Small B-D's clients overly concentrated in illiquid alts: Finra

In complaint, regulator says that almost 95% of firm's revenues were generated from nontraded REITs and other direct participation programs

Feb 16, 2016 @ 1:16 pm

By Bruce Kelly

The Financial Industry Regulatory Authority Inc. last week filed a complaint against a small broker-dealer that allegedly generated almost 95% of its revenue from the sale of nontraded real estate investment trusts and other illiquid investments.

Finra said the firm, VFG Securities Inc., failed to supervise its brokers to ensure that clients' portfolios would not become overly concentrated in such illiquid investments.

From November 2010 to June 2012, VFG generated almost 95% of its revenue from the sale of nontraded REITs and direct participation programs, according to the Finra complaint. The firm had almost $4 million in total revenues for the year ended June 30, 2012, according to its audited financial statement with the Securities and Exchange Commission.

In an interview Tuesday, Jason Vanclef, the owner of VFG Securities, said that Finra had been “persecuting” him since an exam of the firm in 2012, when Finra began to focus on the firm selling illiquid alternative investments. Finra's investigation has been an attempt at “character assassination” and “an absolute persecution,” he said, adding that the cost of Finra's investigation to the firm has been close to $500,000.

The Finra complaint alleges that Mr. Vanclef used a book he had written, "The Wealth Code," as sales literature to promote investments in nontraded REITs and direct participation programs and “to lure” potential investors to VFG.

The Finra complaint said Mr. Vanclef “repeatedly claimed in 'The Wealth Code' that nontraded [direct participation programs] and nontraded REITs offer both high return and capital preservation. This claim was inaccurate and misleading, and contradicted information provided in the prospectuses for the instruments that [Mr.] Vanclef and VFG sold. Nontraded DPPs and nontraded REITs are speculative investments that contain a high degree of risk, including the risk that an investor may lose a substantial portion or all of his or her initial investments."

Mr. Vanclef “also claimed in 'The Wealth Code' that by investing in 'real' or 'tangible' assets and other instruments that he recommended, investors could 'reasonably achieve 8-12% results,' on their investments and 'get consistent returns' that provided 'piece [sic] of mind,'” according to the complaint.

“These claims were unwarranted because they were promises of future results and failed to provide the reader a sound basis to evaluate the claim," the complaint states.

Finra spokeswoman Michelle Ong said that the regulator had no comment on Mr. Vanclef's comments because the VFG matter is in litigation. She added that “generally speaking, when we see a violation of Finra rules, we will bring an action.”

Mr. Vanclef made no apologies about using illiquid alternatives for his clients, describing his clients as sophisticated “rocket scientists” who welcome the firm's investment philosophy that focuses on illiquid investments. A typical client comes to VFG with $2 million to $10 million invested, and he recommends putting 40% to 50% in illiquid investments, he said. The investment philosophy follows that of endowments and institutions that buy hard assets to generate income. “We usually don't have all the clients' money and are hired for a specific purpose,” he said.

“We design portfolios for clients and what they need, not what a regulator in Washington is telling us what they need,” Mr. Vanclef said. He wrote a follow up book to address changes in the market, he said.


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