In an article for InvestmentNews.com, on February 1st, 2012, Mark Schoeff Jr. writes that in a market defined by low interest rates, investors are searching for higher returns. But brokers better be careful how they try to deliver those results, according to their primary regulator.

In a 16 page letter posted on its website, the Financial Industry Regulatory Authority Inc., (FINRA)  outlined its regulatory and examination priorities for 2012. At the top of the list: conduct and products meant to beat the market that instead are unsuitable for investors.

“FINRA is informing its examination priorities against the economic environment that investors have faced since 2008, as these circumstances have steadily contributed to conditions that foster an increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings, and misappropriation and fraud,” the letter states.

“Given the low yields on Treasuries, we are concerned that investors may be inadvertently taking risks that they do not understand or that are inadequately disclosed as they chase yields,” the letter continues. Lack of liquidity and inadequate cash flow in investments also are red flags Finra is monitoring.

Shoeff writes that among the products that are on FINRA’s watch list for suitability problems: residential- and commercial-mortgage-backed securities, nontraded real estate investment trusts, municipal securities, exchange-traded funds using synthetic derivatives and significant leverage, variable annuities, structured products, private placements and life settlements.

FINRA said that it is undertaking a “broader data collection effort” and targeting its enforcement efforts on high-risk firms.  FINRA warned brokers not to enhance their balance sheets by taking on excessive debt or manipulating their assets and liabilities.

“FINRA is concerned about the additional risks that are being taken as a result of increased leverage, including market, credit and liquidity risk,” the letter states. “We will continue to monitor firms that employ a high degree of leverage, both on-balance-sheet and off-balance-sheet during the upcoming year.”

The InvestmentNews.com article goes on to say that FINRA also is zeroing in on fees.

“We remain concerned about firms’ charging retail investors hidden, mislabeled or excessive fees,” the letter states. “In 2011, FINRA brought cases against several broker-dealers that charged such excessive fees in the form of postage and handling charges that were unrelated to actual costs, and we will continue to investigate firms that appear to be taking advantage of investors through fee schemes.”

FINRA’s guidance on social media is less explicit. It said that it “is a topic on which we continue to receive many questions from firms.” FINRA reiterated that “core regulatory requirements apply to all communications with the public, irrespective of the medium or device used to communicate. Firms must be able to appropriately supervise business communications made using personal devices.”

Schoeff writes that high-frequency trading, and oversight of the creation and redemption of exchange-traded funds, also are listed among the agency’s many priorities. FINRA oversees about 4,460 broker-dealers and enforces the suitability standard, which requires brokers to sell products that fit their clients’ investment needs, timelines and risk appetites.

Other regulators are paying attention to FINRA’s priorities as   well.

“States look at these very highly,” said Steve Thomas, director of Lexington Compliance, a division of RIA in a Box LLC, and former South Dakota chief compliance examiner. “They make individual decisions on whether these items should be added to their state’s examinations.”

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In a November 28, 2011 article for InvestmentNews.com, Bruce Kelly writes that Next Financial Group, Inc. has agreed to pay $2 million in restitution to clients who bought oil and natural gas private placements of Provident Royalties LLC, which the Securities and Exchange Commission in 2009 accused of fraud.

In a Financial Industry Regulatory Authority Inc. letter of acceptance, waiver and consent, Next Financial sold $20 million of three separate Provident private placements from July 2008 to January 2009. Over that time, the firm’s due diligence was lacking, according to the Finra.

“Despite the fact that Next received a specific fee related to the due diligence that was purportedly performed in connection with each offering, beyond reviewing the private-placement memorandum for the offerings, [Steven Nelson, vice president of investment products and services] did not perform adequate due diligence on the [Provident] offerings,” according to the AWC, which was finalized last month.

Next Financial reported $136.1 million in gross revenue last year and has 866 affiliated reps and advisers, writes Kelly.

