May 12, 2021
In an Order Accepting Offer of Settlement released on April 6, 2021, the Financial Industry Regulatory Authority (FINRA) Department of Enforcement settled its complaint against Cabot Lodge Securities LLC, a full-service brokerage firm headquartered in New York that receives most of its revenue from underwriting. Cabot Lodge employs approximately 182 registered representatives in approximately 117 branch locations.
According to the Order, Cabot Lodge participated in an initial public offering of a non-traded real estate investment trust (non-traded REIT) that failed to supervise the REIT’s underwriting and sales. The $1.2 billion IPO was not well-received by the market and, through its creation in 2011 through March 31, 2015, had raised only $25.1 million in gross offering proceeds.
FINRA Department of Enforcement claimed in the complaint that the amount of organization and offering expenses exceeded 15 percent of the gross offering proceeds—above fair and reasonable limits, according to FINRA Rule 2310(b)(4)—and the compensation to its registered representatives was not disclosed to potential investors. Cabot Lodge also violated FINRA Rules 5110(c), 2310(b)(3), and 2010 by participating in the IPO even though certain individuals related to the firm were awarded restricted shares of the REIT’s common stock prior to the IPO and this information was not disclosed in offering prospectuses as underwriting compensation.
Based on the foregoing, Cabot Lodge’s violations resulted from its failure to establish, maintain and enforce a supervisory system reasonably designed to achieve compliance with FINRA Rules 5110 and 2310. Thus, Cabot Lodge violated FINRA Rules 3110(a) and (b) and 2010, and NASD Rule 3010(a) and (b).
Finally, based on all previous violations, Cabot Lodge did not have a reasonable basis to believe that its recommendation to an elderly customer to invest in the REIT was suitable for this customer, in violation of FINRA Rules 2111(a) and 2010.
The Offer of Settlement orders that Cabot Lodge Securities pay a $270,000 fine and $75,010 in restitution to the customer involved in the unsuitable recommendation claim. FINRA also ordered Cabot Lodge to review and revise its supervisory systems and procedures to address the deficiencies related to FINRA Rule violations in this Order.
"*" indicates required fields