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Broker-Dealer Charged with Violating of Gatekeeping Provisions

On August 14, 2019, the Securities and Exchange Commission (“SEC”) charged Canaccord Genuity LLC (“Canaccord”) with violating gatekeeping provisions aimed to protect investors. Small market cap, thinly traded securities, such as those that trade over-the-counter (“OTC”), are generally not subject to the same level of investor scrutiny and due diligence as stocks that trade on large established exchanges and are covered by assigned analysts. As such, broker-dealers such as Canaccord are expected to provide some “gatekeeping” functions, before listing the securities offerings of small cap companies.

The Exchange Act Rule 15c2-11 mandates that broker-dealers have a reasonable basis for believing that the prospectus and other information made available by the issuer of the securities are accurate. According to the SEC, Canaccord enabled dozens of OTC companies to list and trade, without making any proper effort to ensure prospectus information and offering figures were accurate or obtained from reliable sources. The SEC alleged that Canaccord assigned a compliance associate to review OTC listings; however, the compliance associate had no trading experience or training required by the rule. For example, the SEC noted that he did not have experience related to the analysis of financial statements. Simply assigning a compliance individual to a task does not waive firms of their obligations to ensure the task is done properly, adequately, and to full extent mandated by the SEC and/or the Financial Industry National Regulatory Authority. Compliance is a robust process of checks and balances so as to ensure fairness and transparency within the financial services industry.

Canaccord consented to the institution of cease and desist proceedings ordering that it cease and desist from committing or causing any violations relating to Exchange Act Rule 15c2-11, and it agreed to pay a $250,000 fine and censure.

The attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of investment and securities fraud. Additionally, attorneys at Lax & Neville are experienced with employment law in the financial services industry, and dealing with regulatory bodies such as the SEC. If you are a victim of fraud or are a Financial Advisor or Broker-dealer with a prospective regulatory issue, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.