Next Financial and Mr. Nelson’s due diligence on Provident fell short in several areas, according to Finra. Mr. Nelson “did not travel to Provident’s headquarters in Texas to conduct due diligence on three separate offerings,” according to the AWC. He also “did not see any financial information regarding Provident Royalties, other than the information contained in the private-placement memorandum. Further, once [Mr.] Nelson had concluded that Next could sell [the three offerings], he did not conduct adequate continuing due diligence.”

The InvestmentNews.com article adds that outside due-diligence reports highlighted a number of red flags of the Provident offerings, and Mr. Nelson “should have scrutinized each of the [Provident] offerings, given the purported high rate of returns,” according to the AWC.

Next Fincancial’s $2 million in restitution to investors is part of a larger case brought by the receiver for Provident in federal court in Dallas. While at least 20 broker-dealers that sold Provident private placements have shut down or declared bankruptcy, others, now including Next Financial, have had the funds to pay the claims and remain open for business. About 50 broker-dealers in total sold Provident, which raised $485 million from 7,700 investors from 2006 to 2009.

Finra censured and fined Next $50,000, and fined Mr. Nelson $10,000 and suspended him as a principal for six months. Next Financial also failed to supervise adequately a registered rep’s sale of fraudulent life settlement products from 2007 to 2009, according to the AWC. The rep, who was not identified, sold $3.5 million in life settlement contracts to 35 clients.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced losses with Next Financial Group, Inc., 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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It was reported that on July 22, 2011, the Securities and Exchange Commission (SEC) released a report from its Life Settlements Task Force which recommended that the SEC urge Congress to amend the federal securities laws to include life settlements as securities. The SEC report also recommended that the SEC monitor brokers and providers to assure that legal standards of conduct are being met.

This report raises a key policy question about life settlements, in which a policyholder sells the policy to someone else, who then assumes responsibility for paying the premiums. In exchange, the insured person receives a lump-sum payment that exceeds the policy’s cash surrender value but is less than the expected payout in the event of death.

The SEC proposal to define life settlements as securities is both wise public policy and the only solution that would give all participants the confidence to create a sustainable secondary market for life policies.

This 43-page report and its 40 pages of exhibits are the product of a joint task force that conducted an extensive review of existing law, litigation and enforcement actions. The task force also interviewed all major market participants, making the study the most comprehensive look at this complex issue to date.

Securities Lawyer, Lars Soreide, feels that ‘life settlements’ should be considered ‘securities.’ Lars Soreide says, “It is a gray area when a financial advisor takes off his securities hat and puts on his insurance hat to sell you a life settlement, which can leave many customers confused as to whether they are dealing with  insurance products or securities. Furthermore, by not classifying life settlements as securities it makes it more difficult on investors, who were burned by their advisors, to pursue legal action. By not classifying life settlements as securities, investors may not be able to pursue these claims in the Financial Industry Regulatory Authority (FINRA) forum and have to sue in state or federal court which is a longer, more expensive process, unless all parties agree to arbitrate before FINRA.”

The courts and regulators have found investments in life settlements to be securities. The SEC report, in fact, points to 25 SEC enforcement actions and 13 enforcement actions brought by the Financial Industry Regulatory Authority Inc. that rest on this conclusion, as well as numerous other cases.

If the definition of a security under the securities laws were amended specifically to include life settlements under the NASAA model the definition would preserve a place for state regulation of legitimate life settlements. At the same time, it would close the door to many abusive transactions, including almost all forms of stranger-originated life insurance.

If life settlements were defined as securities, many of the abusive practices that have spawned more than 300 lawsuits and loss of much personal wealth would have been avoided. Few of these litigated cases involved variable policies, which come under the purview of securities regulation and demonstrate the relative effectiveness of Finra regulation and enforcement.

The SEC proposal to define life settlements as securities may be just what is needed to boost investors’ confidence and encourage them to buy, which would make the market more liquid.

Securities regulation would create full, fair and adequate disclosure of all material facts, and the discipline of Finra oversight would afford policyholders consistent protection in all U.S. jurisdictions. This would make it harder for abusers to sidestep the law.

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit securitieslawyer.com. 

We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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