Registered representatives and financial advisers at small to midsize broker-dealers were reminded last week that to protect their businesses, they need to know the financial health of the firm with which they affiliate.
Advisers must, at a minimum, research the firm's audited financial statements and the volume of litigation the firm faces. All that information is available to the public.
Allied Beacon Partners Inc., an independent broker-dealer with 200 affiliated reps, told its brokers last Wednesday that it is in violation of industry net-capital rules. In other words, the firm isn't in compliance with Securities and Exchange Commission regulations requiring broker-dealers to have enough capital to meet its financial obligations to its creditors and customers.
FREEZES A FIRM
A net-capital violation essentially freezes a firm: Brokers can't buy securities for clients. Typically, managements of firms in this situation scramble to find a buyer or replenish company coffers with fresh capital, and the back-office staff starts sending out résumés.
What allegedly pushed the firm over the edge was a $1.6 million arbitration award to clients of a broker-dealer that no longer exists but at one time was owned by the same holding company that owned the firm that eventually became Allied Beacon.
Confusing? You bet.
The tangled history of Allied Beacon is unique to a broker-dealer that absorbed at least two broker-dealers that went out of business over the past few years after being besieged by costly investor lawsuits. But that tangled history wasn't hidden.
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 violations at firms, declined to comment on Allied Beacon.
Advisers who want to work at such small to midsize firms must do their due diligence on the broker-dealer's history and financial stability if they want to avoid the painful surprise of showing up to the office after a holiday weekend only to learn that their firm is on a death watch.
“I'm seeing some real quality advisers, with spotless records, having to make another move within 18 to 24 months after their previous firms failed,” said Brad Fay, president of recruiting firm IBDSearch LLC
Mr. Fay 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.
“I hope the advisers are careful in selecting their next B-D partner and find one specific to the needs of their practice,” he said.
AVOID SHOCK
Advisers must check the financial information of firms that they are considering joining if they want to avoid the shock that Allied Beacon reps experienced. Start with the firm's annual filing with the SEC called a Focus Report.
Allied Beacon was clear in that filing, which included audited financials, that it potentially faced significant damages and didn't have reserves to pay for those damages.
The firm's tangled history be-comes an issue here.
Until November 2011, Allied Beacon, which was formerly named Waterford Investor Services Inc., was 90% owned by AIC Inc. It is now owned by a Canadian holding company, Beacon Acquisition Partners Inc.
AIC was controlled by Nicholas Skaltsounis. In April 2011, the SEC named both AIC and Mr. Skaltsounis in a complaint alleging a Ponzi scheme.
The SEC sought a return of $486,000 allegedly received by the company from the fraud, according to the SEC filing.
But Allied Beacon had just $104,000 in net capital, far short of the amount that the SEC wanted.
The firm also had made no accrual for the potential damages because it “did not believe it is more likely than not the SEC will prevail in this matter.”
Such a shower of “nots” in a broker-dealer's audited financial statements should tie knots in an adviser's stomach.
The lineage of Allied Beacon was rife with other failed broker-dealers, and if advisers had dug a bit through federal court filings, available online for a fee, they could have seen the firm's history and that its various antecedents were the targets of the $1.6 million arbitration award that pushed the firm into its net-capital violation.
The lesson is that advisers need to dig into the history of small or midsize broker-dealers such as Allied Beacon. If the firm appears to be tangled in litigation and thin on capital, reps should think about the potential problems associated with aligning their businesses with such firms.
Failure to do so puts an adviser's business squarely at risk.
