The Financial Industry Regulatory Authority (FINRA) recently announced it censured and fined Foothill Securities Inc. (“Foothill”). FINRA alleged Foothill maintained inadequate supervisory systems and written supervisory procedures to monitor recommendations of illiquid real estate investment trusts (”REITs”). As a result, FINRA censured Foothill and ordered it to pay $30,000 for its supervisory failures.
Foothill (FINRA CRD No. 1027) has been a FINRA member since 162. Foothill is located in Santa Clara, California and operates a general securities business as an independent broker model. According to FINRA, Foothill employs approximately 255 registered representatives operating from 135 branch offices.
In 2003, FINRA issued Regulatory Notice 03-71 highlighting the unique characteristics and risks of non-traditional REITS that require heightened supervision. FINRA wrote that “when offering non-conventional investments to customers, such as non-exchange traded REITs, FINRA member broker-dealers must establish sufficient internal supervisory controls that are reasonably designed to ensure that the sale of such products are suitable and comply with all applicable FINRA and Securities and Exchange Commission rules.” NTM 03-71.
FINRA’s Department of Enforcement recently investigated Foothill and determined it did not establish, maintain and enforce a reasonable supervisory system, including written supervisory procedures to supervise the sale of illiquid REITs. Specifically, FINRA alleged in March 2008 Foothill permitted one of its registered representatives to recommend illiquid REITs to 21 customers in an amount that exceeded Foothill’s concentration guidelines. According to FINRA, Foothill’s Concentration Guidelines at the time stated that no single order in one non-liquid product should equal more than 10% of a customer’s net worth or 20% of its liquid net worth.
FINRA alleged Foothill engaged in multiple violations of federal securities laws and industry rules and regulations, including but not limited to NASD Rules 3010(a) and (b), as well as FINRA Rule 2010. Specifically, under NASD Rule 3010, a brokerage firm owes a duty to all of its clients to monitor and supervise its employees properly. The rule states: “[e]ach member shall establish and maintain a system to supervise the activities of each registered representative…that is reasonably designed to achieve compliance with applicable securities laws and regulations…”
If a FINRA-member fails to supervise its employees or conduct proper due diligence on investment products, then the firm may be liable to the customer for damages or disciplined by FINRA, or both. Here, FINRA censured Foothill and ordered it to pay $30,000 for its REIT supervisory failures.
Lufrano Law, LLC is a national securities litigation firm and has experience representing investors who have investment disputes with brokers and broker-dealers. If you suffered investment damages investing in illiquid REITs through Foothill, you may be able to recover your losses through FINRA arbitration. Our firm only receives a fee if you recover money. Please contact one of our attorneys at (800) 627-2179 to schedule a free consultation or complete our free case evaluator.