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SEC Charges Broker-Dealer with Diligence Oversight Issues SEC Charges Broker-Dealer with Diligence Oversight Issues

SEC Charges Broker-Dealer with Diligence Oversight Issues

On August 14, 2019, the Securities and Exchange Commission ("SEC") charged Canaccord Genuity, LLC ("Canaccord") with failing to conduct acceptable diligence on dozens of securities before allowing those securities to be traded in U.S. markets between October 2017 and September 2018.

Financial Industry Authority ("FINRA") registered broker-dealers are required to demonstrate their compliance with Rule 15c2-11 of the Securities Exchange Act of 1934. Rule 15c2-11 requires that broker-dealers have a reasonable basis for believing the information contained in an issuer's prospectus and other information made available by an issuer is accurate. FINRA registered broker-dealers are required to demonstrate their compliance with Rule 15c2-11 by filing a Form 211 with FINRA.

The SEC alleged in its order that Canaccord facilitated trading in a variety of over-the-counter securities (“OTC”) without properly reviewing those securities. Canaccord, according to the SEC order, tasked an inexperienced compliance associate with demonstrating Rule 15c2-11 diligence was completed. This compliance associate allegedly had no trading experience or formal training on conducting the kind of review required by Rule 15c2-11. The compliance associate completed the Form 211 for each respective OTC security and then placed a principal's electronic signature on the filing, despite knowing the principal had not reviewed the Form 211.

In the order, the SEC states that Rule 15c2-11 "imposes important responsibilities on broker-dealers to minimize the risk of fraud in the securities they sell to customers." It is not sufficient to complete diligence forms without conducting the required review of the securities to be sold. Rule 15c2-11 exists to provide protection for customers utilizing securities markets. Diligence obligations, whether originating from Rule 15c2-11 or elsewhere, should be taken seriously by entities and persons subject to SEC oversight.

Without admitting or denying the allegations, Canaccord agreed to be censured over the charges and was ordered to pay a civil penalty of $250,000.

Please contact Erik Hansen, Matt Fornshell or another member of our Business Group if you have any questions.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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