Broker-dealer sales of opaque and illiquid private investments are squarely in the sights of securities regulators at the
Financial Industry Regulatory Authority Inc.
In fact, Regulation D private placements and “close cousin” non-traded real estate investment trusts are listed as the first and second areas of focus, respectively, for Finra's enforcement department, according to James Shorris, executive vice president and executive director of enforcement.
Watching the marketplace for Reg D deals, known as such for how they are filed with the Securities and Exchange Commission, is a “major, major initiative” at Finra, Mr. Shorris said Tuesday. He was speaking on a panel at the annual meeting of broker-dealer members of the Financial Services Institute, an advocacy group for independent firms.
He said Finra officials have monitored failures at some broker-dealers that sold private placements as suitable investments for their clients — but noted that there were some firms that failed to perform appropriate due diligence on certain private offerings.
During his comments, he specifically named the offerings of Medical Capital Holdings Inc. and Provident Royalties LLC. Both of those offerings raised hundreds of millions of dollars through sales by independent broker-dealers. In 2009, the SEC charged both with fraud.
Mr. Shorris then pointed to the sale of non-traded REITs as a big focus of Finra staff. “Those may not have been sold properly by reps to customers,” he said, with the reps at times not telling clients about the lack of liquidity that came after buying the product.
Finra is focused on examining other non-traditional investment products as well, Mr. Shorris said. In particular, the regulator is looking at investment products that Mr. Shorris characterized as “chasing yield” in a historically low-interest-rate environment.
Finra is also zeroing in on exotic products such as reverse convertibles and leveraged exchange-traded funds, and anti-money-laundering issues at broker-dealers.
