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Broker-Dealer Cannabis Activity Comes Under Scrutiny

By Rita Raagas De Ramos May 20, 2019

At an “Ask Finra” session at the self-regulator’s annual conference Friday, one question from a member firm’s representative was whether the SRO is reviewing cannabis-related activity as part of its examinations.

William St. Louis, regional director for sales practice at Finra’s Northeast Region, said the SRO is indeed reviewing cannabis-related activity in the context of possible violations of existing rules.

“As you all know, we look at advertising, communications, suitability, whether or not material disclosures are being made or omitted, suspicious activity detection and response,” St. Louis said. “For all of those, they come into play with cannabis.”

There is a “disconnect” between federal law and state laws related to cannabis, so Finra “will look at communications and disclosures around that disconnect,” according to St. Louis.

St. Louis said “there have been fraudulent activities regarding cannabis offerings” so Finra is reviewing if firms are complying with their suspicious activity detection and response responsibilities.

In an investor alert issued in September last year, the SEC said its Office of Investor Education and Advocacy and Retail Strategy Task Force are warning investors about these kinds of investment schemes involving marijuana-related companies.

OIEA regularly receives complaints about marijuana-related investments, and the SEC continues to bring enforcement actions in this area, according to the alert.

The SEC urged investors: “If you are thinking about investing in a marijuana-related company, you should beware of the risks of investment fraud and market manipulation.”

The SEC outlined the following red flags: unlicensed and unregistered sellers; offers of guaranteed returns; and unsolicited offers.

In August last year, Frank Thomas Marino of Newport Beach, Calif. was assessed a deferred fine of $15,000 by Finra and was suspended from association with any Finra member in all capacities for six months until Feb 9, 2019. Marino’s BrokerCheck record still lists him as a previously registered broker.

Without admitting or denying the findings, Marino consented to the sanctions and to the entry of findings that he was responsible for the content of an investment-related website that did not comply with Finra rules regarding communications with the public.

The Finra findings stated that Marino was part owner, chairman and CEO of a company formed to manage pooled investments in businesses expected to benefit from the legalization of cannabis.

Marino was registered with two member firms at the time, one of which served as the placement agent for a private placement that was raising capital for the company, according to Finra. The company marketed itself and attracted investors through a website for which Marino participated in creating, approved and published the content, Finra added.

Finra said the content displayed on the website did not meet the standards for broker-dealer communications with the public.

The company’s website contained false and misleading references to the its registration status under the Investment Company Act of 1940, failed to include appropriate risk disclosure necessary to balance the discussion of the benefits of the company and included unwarranted suggestions of potential investment returns, according to Finra.

Finra said the website also inaccurately characterized the company as a conglomerate, made unwarranted claims about further federal or state legalization of cannabis and made unwarranted statements regarding the liquidity of the company’s securities.

Finra

In June last year, Brian Sung Hyun of Las Vegas, Nevada was assessed a deferred fine of $5,000 by Finra and suspended from association with any Finra member in all capacities for one month until August 1, 2018. Hyun’s BrokerCheck record still lists him as a previously registered broker.

Without admitting or denying the findings, Hyun consented to the sanctions and to the entry of findings that he participated in outside business activities, received compensation and had a reasonable expectation of future compensation — all without providing his member firm with prior written notice of his involvement in these outside business activities.

Finra’s findings stated that Hyun performed financial modeling assignments for a cannabis consulting company and was paid $7,350 for his work, and worked for another company that owned and operated a medical marijuana cultivation, processing and dispensary business.

Hyun indirectly owned an interest in the second company and had a reasonable expectation of future compensation from the company’s business activities, Finra added.