Weighed down by legal and insurance costs, another independent-contractor broker-dealer has gone under.
AFA Financial Group LLC, with about 100 advisers, is shutting its doors today, said Morrie Reiff, the firm's president.
That makes the second independent broker-dealer that has bitten the dust in as many months. In March, GunnAllen Financial Inc., was shut down when it could not meet its net-capital requirement. (More on the fall of Gunn Allen).
What's more, after conversations with industry lawyers and observers, Mr. Reiff said that as many as 35 other broker-dealers could be facing a similar fate.
AFA Financial, which is located in Calabasas, Calif., made the decision on its own to close, Mr. Reiff said. The B-D was “clobbered” by the historic downturn in the stock market in 2008 and 2009, he said, and the firm simply could not keep making its errors-and-omissions-insurance payments.
“Our reps were not producing what they needed to produce to keep the doors open,” he said. AFA, which was open for seven years, also saw a sharp increase in 2010 in securities arbitration claims from investors, he said.
Prior to 2010, the firm had one arbitration claim filed against it; this year, investors have sued the firm seven times. Some of those lawsuits involving the sale of Provident Royalties LLC private placements.
The Securities and Exchange Commission last year charged Provident with being part of a $485 million Ponzi scheme.
Mr. Reiff said that he feels terrible for the firm's employees and clients.
“It is really a very awful thing to go through.”