Securities Lawyer Blog | Victim of Fraud?

TAG | complex products sold by brokers

Feb/13

11

FINRA Filings from Conservative Investors Who Were Sold Complex Products is on the Rise

Comments off · Posted by Securities Lawyer in FINRA

Financial regulators are confronting investor frauds that are giving retirement savers steep losses on complex products that until a few years ago were aimed only at the most sophisticated investors, writes Nathaniel Popper in a New York Times article from Feb. 11, 2013.

These victims are among the millions of Americans whose mutual funds and stock portfolios fell in the financial crisis, and who started searching for ways to make better returns. Many investors put money into speculative bets promoted by aggressive financial advisers. These investments included private loans to young companies and shares in bundles of commercial real estate properties.

“Since the crisis, we’ve seen more and more people reaching out into different types of exotic investments that are a big concern to us,” said William F. Galvin, the Massachusetts secretary of the commonwealth.

Wednesday, Feb. 6th., 2013, Mr. Galvin’s office ordered one of the nation’s largest brokerage firms, LPL Financial, to pay $2.5 million for improperly selling the real estate bundles, known as nontraded REITs, or real estate investment trusts, to hundreds of Massachusetts residents from 2006 to 2009, in some cases overloading clients’ accounts with them.

J. Bradley Bennett, chief of enforcement at the Financial Industry Regulatory Authority, or FINRA, said that for the last two years, 10 staff members have looked at the “proliferation of these products, to understand how they are being sold.”

“It’s got our attention,” he said. “We recognize the trends.”

Brokers are eager to sell these investments because they often bring in higher commissions. Several of these products hold out the promise of higher returns. Many of the investors in these complex products have filed claims with FINRA.

Private placements have been on the list of top enforcement concerns published by the national organization of state securities regulators every year since 2007. The private placements are supposed to be available only to wealthy, sophisticated investors, but several loopholes have allowed them to end up in the portfolios of less sophisticated retirement savers.

REITs have been one of the most heavily sold products. The new version, nontraded — the type that got LPL Financial in trouble in Massachusetts — can be bought and sold only in private transactions.

The outstanding amount of such nontraded REITs grew to $65 billion last year, from $43 billion in 2009. FINRA also issued a $14 million fine in October against David Lerner Associates, a large purveyor of nontraded REITs in the New York area.

If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations regarding non-traded REITs, private placements, or other complex products, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website and complete our online form at: http://www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Oct/12

8

FINRA Paying Attention to Brokerage Conflicts Involving Complex Products

Comments off · Posted by Securities Lawyer in FINRA

In a recent Reuters article, they write that FINRA, or The Financial Industry Regulatory Authority, is examining major brokerages regarding potential conflicts of interest and financial incentives associated with the sale of complex securities, said the Wall Street regulator’s chief.

Richard Ketchum, FINRA’s chairman and chief executive, said that FINRA is looking “very closely” at how brokerages control, analyze and supervise the effects of incentive compensation, such as commission, that may motivate brokers to sell certain complex securities.

FINRA is also looking at conflicts and incentives at broker-dealers that both develop and sell certain complex products, Ketchum said during remarks at an industry conference in New York.

FINRA, the industry-funded watchdog, has been clamping down on sales practices related to a range of complex securities, including leveraged and inverse exchange-traded funds. Investors are often drawn to the securities because of the promise of high returns, but are not fully aware of the risks, Ketchum said. Leveraged and inverse ETFs, for example, are designed to amplify short-term returns by using debt and derivatives and are more suitable for professional traders than for long-term retail investors.

FINRA is also asking brokerages about their training practices to ensure that brokers fully understand the features and risks of complex securities before recommending them to investors, Ketchum said.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, represents clients nationwide. For a free consultation on how to potentially recover your losses call: 888-760-6552, or you may visit our website and complete the online form at: http://www.securitieslawyer.com.

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Jan/12

26

FINRA Recommends Heightened Supervision of Complex Products

Comments off · Posted by Securities Lawyer in FINRA

The following information is excerpts from the article on the FINRA website. 

