Two sizable independent broker-dealers, National Securities Corp. and Calton & Associates Inc., reported as last year closed that they had increased their cash reserves and expenses for potential future costs stemming from investor lawsuits or other legal costs.
Such accruals for potential legal costs are standard practice at broker-dealers. But the two firms reported large increases in 2021 in the amounts they were squirreling away for such potential expenses.
National Securities, with more than 700 registered reps and financial advisers, at the end of December reported to the Securities and Exchange Commission it had accrued close to $4 million for legal matters as of the end of last year's third quarter, or four times the amount it had set aside at the same time a year earlier.
Calton & Associates, with 400 reps and advisers, reported near the end of November that it had $1.46 million in future legal costs and accrued legal costs at the end of the third quarter, an increase of more than 40% compared to a year earlier.
Millions or hundreds of thousands of dollars in legal costs can eat into profit margins at some independent broker-dealers, many of which operate on notoriously thin margins in the mid-to-low single digits. Brokerage firms also typically carry errors and omissions insurance policies to handle legal claims, but that insurance doesn't provide blanket coverage for all legal costs.
Both National Securities and Calton & Associates made the disclosures in annual audited financial statements with the SEC known as Focus reports.
A spokesperson for National Securities didn't return calls Thursday to comment. Randy Ciccati, CEO of Calton & Associates, also did not return calls to comment.
Neither stated their reasons for increasing the legal reserves, but last year Calton & Associates told InvestmentNews that it had increased legal reserves for future legal costs related to paying back investors who bought leveraged exchange-traded funds from the firm's advisers several years ago.
B. Riley Financial Inc., a Los Angeles-based diversified financial services firm, a year ago said it agreed to acquire the remaining 55% of New York-based National Holdings Corp., an investment banking and asset management firm, that it didn’t own already. National Holdings is the parent of National Securities.
All broker-dealers are required to file a public audited financial statement two to three months after the close of their fiscal year. The reports are a window into the financial workings and health of each firm, and include potential liabilities for legal and regulatory issues.
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