Practice Management>Regulation & Compliance FINRA Fines Canadian Firm For Reg BI Violations Haywood USA failed to do due diligence for approximately 134 sales recommendations of private placement offerings totaling nearly $11 million, breaking FINRA rules and violating the SEC's care obligations.

Patrick Donachie | Nov 14, 2023

The Financial Industry Regulatory Authority censured the American-focused subsidiary of a Canadian investment firm for violating Regulation Best Interest (Reg BI) requirements by recommending 134 sales totaling nearly $11 million in private placements to U.S. customers over a number of years.

Haywood USA is a wholly-owned subsidiary of the Vancouver, British Columbia-based Haywood Securities, and was founded in 1996. (Haywood Securities was founded in 1981.)

Related: SEC Charges SW Financial Reps With Violating Reg BI

According to the settlement order, Haywood’s issues trail back to 2014, six years before Reg BI went into effect. Starting in September of that year, Haywood USA recommended a certain type of Canadian private placement offering known as “non-brokered private placements,” in which the firm didn’t serve as the issuer’s agent but as a “finder” making connections between investors and issuers.

But Haywood failed to do due diligence on the private placement offerings “beyond a search and review of the issuers’ recent public findings,” according to the FINRA settlement.

Related: New Reg BI Guidance Focuses on Care Obligations At Heart of Recent Enforcement

“To the extent the firm obtained any information from the issuer, Haywood USA generally sought minimal information and relied mostly on the issuer with little to no independent verification,” the order read.

FINRA found Haywood typically didn’t ask about any past or pending litigation or disciplinary issues, review the issuer’s “key contracts,” probe their business plans, nor do any site visits. 

Haywood USA’s due diligence procedures actually spelled out that when reviewing private placements, the firm must do “a search of the regulatory history of the issuer's officers and directors, and that its staff maintain a record and evidence of the due diligence conducted.” 

But Haywood didn’t typically do any searches into an issuer’s regulatory background, and didn’t keep any documentation on the due diligence it did do, according to FINRA. The firm therefore broke both the rules pertaining to due diligence before Reg BI, as well as that its care obligation, FINRA argued. 

Additionally, FINRA required certain documentation when a firm acted as a finder that Haywood USA never submitted for private placement sales between 2014 and 2023; the firm had a policy not to make those findings when an offering’s sale transactions weren’t solicited, and when the issuer didn’t give the firm a finder’s fee, but these exemptions didn’t match FINRA’s.

Haywood didn’t admit nor deny the findings, but agreed to the censure, as well as a $175,000 fine and to remediate the issues within 60 days; the firm did not respond to requests for comment.

To Sander Ressler, the co-owner and managing director of Essential Edge Compliance Outsourcing Services, the lesson for firms was less about the nuances of Reg BI compliance, but rather that FINRA rules could indeed apply beyond borders.

"FINRA made it clear that if a firm is involved in the solicitation of a security to an American citizen, regardless of where the firm is located, the firm has a responsibility to conduct significant due diligence of an offering made to an American citizen - no different than if the firm was domiciled in the US," he said.

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