JMP Securities Sanctioned by FINRA Over Conflict of Interest Disclosures in Research Reports
The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2013039333001) brokerage firm JMP Securities LLC (JMP Securities) concerning allegations that from January 1, 2010, through December 31, 2013, the firm violated multiple disclosure provisions of NASD Rule 2711, FINRA's research analyst conflict of interest rule. The purpose of the rule is to foster transparency in research reports by requiring member firms to clearly and prominently provide investors with important information regarding the firm’s conflicts of interest. In this case FINRA alleged that JMP Securities violated the rule by: (a) failing to present required disclosures in a clear, comprehensive and prominent manner; (b) omitting from certain research reports required disclosures concerning conflicts of interest relating to investment banking relationships with the subject company; and (c) failing to adopt written supervisory procedures reasonably designed to ensure compliance with the research analyst compensation restrictions.
JMP Securities has been a FINRA member since 1988 and is located in San Francisco, California. JMP Securities engages in a general securities business for institutional clients, including research, with approximately 153 registered representatives and 6 branch offices, publishing approximately 3,100 research reports per year.
As a background, NASD Rule 2711 is intended to provide transparency to investors with respect to conflicts of interest that could impact the objectivity and reliability of research reports issued by brokerage firms. The rule provides that research disclosures "must be clear, comprehensive and prominent." FINRA also provided interpretative guidance concerning the clarity of research disclosures including that member firms may not use conditional or indefinite language in required disclosures, such as "may have a position" in any of the subject company's securities. FINRA finds that conditional or indefinite language lacks the specificity required under the rules. Additionally, according to the rules research reports may not include disclaimers that contradict or are inconsistent with required disclosures.
FINRA found that JMP Securities failed to make clear, comprehensive, and prominent disclosures as required by the rules. For instance JMP Securities was required to disclose in its research reports if it expects to receive or intends to seek compensation for investment banking services from the subject company in the next 3 months. FINRA found that JMP Securities used an indefinite boilerplate statement that “The reader should assume that JMP Securities LLC will solicit business from the company covered in this report." FINRA found that this language, which appeared in each of the firm's 12,392 research reports published during the relevant period, lacked the specificity required under the rule and was not "clear, comprehensive and prominent."
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