Schorsch REIT suspension still in place at major broker-dealers

Despite RCS Capital Corp.’s statement Nov.24 that broker-dealers had reinstated 51 selling agreements for products, some major independent broker-dealers and large broker-dealer networks still have suspensions in place for new sales of nontraded real estate investment trusts and other products controlled by Nicholas Schorsch, RCS Capital’s executive chairman.
RCS Capital, or RCAP, declined to identify the broker-dealers that had resumed selling the nontraded REITs it distributes. But broker-dealers that are home to almost 29,000 registered representatives and financial advisers told InvestmentNews that suspensions of sales of RCAP-distributed REITs, along with REITs with the Cole brand, still are in place.
Broker-dealers in October began suspending sales of RCAP-distributed REITs and Cole REITs after American Realty Capital Properties Inc., or ARCP, a giant net-lease REIT that Mr. Schorsch controls, revealed a $23 million accounting error over the first half of the year that was intentionally left uncorrected.
Mr. Schorsch controls a vast web of real estate and brokerage companies. He is chief executive and chairman of American Realty Capital, the REIT sponsor that is the cornerstone of his empire. RCAP subsidiary Realty Capital Securities is the wholesaling broker-dealer for the ARC REITs. He is also chairman of ARCP, the traded REIT that owns the broker-dealer Cole Capital Corp., the distributor of the Cole-branded REITs.
The broker-dealers that still have suspensions in place for Cole and ARC REITs are among the largest in the industry. They include LPL Financial, the four broker-dealers of the National Planning Holdings Inc. network, the four firms in the AIG Advisor Group network, Securities America Inc. and Cambridge Investment Research Inc. Those firms total close to 29,000 registered representatives and advisers.
Not all firms, however, are shying away from REITs distributed by RCAP. Berthel Fisher & Co. Financial Services Inc. in mid-November reinstated sales of two REITs distributed through Realty Capital Securities. Berthel Fisher is a midsize broker-dealer with 326 affiliated reps and advisers and generated $64.2 million in total revenue last year.
Those two REITs are the Philips Edison-ARC Grocery Center REIT II Inc. and United Development Funding Income Fund V. Shelli Brady, a spokeswoman for Berthel Fisher, noted that both REITs, while they are distributed by RCAP, are independently controlled. Each has an accounting team that is not affiliated with other REITs and has their own subadvisory agreements and subadvisers that make their own business decisions.
Cetera Financial Group, which is owned by RCAP, previously had suspended sales of Cole-branded REITs. A spokesman for Cetera, Joseph Kuo, declined to comment when asked whether that suspension had been lifted.
RCAP spokesman Andrew Backman declined to comment for this story.
RCAP on Monday said it was regaining the confidence of the independent broker-dealers that sell its nontraded real estate investment trusts and other alternative investment products.
In a statement, it said broker-dealers had recently reinstated 51 selling agreements for products. It did not name the broker-dealers or the products. RCS Capital, or RCAP, has 1,020 selling agreements for its array of nontraded REITs and other products with 250 broker-dealers, according to the company statement.
“We have consistently communicated to the market our belief that the suspensions of certain of our ongoing selling agreements were of a temporary nature,” said Bill Dwyer, chief executive of Realty Capital Securities. “The reinstatement of these agreements and this initial resumption of sales are confirmation of this belief.”
Meanwhile, RCAP senior executives purchased a total of 79,165 shares of the company’s common stock earlier this month, the company said. Those executives included Mr. Dwyer and RCAP CEO Michael Weil. Mr. Schorsch was not on the list of executives who bought more RCAP shares.
“The recent purchase of RCS Capital shares by management underscores our firm belief that the company’s current market valuation does not properly reflect the fair value of the business’ robust fundamentals, earning power, growth prospects and significant competitive advantages,” Mr. Weil said.