The fact that a product is “complex” indicates that it presents an additional risk to retail investors because its complexity adds a further dimension to the investment decision process beyond the fundamentals of market forces. This may be the case even though the complexity of some products may arise from features that seek to reduce the probability of investment losses in particular situations. Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments, and can lead to inappropriate recommendations and sales.

Although this Notice provides guidance about the characteristics of many complex products, it does not define a “complex product” or provide an exhaustive list of features that might render a product “complex.” Moreover, some relatively simple products may also present significant risks to investors that warrant heightened scrutiny or supervision. Each firm is responsible for determining which products require enhanced compliance and supervisory procedures. 

The fact that a product is “complex” indicates that it presents an additional risk to retail investors because its complexity adds a further dimension to the investment decision process beyond the fundamentals of market forces. This may be the case even though the complexity of some products may arise from features that seek to reduce the probability of investment losses in particular situations. Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments, and can lead to inappropriate recommendations and sales.

The fundamental point for firms is that if a product has similar features of complexity, such as embedded derivative-like features or a structure that produces different performance expectations according to price movements of other financial products or indices, then firms should err on the side of applying their procedures for enhanced oversight to the product.

Reasonable diligence must provide the firm or registered representative “with an understanding of the potential risks and rewards associated with the recommended security or strategy.” This understanding should be informed by an analysis of likelyproduct performance in a wide range of normal and extreme market actions. The lack of such an understanding when making the recommendation could violate the suitability rule. Firms should have formal written procedures to ensure that their registered representatives do not recommend a complex product to a retail investor before it has been thoroughly vetted. Those procedures should ensure that the right questions are answered before a complex product is recommended to retail investors. 

A well-designed system of internal controls should include a process to periodically reassess complex products a firm offers to determine whether their performance and risk profile remain consistent with the manner in which the firm is selling them. While a firm’s procedures for approving specific complex products will help to ensure that the solicitation of investors is properly supervised, firms also should consider developing procedures to monitor how the products performed after the firm approved them. Every product presents risks that may cause the product to perform differently than anticipated, particularly when market conditions have changed. Some firms require that complex products be formally reviewed for a specific period of time so that the firm can assess their performance and determine whether product limitations are being met and whether market conditions have altered the risks associated with each product. Firms also should conduct periodic reviews to ensure that only associated persons who are authorized to recommend complex products to retail customers are doing so.

Registered representatives who recommend complex products must understand the features and risks associated with those products. For example, a registered representative who recommends a collateralized mortgage obligation should understand the various features of the instrument, including the prepayment, credit and liquidity risks associated with the collateral and the particular tranche being recommended. Registered representatives who recommend structured products with embedded options and derivatives should possess a sophisticated understanding of the payoff structure, any limit on upside potential and the risks to investors that the payoff structure presents.

The registered representative who intends to recommend a complex product should discuss with the retail customer the features of the product, how it is expected to perform under different market conditions, the risks and the possible benefits, and the costs of the product. The registered representative also should discuss the scenarios in which the product may perform poorly. The registered representative should do so in a manner reasonably likely to facilitate the customer’s understanding. The registered representative should consider whether, after this discussion, the retail customer seems to understand the basic features of the product, such as the fundamental payout structure and the nature of underlying collateral or a reference index or asset.

Conclusion

The decision to recommend complex products to retail investors is one that a firm should make only after the firm has implemented heightened supervisory and compliance procedures. Firms should rigorously monitor the extent to which these procedures address the various investor protection concerns raised by the recommendation of complex products to retail investors. Firms also should monitor the sale of these products in a manner that is reasonably designed to ensure that each product is recommended only to a customer who understands the essential features of the product and for whom the product is suitable.

The entire article is available on FINRA’s website.  The posting is excerpts from the article obtained on FINRA’s website.

Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.
 
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Nov/11

10

SEC Sets New Record in Enforcement Actions on Advisers– up by nearly a third, B-Ds by 60%

Comments off · Posted by Securities Lawyer in FINRA

In an article for InvestmentNews.com, November 9th., 2011, Mark Schoeff Jr. writes that the Securities and Exchange Commission (SEC) engaged in an unprecedented crackdown on investment advisers over the last year, contributing to an overall surge in agency enforcement.

