Voya Financial Advisors Inc., Transamerica Financial Advisors Inc. and four other independent broker-dealers failed to give clients appropriate discounts on large sales of nontraded real estate investment trusts and business development companies, and Finra took notice, fining the six a total of more than $500,000.
The fines, levied in July and August, come as the Financial Industry Regulatory Authority Inc. watches whether firms are properly giving their clients discounts, commonly known in the securities industry as breakpoint discounts, according to industry executives.
Discounted prices are available on sales of certain nontraded REITs, typically when the sale is greater than $500,000. The price of a REIT, usually $10 per share with a $0.70 commission to the broker, can drop to $9.90 per share with the commission falling to $0.60 for sales between $501,000 and $1 million, according to various prospectuses of nontraded REITs.
'EXCESSIVE SALES CHARGES'
The six firms “failed to identify and apply volume discounts to certain customers' eligible purchases of non-traded REITs and BDCs, resulting in customers paying excessive sales charges,” according to the Finra settlements. The firms were also ordered to pay restitution to clients who were overcharged.
The two largest fines were $325,000 for Voya and $85,000 for Transamerica. Voya also was ordered to pay $42,000 in restitution, while Transamerica was ordered to pay restitution of $51,000.
The other firms, fines and client restitution included: Investacorp Inc., $50,000 and $27,400; J.P. Turner & Co., $45,000 and $21,200; National Planning Corp., $30,000 and $16,400; and Cetera Investment Services, $30,000 and $17,900.
Executives and spokespeople for the firms in question did not return calls Wednesday to comment. The firms did not admit or deny Finra's findings as part of the settlements.
Finra noted that the firms often relied on brokers and supervisors to ensure that clients received the appropriate discounts. The settlements focus on firms failing to maintain supervisory systems for the products. Five firms did not apply the volume discounts from 2009 through last year; one failed to do so from 2012 to 2014.
MORE CASES POSSIBLE
When asked whether Finra could soon bring other cases related to firms that failed to give clients appropriate volume discounts, a top official said it was keeping an eye on the issue.
“We will continue to seek restitution for adversely affected investors who are not afforded the full benefit of available volume discounts,” Brad Bennett, Finra's executive vice president of enforcement, wrote in an email to InvestmentNews.
Nontraded REITs and BDCs are sold almost exclusively by independent broker-dealers.
Finra has been focused on the broader issue of discounts for investors.
In July, Finra ordered three major broker-dealers, Wells Fargo, Raymond James and LPL Financial, to repay investors a total of more than $30 million after improperly charging them for mutual funds that were purchased for retirement accounts and charities.