More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Mediation is set to take place on Thursday in Chicago between Securities America, parent-firm Ameriprise Financial and plaintiffs’ attorneys involved in a class-action settlement rejected March 18 by a federal judge in Dallas.
But for the independent broker-dealer industry, the ramifications of the case – which entailed private-placement shares of Provident Royalties – and similar lawsuits (namely those tied to the private-placement of Medical Capital Holdings’ shares) are likely to be felt for some time, experts say. (See a full list of IBDs who sold Provident at the end of this article.)
“The vast majority of IBDs do not have such a parent and are thinly capitalized,” said Chip Roame of Tiburon Strategic Advisors near San Francisco, in an interview with AdvisorOne.
“They will also be far more threatened,” Roame noted. “I do expect more IBDs to go under in 2011 -- and more to sell out just before they go under.”
Other industry experts agree. “As more independent firms become subject to lawsuits from sales of these private placements, it remains to be seen if they will have the capital to handle them and if some will be forced out of business,” said Mark Elzweig, an executive-search consultant in New York, in an interview.
For those IBDs that choose to stay in the private-placement game, “They will probably move to ramp up their due diligence and be more skeptical of such offerings. In other words, they will need to be a lot more careful,” Elzweig (left) explained, and this is particularly true for those IBDs that don’t have a large parent company.
“Financial products are becoming more complex by the day,” Roame said. “This is not a one-time thing related to Medical Capital. This is a long-term trend of more complicated products requiring better due diligence.”
Recently, these private-placement lawsuits have contributed to the demise of QA3 LLC in February 2011 and GunnAllen in May 2010.
As Ameriprise said in a statement on Wednesday, Securities America is one of "many firms that distributed Medical Capital and Provident Shales securities."
Widespread IBD Issue
A January 2004 Form D filing with the SEC, for instance, listed the following broker-dealers as potential sellers of shares in Medical Capital Holdings of Anaheim, Calif.: First Security Financial Advisors of Venice, Fla.; Great Northern Financial Services Inc., of Veradale, Wash.; WFP Securities Inc., of San Diego; and First Montauk Securities of Red Bank, N.J.
An August 2009 court document associated with sales of Provident Royalties’ shares named the following defendants in the lawsuit brought by Joseph Billiterri against Securities America: CapWest Securities, Ameriprise, Capital Financial Services, GunnAllen Financial, National Securities Corp., Capital Financial Holdings Inc., Capstone Financial Group Inc., GunnAllen Holdings Inc., National Holdings Corp., NEXT Financial Holdings Inc., QA3 LLC., QA3 Financial Corp., and NEXT Financial Group.
Furthermore, close to 50 IBDs and investment firms are highlighted in a document from the case brought by Milo Segner against Provident Royalties filed as part of the company’s bankruptcy proceedings in June 2010 in Dallas. (See the full list at the end of this article.)
Many of these IBDs, like Investors Capital Corp., though, were much less exposed to liabilities than Securities America and some of the now-defunct broker-dealers.
“The company had limited sales of Provident Royalties, as compared to some other broker-dealers, like Securities America or QA3,” said Melissa Tarentino, general counsel and chief risk officer of Investors Capital Corp., in a statement. “A total of 22 ICC advisors sold $4.99 million of Provident Royalties, selling it to their clients or investing in the product themselves.”
According to Tarentino, “The company believes that this lawsuit will not have a material financial impact on Investors Capital Corp., due to various factors, including the firm’s robust risk management process, its insurance coverage, on both primary and excess levels, as well as its responsible legal accrual process and strong net capital position."
In addition, she notes, Investors Capital “did not approve as a product nor did its registered representatives sell any [shares of] Medical Capital Holdings.”
"Broker-dealers with outstanding lawsuits immediately become less attractive places for advisors to join,” said Elzweig. “Advisors don't want the reputational risk, and they don't want to worry if their new firm has enough resources to handle legal settlements.”
The New York-based recruiter thinks other broker-dealers may shy away from hiring advisors with outstanding legal issues, and points out that “open issues can impact the transfer of an advisor's license.”
Recruiter Rick Peterson of Houston, however, thinks that generally advisors (unlike the broker-dealers) can survive intact. “The broker-dealers may in fact fold and get thrown out the window,” Peterson said in an interview with AdvisorOne. “But the advisors are generally fine and always will be. The world loves revenue.”
Bill McGovern of B/D Search in St. Petersburg, Fla., believes Securities America “will have a hard time retaining [advisors] as we see how this shakes out,” he said in an interview.
“There was a lot of this going on in the '80s,” McGovern added. “You can often not tell until it's too late if the LLC will behave well or not.”
Several decades ago, “Prudential [Bache] got massacred by private placements,” noted Peterson. Other firms went out of business as a result, “because so many folks were selling these products,” he said.
At the time Prudential Bache was owned by a large insurance company with tremendous resources, recalls Elzweig. A similar situation exists for Securities America today.
Likewise, “The wirehouses can more easily survive missteps,” added Elzweig. "They are very well capitalized and, as the TARP program demonstrated, the Fed is ready to bail out big firms with access to funds and by choreographing mergers. The independents are not so lucky."
Going forward, however, IBDs will need to be “way more careful with what their financial advisors can sell,” the recruiter concluded. “This could end up impacting the [IBD] industry quite a lot.”
Provident & IBDs
As noted above, a lawsuit brought by Milo Segner against Provident Royalties included the following defendants:
- Advisory Group Equity Services Ltd.
- AFA Financial Group LLC
- American Portfolios Financial Services Inc.
- Asset Management Strategies LLC
- Ausdal Financial Partners Inc.
- Barron Moore Inc.
- Boogie Investment Group Inc.
- Brookstone Securities Inc.
- Callaway Financial Services Inc.
- Calton & Associates Inc.
- Capital Financial Services Inc
- CapWest Securities Inc.
- Chester Harris & Co.
- Community Bankers Securities LLC
- Crescent Securities Group
- David Harris & Co. Inc.
- DeWaay Financial Network LLC
- Eagle One Investments LLC
- Empire Financial Group Inc.
- Empire Securities Corp.
- E-Planning.com Securities Inc.
- First Allied Securities Inc.
- Gk Securities LLC
- Grant Bettingen Inc.
- GunnAllen Financial Inc.
- Harrison Douglas Inc.
- Independent Financial Group
- INVEST Financial Corp.
- Investlinc Securities LLC
- Investors Capital Corp.
- J.P. Turner & Co. LLC
- Kaiser & Co.
- Lighthouse Capital Corp.
- Main Street Securities LLC
- Matheson Securities LLC
- Milkie Ferguson Investments Inc.
- National Securities Corp.
- Newbridge Securities Corp.
- NEXT Financial Group Inc.
- Okoboji Financial Services Inc.
- Private Asset Group Inc.
- Provident Asset Management
- QA3 Financial Corp.
- Questar Capital Corp.
- Securian Financial Services Inc.
- Securities America Inc.
- Securities Network LLC
- SII Investments Inc.
- Sterling Enterprises Group Inc.
- Summit Brokerage Services Inc.
- United Equity Securities LLC
- United Securities Alliance Inc.
- Waterford Investor Services Inc.
- Wedbush Morgan Securities Inc.
- WestPark Capital Inc.
- WFP Securities Corp.
- Williams Financial Group Inc.
- Workman Securities Corp
(According to a law firm involved in the Billiterri case against Securities America, claims were dismissed against several parties, identified in the original online story, between December 2009 and July 2010. - Ed)