“Show some love” – failure to manage conflicts of interest triggers fine for Chardan Capital Markets
An employee from the special equities group suggested the investment banking department would use research staff “as the first introduction to new companies to bait them in” and get investment banking’s “foot in the door.”
Chardan Capital Markets, LLC has agreed to pay a fine of $100,000 as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).
From March 5, 2013 through August 31, 2016 (the “Review Period”), Chardan violated certain research report disclosure requirements, and failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with disclosure rules.
Specifically, Chardan improperly published at least 103 research reports that contained 123 disclosure deficiencies, including failing to accurately disclose investment banking relationships, in violation of F1NRA Rules 2241(c) and 2010, and NASD Rule 2711(h).
The firm’s disclosure failures were the result of Chardan’s failure to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with the disclosure requirements of the Research Rules. By this conduct, the Firm violated FINRA Rules 3110(a), 3110(b)(1) and 2010, and NASD Rules 2711(i), 3010(a) and 3010(b)(1).
Chardan violated Research Rules that require firms to manage conflicts of interest between research analysts and those engaged in investment banking services. These failures involved the supervision of the Special Equities Group (SEG), which was a subgroup of the firm’s investment banking department during the Review Period. Chardan’s supervisory failure created the risk that research analysts could be inappropriately influenced by the Firm’s interest in attracting and maintaining investment banking business.
During the Review Period, the firm’s investment banking department consisted of 16 employees, seven of whom were members of SEG. However, Chardan failed to enforce its policies and procedures to block direct email communications between the SEG investment banking personnel and research personnel or ensure that compliance acted as an intermediary for communications between the SEG investment banking personnel and research personnel.
There were a number of direct email communications between SEG personnel and research personnel without compliance as an intermediary or any other institutional safeguards or supervisory review. Further, some direct email communications between SEG personnel and research personnel included improper suggestions by SEG investment bankers that research personnel should help solicit investment banking clients.’ For example:
- In an email dated February 24, 2015, sent by a SEG employee to other SEG employees and two research analysts, the SEG employee proposed establishing weekly meetings between research and investment banking, and stated that the investment banking department would use research staff “as the first introduction to new companies to bait them in” and get investment banking’s “foot in the door.”
- An email dated November 19, 2015, sent by the head of SEG to a research analyst, asked whether the head of SEG should have the head of research “show some love” to a prospective investment banking customer.
By failing to enforce (i) policies and procedures reasonably designed to achieve compliance with the Research Rules cited above; and (ii) information barriers or other institutional safeguards reasonably designed to ensure that research analysts are insulated from the review or potential pressure by persons engaged in investment banking services activities, Chardan violated FINRA Rule 3110(b)(1) (for conduct on and after December 1, 2014), Rules 2241(b)(1), 2241(b)(2)(G) and 2241(b)(2)(M)(i) (for conduct on and after December 24, 2015) and 2010, and NASD Rules 3010(b)(1) (for conduct before December 1, 2014) and 2711(i) (for conduct on and before September 24, 2015).
In addition to the fine, the respondent agrees to a censure.