FINRA Sanctions First Southwest Company Over Supervisory and Prospectus Delivery Failures
The Financial Industry Regulatory Authority (FINRA) brought an enforcement action ( FINRA No. 2013038322901) and sanctioned brokerage firm First Southwest Company (First Southwest) concerning allegations that from August 8, 2012 through April 26, 2013 First Southwest failed to deliver Exchange Traded Fund (ETF) prospectuses to its own customers in violation of the securities laws. In addition, FINRA found that First Southwest failed to establish and maintain a supervisory system reasonably designed to monitor and ensure the delivery of prospectuses to customers Finally, FINRA found that First Southwest delayed notification of its prospectus delivery failures to the 36 correspondent firms that were affected by the firm’s failures.
First Southwest is registered broker-dealer since 1946 and is headquartered in Dallas, Texas. The firm offers investment services that include corporate equity and debt securities, mutual funds, government securities, municipal securities, variable life insurance and annuities, limited partnerships, exchange traded funds, and unit investment trusts. First Southwest is also a clearing firm that offers clearing services to 78 correspondent firms.
According to FINRA, on August 8, 2012, First Southwest's clearing operations converted its back office system to a new system that needed to coding to instruct its third party vendor to deliver a prospectus at the same time that securities were delivered. FINRA found that over the course of approximately seven months the coding was erroneous for certain securities transactions effected by the firm's customers resulting in the firm's failure to deliver a prospectus for at least 506 securities transactions with approximately $40 million in trading value.
FINRA also found that First Southwest failed to deliver a prospectus for thousands of ETF, Closed-End Fund (CEF) and Unit Investment Trust (UIT) purchase transactions for 36 correspondent firms that used First Southwest as their clearing firm. In addition, FINRA found that First Southwest’s prospectus delivery failures were identified in April 2013 by the firm. Even though First Southwest became aware of the prospectus delivery system failures in April 2013, FINRA determined that the firm did not provide notice of the prospectus delivery failures to the firms it cleared for until over a year later, in August 2014.
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