Regulators continue to crack down on sales of alternative investments, leading to more pain for broker-dealers.
Earlier this week, the
Financial Industry Regulatory Authority Inc. signed off on a $550,000 fine against VSR Financial Services Inc., a midsize broker-dealer known for selling alternative investments, as well as a $10,000 fine and 45-day suspension of VSR's chairman, Don Beary. Mr. Beary is suspended from acting as a principal over that time but is not suspended from the industry.
VSR fell short on watching over concentrated client positions of alternative investments, according to Finra. In a letter of acceptance, waiver and consent dated May 15, Finra alleged that from 2005 to 2010, VSR and Mr. Beary “failed to adequately implement the firm's supervisory system pertaining to its supervision of concentrated positions in alternative investments through the use of a 'discount program.'” That program “artificially reduced the amount a customer had invested in a particular investment for purposes of calculating concentration,” according to the Finra letter.
“In addition, when calculating concentration at certain risk levels, VSR reduced the risk ratings on many investments, making the ratings inconsistent with the risks stated in the offering documents related to the investments,” according to the Finra letter.
VSR Financial has 460 registered reps. Between January 2006 and September 2010, 20% to 45% of the firm's revenue was generated by the sale of nonconventional investments, according to Finra. That level of sales contributed to “increasing the seriousness of the violations,” the Finra letter said.
VSR generated $98.1 million in total revenue in 2012, according to
InvestmentNews' most recent survey of independent broker-dealers.
Earlier this week, Mr. Beary told
InvestmentNews about changes VSR made this month to policies regarding the sale of alternative investments. In particular, the firm scaled back the amount of illiquid alternative investments that can be held in client accounts and lessened the amount that investors over 70 could own. In the past, VSR clients could have 40% to 50% of their accounts in illiquid investments. That has been reduced to 35%, with new limits for older clients.
In an interview Friday, VSR chief executive J. Michael Stanfield said the Finra letter ended a long-running investigation that was touched off several years ago by a rogue representative in Baton Rouge, La.
“VSR is 28 years old, and its largest fine prior to this was $20,000,” Mr. Stanfield said. “The regulators are sending a powerful message that if you sell alternative investments, you have to have robust supervision and order approval processes.”
