Allied Beacon Partners Inc., a midsize independent broker-dealer with 200 registered representatives, informed its financial advisers last Wednesday that the firm is in violation of industry rules requiring that sufficient capital be kept on hand to remain open for business, according to a rep at the firm, who spoke on the condition of anonymity.
Although the broker-dealer remains open and brokers can make unsolicited sales of securities for clients looking to cash out of positions, reps no longer can buy securities for their clients.
Other industry participants echoed what the rep told InvestmentNews about the status of the broker-dealer.
“I've spoken to a number of producers and producer groups, and it's my understanding that the advisers were told earlier [last] week that Allied Beacon was under its net-capital requirement,” said Brad Fay, president of recruiting firm IBDSearch LLC.
“That means the brokers can't buy securities for clients and can only make unsolicited sales of a client's position,” he said. “The firm was looking for an equity partner or capital infusion.”
Allied Beacon's chief financial officer, Roger Leibowitz, didn't return calls last week seeking comment.
Nancy Condon, a spokeswoman for the Financial Industry Regulatory Authority Inc., which monitors net-capital levels at broker-dealers, declined to comment on Allied Beacon.
The company is the legacy broker-dealer for at least two broker-dealers that went out of business over the past few years after being hit with investor lawsuits over fraudulent private placements. One of those investor complaints, originally filed in 2010 against a defunct broker-dealer called Community Bankers Securities LLC, finally caught up to Allied Beacon last month.
In a decision rendered by a Finra panel, Allied Beacon was ordered to pay a $1.6 million claim stemming from the 2010 complaint.
Claimants made several allegations, including that the firm failed to conduct due diligence related to selling private placements of what turned out to be Ponzi schemes, Medical Capital LLC and Shale Royalties, also known as Provident Royalties LLC.
That award allegedly pushed the brokerage into a net-capital violation, said several people familiar with Allied Beacon's situation.
The Securities and Exchange Commission's net-capital rule regulates a broker-dealer's ability to meet its financial obligations to its customers and creditors.
According to Allied Beacon's 2012 audited financial statement filed with the SEC, the firm had $104,000 in net capital at the end of last year.
Mr. Fay said he estimated that about 40% of the reps at Allied Beacon previously were affiliated with two firms: Workman Securities Corp., which closed in 2011 after striking a deal for many of its reps to move to Allied Beacon, and QA3 Financial Corp., which also closed in 2011 but had no formal agreement with Allied Beacon to move its reps there.
“A rep called me and said the firm was closed due to a net-capital violation as told to him from the back office of the broker-dealer,” said Jon Henschen, also an industry recruiter. “Allied Beacon's story shows a repeating theme of smaller firms taking on more risk with alternative investments to attract reps to join, but having a lack of capital to cover those risks when arbitrations occur.”
Another wrinkle is Allied Beacon's role as the distributing broker-dealer for a new nontraded real estate investment trust, United Realty Trust Inc.
The REIT will change dealer-managers to another broker-dealer, Cabot Lodge Securities LLC, said Jacob Frydman, the REIT's chief executive and one of the owners of Cabot Lodge Securities.
That change had been afoot prior to the net-cap violation, he said.