transactions increasingly burdensome if not impossible,” the suit continues.

The lawsuit cites FINRA guidance “directly targeting transactions involving microcap and low-priced securities, identifying such transactions as ‘red flags’ indicative of ‘suspicious activity,’” and that FINRA requires firms to file suspicious activity reports “on every transaction that possesses those characteristics.”

Enforcement Woes

According to FINRA’s BrokerCheck, the self-regulator filed a complaint against Scottsdale on July 23 alleging that the broker-dealer failed to establish and maintain a supervisory system, including written supervisory procedures, for sales of unregistered shares of microcap stocks.

FINRA’s National Adjudicatory Council, which reviews initial decisions rendered in FINRA disciplinary and membership proceedings, ruled on July 20 that Scottsdale should pay a $1.5 million fine for the sales of unregistered shares of microcap stocks.

Scottsdale has appealed NAC’s decision to the Securities and Exchange Commission.

Scottsdale has also previously been sanctioned by FINRA for penny stock violations, according to BrokerCheck.

In Scottsdale Capital’s complaint, attorneys cite FINRA’s attempts to discipline and fine Sterne Agee “on a theory that its entire anti-money laundering program was inadequate because it failed to identify and treat microcap transactions as suspicious activity,” which was rejected by a FINRA hearing panel.

Year after year, the lawsuit states, “FINRA has targeted members’ activity in this segment as an enforcement priority.”

By doing so, FINRA “has abdicated its obligation to ensure fair representation to those members who engage in the microcap and low-priced securities market.”

FINRA “has cast those members, including SCA, as outsiders, who, despite operating in a fully legal segment of the securities market, are repeatedly charged as lawbreakers simply on the basis of FINRA’s non-binding guidance,” the lawsuit asserts.

Further, according to the lawsuit, the self-regulator’s “desire to regulate the microcap and low-priced securities market out of existence is strikingly anti-competitive.”

States the lawsuit: “By forcing member firms to abandon or stay away from this market segment, issuers are isolated and unable to access the securities markets, while investors, particularly consumer and retail level investors, are unable to engage in the securities market at a level that they desire.”

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