SEC homing in on alternatives, Commonwealth CCO says

Tolley: Exams do 'deep dive' on sale of products such as nontraded REITs

Jan 28, 2014 @ 11:44 am

By Bruce Kelly

The Securities and Exchange Commission is paying close attention to how broker-dealers sell alternative investment products such as nontraded real estate investment trusts, and is performing a “deep dive” in its exams, according to a senior compliance officer of a leading independent broker-dealer.

In its 2012 and 2013 exam, the SEC was looking at details of the due-diligence process for such products at Commonwealth Financial Network, said Paul Tolley, the firm's chief compliance officer.

That review included multiple interviews with staff members, including specific analysts at the firm who review products , he said at the Financial Services Institute Inc.'s OneVoice Broker-Dealer Conference.

Live from FSI OneVoice: Check out a video interview with Dale Brown, in which the organization's president and CEO offers his Finra wish list.

The SEC exam began with a focus on senior investors, but quickly expanded to include alternative investments, Mr. Tolley said.

“It was a focus on alternatives from start to finish,” said Mr. Tolley, who moderated a compliance panel in Washington on Tuesday. “It was a deep dive and not something we have experienced before.”

SEC spokesman John Nester did immediately comment about SEC examinations focusing on due diligence of alternative investments.

The SEC's focus comes as the sale of nontraded REITs and other alternative investments have exploded at many independent broker-dealers, the exclusive sellers of such products. Last year, independent broker-dealers sold about $20 billion in nontraded REITs, double the amount they sold in 2012.

Don't miss: Compliance efforts help some independent broker-dealers avoid regulators.

Mr. Tolley said the SEC's exam was part of Commonwealth's broker-dealer/investment adviser review of dually registered firms.

The last such exam for Commonwealth was in 2005 and 2006, he said.

“I was pleased because I know how thorough and exhaustive we are on both sponsor due diligence and product due diligence,” Mr. Tolley said.


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