FINRA Fined First Clearing, LLC $300,000 For Non-compliant Valuation Information Related to Investments in DPPs and REITs
Posted on Monday, February 1st, 2021 at 9:11 pm
In November 2020, FINRA censured and fined First Clearing, LLC $300,000 regarding non-compliant valuation information sent to more than 2,390 customers regarding their investments in Direct Participation Programs (DPPs) or Real Estate Investment Trusts (REITs). FINRA alleged that First Clearing failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to ensure compliance.
First Clearing, LLC obtained much of its valuation data regarding DPP and REIT securities from third-party vendors. According to FINRA, “From April 2016 through October 2016, First Clearing distributed 6,851 account statements to customers containing valuation information for one or more Direct Participation Programs (DPPs) or Real Estate Investment Trusts (REITs)… The firm sent these statements containing noncompliant valuations to more than 2,300 customers. During the same period, First Clearing failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to ensure that its customer account statements reflected DPP and REIT prices derived from a valuation methodology allowed by NASD Rule 2340(c). For the same reasons, the firm also failed to maintain accurate books and records relating to monthly and quarterly statements for customer accounts containing DPPs and REITs.”
FINRA found that “First Clearing a letter identifying several dozen DPP and REIT securities for which it was unable to provide rule-compliant, per-share estimated values. A few days later, that vendor provided First Clearing with April 2016 valuation data, which included zeros as valuations for those DPPs and REITs for which compliant valuations were unavailable. Those zeros fed directly into the system First Clearing used to generate customer-account statements at the end of each month… When First Clearing created its customer account statements at the end of April 2016, however, the firm’s security pricing team manually overrode the zeros that the firm’s third-party valuation vendor had provided for 33 DPP and REIT securities, and instead populated the April 2016 statements for customers holding those securities with the valuations that the vendor supplied for those positions the previous month—i.e., before the rule change. Thus, rather than learning that compliant valuations were not available, customers who owned one or more of the affected DPPs or REITs received account statements showing outdated valuations for those holdings. Because those earlier valuations did not derive from either the net-investment or appraised-value methodology, they did not comply with Rule 2340(c). In one example, an erroneous account statement showed the per-share estimated value of a customer’s REIT at $14.72, when the security’s rule-compliant per-share valuation at the time was approximately $0.90.”
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, First Clearing, LLC may be liable for investment or other losses suffered by its customers.
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