FINRA Expels Firm Over Reg BI Violations

The Financial Industry Regulatory Authority has expelled broker-dealer SW Financial for “multiple violations” related to Regulation Best Interest.

FINRA found that between January 2018 and December 2021, New York-based SW Financial and Thomas Diamante, the firm’s co-owner, made material misrepresentations and omitted material information in connection with the sale of private placement offerings of pre-IPO securities in violation of both FINRA rules and Reg BI’s Disclosure Obligation.

Reg BI’s Disclosure Obligation requires broker-dealers and associated persons to provide investor clients “with full and fair written disclosure, prior to or at the time of a recommendation, of all material facts relating to conflicts of interest associated with the recommendation,” FINRA states.

According to FINRA, the firm misrepresented its sales of private placement offerings of pre-initial public offering (pre-IPO) securities to clients, churned accounts and failed to supervise its representatives.

In a related settlement, FINRA said that it suspended Diamante, for nine months in all capacities followed by a three-month suspension in all principal capacities, fined him $50,000 and required him to requalify by exam if he seeks to register with FINRA as a general securities principal or investment banking representative in the future.

“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 Department of Enforcement. “Firms cannot make material misstatements or omissions when they sell securities to customers.”

FINRA-registered 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,” Kelly explained.

More Details

SW Financial, FINRA said, informed potential investors that it would receive only a 10% sales commission in connection with its sale of 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 (i.e., a share of profits payable to the issuer’s investment manager).