The SEC announced that it filed 146 enforcement actions against investment advisers and investment companies during the 2011 fiscal year, which ended Sept. 30. That number represents a 30% increase over the previous fiscal year and a nearly 200% increase since 2002, when the SEC filed 52 cases. The SEC took 112 enforcement actions against broker-dealers, a 60% boost from fiscal year 2010. Overall, the SEC filed 735 enforcement actions, also a record number. The cases resulted in disgorgements and penalties totaling $2.806 billion writes Schoeff.

The enforcement arm of the SEC can now more effectively pursue nefarious activities involving complex products and practices, such as those that contributed to the financial crisis, the agency asserts.

The InvestmentNews.com article states that the agency credited the increased activity to a reorganization of its Enforcement Division. The overhaul included reforming the tips and complaints process and establishing specialized units that allow the division to operate more like a prosecutor’s office.

“We continue to build an unmatched record of holding wrongdoers accountable and returning money to harmed investors,” SEC Chairman Mary Schapiro said in a statement.

SEC ‘s enforcement results release follows a similar announcement last month by the North American Securities Administrators Association Inc. The group said that state regulators reported a 51% increase in enforcement actions that led to $14.1 billion being returned to investors.

The SEC highlighted three investment adviser and broker dealer cases. One was an action against affiliates of The Charles Schwab Corp. for allegedly misleading investors about mutual funds that were laden with mortgage-backed securities. Another centered on AXA Rosenberg Group LLC and its founder, Barr Rosenberg, who was accused of papering over an error in an asset-management computer model. The third involved Merrill Lynch Pierce Fenner & Smith Inc.’s purportedly misusing customer information for proprietary trading and surreptitiously charging trading fees. The agency said that the Schwab paid more than $118 million to settle, while AXA Rosenberg ponied up $217 million for investor losses as well as a $25 million penalty.

The SEC also took 15 actions against executives involved in the financial crisis during fiscal year 2011. In the last two and a half years, the agency said, it has filed 36 separate actions against 81 defendants resulting in $1.97 billion in disgorgement.

Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained a loss through financial fraud, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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Aug/11

14

SEC Report Slams B-Ds over Sales of Reverse Convertibles

Comments off · Posted by Securities Lawyer in FINRA

In an article from InvestmentNews.com, Mark Schoeff Jr., writes that broker-dealers have been engaging in sales practices for structured securities products that hurt retail investors, according to a Securities and Exchange Commission (SEC) report released in July.

The article goes on to say that in an examinations of 11 broker-dealers, the SEC found that the firms may have steered clients into the complex products even though they were not suitable for their portfolios. The SEC also noted instances where broker-dealers charged prices that were too high, did not adequately disclose risks related to them and misrepresented them on customer account statements.

The SEC recommended that broker-dealers improve disclosure about structured securities products, establish procedures and controls to prevent abuses in the secondary market and conduct specialized training for their representatives who sell the instruments.

Schoeff writes that structured securities products are derivatives whose value is based on other securities, baskets of indexes, options, commodities, debt issuances and foreign securities. Sales to retail investors rose to $45 billion in 2010 from $34 billion in 2009, as customers have been seeking higher returns in a market characterized by low interest rates and uneven growth.

The InvestmentNews.com article goes on to say that one of the riskiest structured products, according to the SEC report, is a reverse convertible note, which is a security with an embedded put option.

“There were numerous instances at these firms where the sale of RCNs did not appear to coincide with the customers’ stated investment objectives and financial profile,” the report states. “In addition, the firms solicited the purchase of RCNs without adequately disclosing to customers the material risks associated with investing in RCNs. Many of the customers experienced significant losses in these securities as the value of the underlying equity securities diminished.”

Carlo di Florio, director of the SEC Office of Compliance Inspections and Examinations, said the report is designed to help broker-dealers strengthen their compliance programs.

“Beyond this report, we are monitoring the way in which these products evolve, and are considering additional steps in the near future relating to structured securities products that may further bolster investor protection,” he said in a statement.

The SEC report follows a recent warning to investors from the Financial Industry Regulatory Authority Inc. to be careful when considering the purchase of complex investment products.

Schoeff concludes that although the report does point out deficiencies in sales practices for structured instruments, it doesn’t indicate the scope of the problem.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member feel you have become a victim of stock/securities loss, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

 

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