KCD Financial, headquartered in De Pere, Wisconsin, was censured and fined $73,000.00 by Financial Industry Regulatory Authority (FINRA) per a National Adjudicatory Council Decision stating that the firm engaged in the sales of unregistered securities and failed to supervise staff who sold such unregistered securities. Department of Enforcement v. KCD Financial, Inc., No. 2011025851501 (Aug 3, 2016).
According to the Decision, the firm offered interests in a Westmount Realty Finance Distressed Residential Fund 2011 LLC through general solicitation of the securities, when such conduct was prohibited by Securities Act of 1933 Section 5(a) and (c) due to such securities not being first registered with the Securities and Exchange Commission and due to no exemption from registration with the SEC that applied.
The Decision stated that KCD’s general solicitation of the WRF Fund was apparent, which prevented the Fund from qualifying for a registration exemption under Rule 506. Particularly, the issuer of the fund reportedly made a press release, which directly prompted two separate newspaper articles to be produced and reprinted on the website of Westmount Realty Capital.
FINRA found that Westmount Realty Finance’s press release qualified as a general solicitation. The Decision stated that that the press release and newspaper articles that resulted on the website were not just directed at persons who the issuer had some form of a preexisting and substantive relationship with; but rather, directed at the general public.
FINRA additionally noted in the Decision that Westmount Realty Capital’s securities constituted an offer. The aforementioned articles, which FINRA found to be based on the press release details, stated information about the WRF Fund’s issuer, name, nature, size, and description. WRF was reportedly described as a $10,000,000.00 real estate fund designed to acquire both residential properties that were bank owned, and residential loans that were discounted and nonperforming.
Apparently, the articles also stated that the Fund was recently launched by a private investment firm, in which the business relationships, history in the property business, and other positive details of the issuer were discussed. FINRA particularly noted that the articles had advertised conditions in the real estate market as being favorable, and that a specific investment was being offered through Westmount. FINRA found that Westmount’s tactics constituted an attempt to generate interest in the WRF Fund, and that at least one customer contacted KCD in connection with the reading of such articles.
The Decision also addressed KCD’s failure to demonstrate that the only individuals who made an investment in the WRF Fund were those that were solicited under legitimate mechanisms (e.g. other than the newspaper articles or through a pre-existing client base). FINRA’s National Adjudicatory Counsel found that the firm’s aforementioned conduct was violative of Securities Act of 1933 Section 5, as well as FINRA Rule 2010.
FINRA also found that KCD had failed to supervise the sales of its staff pertaining to the unregistered securities sales of the WRF Fund. Apparently, the firm had supervisory procedures which were specific to the private offerings of securities, in which supervisors were called upon to conduct a due diligence review and ensure regulatory compliance. The Decision stated that KCD was cognizant of issues pertaining to the WRF Fund in this regard.
Particularly, KCD was seemingly made aware from the issuer’s counsel that Westmount Realty Finance violated advertising solicitation rules, and that the press release of the WRF Fund would result in its offering being non-exempt from securities registration. KCD’s compliance officer and supervisor of KCD’s Dallas branch office was reportedly instructed by the issuer’s counsel not to sell securities from customers who sought to invest in response to such newspaper articles.
According to the Decision, despite KCD’s knowledge of the issues pertaining to WRF, it never stopped its staff from selling securities interests in the WRTF Fund. FINRA further noted that the KCD’s compliance administrator did not respond appropriately even after being made aware of the violations of Regulation D directly from FINRA’s personnel. FINRA found that the firm’s conduct of failing to supervise the staff’s sales of unregistered securities sales was violative of FINRA Rules 2010 and NASD Rules 3010.
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