Monday, March 28, 2016

Broker to Pay Fine Over Research Report in SEC's First Action Under 5(b)

By Rodney F. Tonkovic, J.D.

The Commission has ordered a broker-dealer to disgorge over $400,000 for its violations of the registration provisions of the Securities Act. According to the Commission, Canaccord violated Section 5(b)(1) by failing to meet the requirements for a prospectus under Securities Act Section 10 or qualifying for any of the safe harbors governing the publication or distribution of research reports (In the Matter of Canaccord Genuity Inc., Release No. 33-10059, March 24, 2016).

According to the Commission, Canaccord initiated research coverage of an issuer soon after the issuer invited Canaccord to participate as an underwriter for a secondary stock offering led by another broker-dealer that the issuer was planning for a month later. The initiation report constituted a written “offer” to sell the issuer’s securities, but Canaccord violated Section 5(b)(1) because the report did not meet the requirements for a prospectus under Securities Act Section 10 or qualify for any of the safe harbors governing the publication or distribution of research reports.

After Canaccord initiated coverage in April 2012, the issuer changed its plans and decided to conduct an accelerated offering later that month. The issuer asked Canaccord to act as the lead underwriter for this revised deal, and on April 24, 2012, Canaccord acted as the managing underwriter for the U.S. portion of a $40 million stock offering that the issuer conducted in the U.S. and Israel.

According to the Commission, a broker or dealer is subject to the restrictions of Section 5(b)(1) of the Securities Act when it publishes research on an issuer or its securities: (1) while seeking to participate in the underwriting of the issuer’s securities offering; (2) after having been invited to participate by the issuer in the underwriting of its securities offering; or (3) after reaching an understanding with the issuer that it will participate as a managing underwriter in the issuer’s securities offering. Canaccord's initiation of research coverage constituted an “offer” to sell the issuer’s securities because the initiation report was a written offer to sell the issuer’s securities and was a “prospectus” under the Securities Act.

Sanctions. Canaccord was ordered to pay $407,481 in disgorgement; $42,717 in prejudgment interest; and $100,000 in civil money penalties. The Commission also granted Canaccord a disqualification waiver under Rules 262 and 506 of Regulation D. This is the Commission's first action against a registered broker-dealer for violating Section 5(b) of the Securities Act by initiating research coverage while it was seeking, or had been invited, to participate in underwriting an offering for that issuer.

The release is No. 33-10059.

No comments: