Sanctions levied on Fox Financial Mangement Corporation, a brokerage firm based on Carrollton, Texas, along with principals Brian A. Murphy, of Frisco, Texas, and James E. Rooney, Jr., of Carrollton, Texas, were affirmed by Financial Industry Regulatory Authority (FINRA) National Adjudicatory Council in a Decision which confirmed findings that the firm and principals, inter alia, failed to adequately supervise private securities transactions. Department of Enforcement v. Fox Financial Management Corporation et al., No. 2012030724101 (Jan. 6, 2017).

According to the Hearing Panel’s findings, the firm, Rooney, and Murphy were responsible for managing the private securities transactions of JEP, a corporate securities representative who was registered with Fox Financial Management Corporation from May of 2008 to October of 2012. JEP reportedly founded and was the president of JP&A, Inc., which provided customers with financial planning and investment management services on a fee basis.

Evidently, assets of JP&A’s clients were invested in P&C Global Fund, LP, P&C Value Added Fund, LP, or P&C Dividend Capture Fund 1, LLC, which were hedge funds managed by P&C Partnership, LLC. The Decision stated that JEP was the managing partner of P&C Partnership, LLC. The funds reportedly made investments in domestic and international sector funds, closed-end dividend paying funds, and strategies for timing domestic indices.

Apparently, JEP or his partner, AC, invested the JP&A clients’ funds in the aforementioned hedge funds, or a model investment portfolio. The Decision stated that funds which clients’ assets were placed into had provided an annual fee of two percent to JP&A for management services. Additionally, the limited partners of the funds reportedly provided P&C with a twenty percent payment based upon the net profits which the funds’ accumulated monthly.

The Hearing Panel determined that JEP’s activities were disclosed to Fox and ultimately Rooney and Murphy, where his work was treated as an outside business activity. However, the transactions associated with JEP’s work were private securities transactions, and were never placed on Fox Financial Mangement Corporations’ records and books. Critically, they were evidently never supervised by the firm, Murphy, or Rooney. According to the Decision, the firm, Rooney and Murphy admitted to have violated FINRA Rules in this regard.

Particularly, the firm, Rooney and Murphy acknowledged that the private securities transactions which JEP engaged were approved upon and ultimately not recorded on Fox’s records and books or supervised as if the transactions had been placed by Fox itself. Consequently, the firm, Rooney and Murphy were found to have violated FINRA Rule 2010, as well as NASD Rules 2110 and 3040(c)2.

FINRA found that the firm, Rooney and Murphy did not conduct an adequate analysis of JEP’s activities in order to make a determination as to whether they were considered outside business activities or private securities transactions. Apparently, no examination was conducted pertaining to the compensation that JEP received outside the auspices of the firm, or any analysis into whether the services or investments which JEP offered through P&C and JP&A were actually suitable for customers.

The firm evidently failed to analyze the offering materials associated with the investment advisory services or the P&C hedge funds. Additionally, financial statements, business related correspondence, and advertising materials were not reviewed by the firm, Rooney and Murphy. The firm, Rooney and Murphy engaged in conduct FINRA found to be violative of FINRA Rules 2010, and NASD Rules 2110 and 3010 in this regard.

Consequently, the firm was fined $100,000.00 and its FINRA membership was expelled, while Murphy and Rooney were barred from associating with any firm in any principal capacity. Further, Murphy was fined $25,000.00 and suspended for three months from associating with any FINRA member in any capacity, while Rooney was fined $50,000.00 and barred for six months. Upon review, The National Adjudicatory Council held that FINRA’s Hearing Panel’s sanctions were appropriate.

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