At Bakhtiari & Harrison, we believe that the cornerstone of any successful investment strategy is rooted in robust due diligence. Investors trust that broker-dealers will thoroughly vet the products they recommend, ensuring their clients’ financial security. Unfortunately, as recent findings have shown, not all firms meet these critical responsibilities. The Financial Industry Regulatory Authority (FINRA) has recently sanctioned Haywood Securities (USA) Inc. (“Haywood USA”) for significant due diligence failures, which serve as a stark reminder of the importance of regulatory compliance and investor protection.
Background: The AWC Findings
Haywood USA, a FINRA member since 1997 and a subsidiary of the Canadian investment dealer Haywood Securities, Inc., has been found to have breached critical regulatory obligations over several years. According to the Letter of Acceptance, Waiver, and Consent (AWC) issued by FINRA, the firm’s misconduct spanned from September 2014 to February 2023, involving over $11 million in private placements. Haywood USA’s primary failure centered on its lack of reasonable due diligence in the recommendation and sale of 53 different Canadian private placement offerings, also known as non-brokered private placements (NBPPs), to U.S. customers.
The Due Diligence Shortfall
From 2014 to 2023, Haywood USA recommended 134 sales of NBPPs without conducting the necessary due diligence required under FINRA rules and later, Regulation Best Interest (Reg BI). The firm’s approach to these private placements was alarmingly superficial. The only due diligence performed involved a cursory review of the issuer’s recent public filings, with minimal independent verification of the information provided by the issuers. Crucial steps like investigating past or pending litigation, reviewing key contracts, or conducting site visits were generally ignored.
Haywood USA’s written supervisory procedures required thorough due diligence, including a search of the regulatory history of the issuers’ officers and directors. However, these procedures were not followed. This lack of diligence was exacerbated by the firm’s failure to maintain proper documentation of any due diligence activities that were conducted, a direct violation of FINRA’s standards.
Supervisory System Failures
The failures at Haywood USA were not limited to due diligence alone. The firm also failed to establish, maintain, and enforce a supervisory system designed to ensure compliance with FINRA and NASD rules, as well as Reg BI. Initially, from September 2014 to June 2020, Haywood USA did not adhere to the supervisory requirements under FINRA Rule 2111, which mandated that broker-dealers must reasonably ensure that recommendations are suitable for clients. Post-June 2020, the firm also failed to comply with the requirements under Reg BI, which imposed a higher standard, requiring brokers to act in the best interest of their retail customers.
Non-Compliance with Filing Requirements
Further compounding these issues, Haywood USA failed to file offering documents with FINRA as required under FINRA Rule 5123. Over the span of nearly a decade, the firm neglected to submit the necessary documentation for 236 Canadian private placement offerings. The firm’s rationale for non-compliance was that unsolicited transactions or those where no finder’s fee was received did not require filings—a stance that FINRA found to be baseless.
Sanctions and the Path Forward
In response to these violations, FINRA imposed significant sanctions on Haywood USA, including a censure, a $175,000 fine, and an undertaking to remediate the supervisory deficiencies identified. Within 60 days of accepting the AWC, a senior member of Haywood USA’s management, who is a registered principal of the firm, must certify that the firm has rectified these issues and implemented a compliant supervisory system.
Lessons Learned: The Importance of Due Diligence
This case underscores the critical role of due diligence in protecting investors and maintaining market integrity. The failures at Haywood USA serve as a cautionary tale for other broker-dealers, highlighting the severe consequences of neglecting regulatory obligations. At Bakhtiari & Harrison, we hold firms accountable when they fail to protect their clients. We believe every investor deserves the peace of mind from knowing their investments have been vetted with the highest level of scrutiny.
If you believe you have been affected by due diligence failures or other misconduct by your broker-dealer, our team is here to help. We concentrate on representing investors who have suffered financial losses due to regulatory breaches, ensuring that those responsible are held accountable.
Contact Bakhtiari & Harrison today for a consultation. Your financial future deserves nothing less than the utmost diligence and care.