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Securities and Exchange Commission Upholds FINRA'S Censure and $50,000 Fine of Member Firm CapWest Securities Over Tenant-in-Common Investments

The Securities and Exchange Commission sustained disciplinary sanctions stemming from a 2007 case in which FINRA found that CapWest Securities, Inc. promoted through firm communications the use of IRS Code Section 1031 Exchanges or tenant-in-common (TIC) investments without providing sound basis or justifications for their use. At the time, investigators alleged CapWest promoted TICs in a way which was not fair and balanced.

Securities and Exchange Commission: SEC Opinion in Review of Disciplinary Proceeding

In its original decision, FINRA found that CapWest violated industry rules in its use of public communications to promote TICs while simultaneously failing to implement satisfactory supervisory systems and procedures to adequately review those communications.

CapWest promoted TICs, according to FINRA, without adequately explaining the investment option's features or potential risks, such as great illiquidity. The investigation concluded that CapWest "failed to provide" a balanced disclosure of rewards and risks associated with TIC investments.

FINRA uncovered the violative conduct when the regulator's Department of Advertising Regulation conducted a standard sweep of member firms, including CapWest, during which CapWest provided FINRA with 268 documents pertaining to marketing, advertising and other forms of public communications.

For instance, one of the documents uncovered during the sweep pictured a chess board with the caption, "What's Your Next Move?" The advertisement also stated in large print: "1031 Exchanges might just be the best kept secret in the Internal Revenue Code." The advertisement failed to discuss the actual mechanics of 1031 Exchanges, the investment's requirements, privileges and risks.

Other real-estate targeted advertisements promoted the positive attributes of TICs, marketing them as simple investments whose very simplicity eliminates "time intensive property management burdens associated with being a landlord." FINRA's review found that these same advertisements failed to disclose any of the negative attributes of the investments, such as risks inherent in an illiquid investment, and downside risk analysis that would balance the existent reward statements.

Furthermore, investigators wrote that some CapWest communications actually made exaggerated claims pertaining to TIC investor protections and 1031 Exchange tax benefits, thus misleading investors. FINRA specifically found that CapWest exaggerated the amount of protection offered by the securities industry as well as the likelihood that a given TIC investment will be successful. In a related finding, the investigation concluded that CapWest used improper performance predictions and forecasts to paint positive pictures of the TIC investment, also in violation of NASD/FINRA rules.

FINRA'S National Adjudicatory Counsel ("NAC"), which FINRA describes as "...the national committee that reviews initial decisions rendered in FINRA disciplinary and membership proceedings" on its own decision, reviewed the initial disciplinary decision and reduced the original sanction to $50,000.

Upon its review, the NAC determined that although CapWest perpetrated many violative actions, a majority of these violations were "inadvertent," as the firm's deficient supervisory system led to a number of the instances of misconduct simply because of poor design.

Following the NAC'S findings and reduction of the fine, CapWest sought relief from the Securities and Exchange Commission to review FINRA'S decision. The SEC was not as generous, and in its recently released decision, upheld the censure and reduced sanction.

If you have invested with CapWest Securities, Inc. or with any firm whose inaccurate, misleading or false communications or recommendations regarding Tenants-in-Common investments have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881.

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