FINRA Fines Los Angeles Firm E.J. De La Rosa & Co., Orders Restitution for Compliance Failures Including Unfair Practices, WSP Inadequacies & Improper Reimbursements

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The Financial Industry Regulatory Authority (FINRA) censured Los Angeles, California firm E.J. De La Rosa & Co., Inc, fining the brokerage $200,000 and ordering $43,564 in restitution after determining the firm engaged in unfair practices related to documenting municipal securities expenses and requesting inappropriate reimbursement, thus failing to comply with fair dealing and supervisory rules of the Municipal Securities Rulemaking Board (MSRB). FINRA also sanctioned De La Rosa for lack of adequate supervisory systems and written supervisory procedures related to the aforementioned misconduct.

FINRA Case #2013037910801

According to the investigation, De La Rosa's violations occurred between January 2006 and December 2010 and involved reimbursements for voluntary payments the firm made to the California Public Securities Association (Cal PSA). FINRA also determined that De La Rosa's misconduct extended and was influenced by a failure to have adequate systems and written supervisory procedures (WSPs) designed to address and monitor municipal securities reimbursement payment requests and receipts, such as occurred between De La Rosa and Cal PSA.

FINRA's report states that during the 2006-2010 period, De La Rosa made payments to Cal PSA, of which De La Rosa was a member firm and active on the association's Board of Directors, and requested reimbursement as underwriting expenses related to municipal and state bond offering negotiations. Enforcement reasoned that because, to De La Rosa's knowledge, Cal PSA's activities did not bear a direct relationship to the referenced state and municipal bond offerings, they could in no way be claimed as underwriting expenses. For this reason, FINRA deemed De La Rosa's requests for reimbursement an "unfair practice." They were additionally unfair because, as explained by FINRA, De La Rosa failed to accompany the requests with adequate disclosure to issuers about the nature of the related fees. This placed issuers at a financial disadvantage.

For instance, no statute or regulation required De La Rosa to be a member of Cal PSA in order to underwrite bond offerings, yet the firm treated certain Cal PSA underwriting assessments as transaction expenses and requested reimbursements accordingly. FINRA notes that De La Rosa's payments to Cal PSA were made on a voluntary basis and these underwriting assessments did not directly correspond to underwriting costs or work performed. Furthermore, a portion of De La Rosa's reimbursement payments concerned "expenses" related to political activities, including another organization's hiring of a lobbyist who occasionally advocated for legislative action related to Cal PSA's interests.

Investigators also found that De La Rosa's supervisory systems were inadequate: WSPs related to the reimbursement process were not in place nor did any De La Rosa WSPs at the time call for supervisors to review and approve requests for expense reimbursement to ensure fairness and adequacy.

As such, FINRA concluded that De La Rosa violated MSRB Rule G-17 by engaging in unfair practices and Rule G-27 by failing to adopt, maintain and enforce adequate written supervisory procedures designed to maintain compliance with, among other key areas, unfair practices as specified by the aforementioned Rule G-17. The investigation notes that, to date, De La Rosa has reimbursed some Californian issuers to the tune of $24,806 of its ordered $43,564 in total.

If you have invested with Southern California firm E.J. De La Rosa & Co. or with any other broker-dealer whose failures related to WSPs, compliance or standards of fair and just business dealings and practices has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.