More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The Financial Industry Regulatory Authority said Tuesday that it sanctioned eight firms and 10 individuals and ordered restitution of more than $3.2 million for sales of private placements, including some issued by Provident Royalties and Medical Capital Holdings.
FINRA ordered Next Financial, for instance, to pay $2 million in restitution to affected customers and fined the firm $50,000, In addition, Steven Lynn Nelson, the firm's vice president for investment products and services was suspended for six months and fined $10,000.
Securities America was censured and fined $250,000 in connection with the sale of two Provident Royalties private placements.
The latest action follows FINRA’s sanctioning of two firms and seven individuals in April 2011 for selling interests in private placements without conducting a reasonable investigation.
"FINRA continues to look closely at sales of private placements to determine whether the selling firms are fulfilling their responsibilities to customers,” said Brad Bennett, FINRA executive vice president and chief of enforcement, in a press release. “These actions reinforce that any firm or individual who fails to conduct reasonable investigations of these offerings, especially in light of multiple red flags, will not be allowed to shift all the responsibility to the issuers of the fraudulent private placements."
The legal costs and related issues associated with private placements plagued Securities America for much of 2011 and prompted its sale by Ameriprise Financial (AMP) to Ladenburg Thalmann for an initial price of about $150 million.
In terms of the latest FINRA matter, Securities America said (in a statement), “We are pleased to have put this matter behind us.” (Next Financial did not return a call requesting a statement by press time.)
As part of the deal, which was announced in August, Ameriprise agreed to indemnify Ladenburg for losses related to claims pending from the sale of certain securities issued by Provident Royalties and Medical Capital Holdings. These sales prompted Ameriprise to take a $77 million charge in the first quarter and put Securities America up for sale in April.
Before news of the sale, a Dallas judge gave his final approval of an $80 million class-action settlement over the sale of private placements of shares in Provident Royalties and Medical Capital. (A separate settlement of $70 million involved those who had begun arbitration proceedings against Securities America, Securities America Financial Corp. or Ameriprise.)
In its Nov. 29 announcement, FINRA says that some broker-dealers “did not have adequate supervisory systems in place to identify and understand the inherent risks of these offerings and, as a result, many of the firms failed to conduct adequate due diligence of these offerings.”
Also, according to FINRA, “some of the firms did not have reasonable grounds to believe that the private placements were suitable for any of their customers … [and] the sanctioned principals did not have reasonable grounds to allow the firms' registered representatives to continue selling the offerings, despite the numerous ‘red flags’ that existed regarding the private placements.”
The regulatory group said Thursday that it imposed sanctions and restitution against the following firms and individuals “for failing to conduct a reasonable investigation or for failing to enforce procedures with respect to the sale of private placements offered by Provident Royalties LLC, Medical Capital Holdings Inc., or DBSI Inc.:
- Houston-based NEXT Financial Group Inc. ($2.05 million);
- Investors Capital Corp. of Lynnfield, Mass. ($400,000);
- Garden State Securities Inc., of Red Bank, N.J. ($335,000);
- Securities America of La Vista, Neb. ($250,000)
- Equity Services Inc., of Montpelier, Vt. ($249,000)
- Capital Financial Services of Minot, N.D. ($210,000);
- National Securities Corp. of Seattle ($185,000);
- Equity Services Inc., of Montpelier, Vt. ($249,000);
- Securities America of La Vista, Neb. ($250,000);
- Newbridge Securities Corporation of Fort Lauderdale, Fla. ($40,000);
- Leroy H. Paris II of the now-defunct Meadowbrook Securities (Investlinc Securities), of Jackson, Miss. ($10,000); and
- Michael D. Shaw, formerly of VSR Financial Services Inc., of Baton Rouge, La.
According to FINRA, Medical Capital Holdings, a medical-receivables financing company based in Anaheim, Calif., raised roughly $2.2 billion (2001-2009) from over 20,000 investors through nine private placement offerings of promissory notes. In July 2008, it began experiencing liquidity problems and stopped making payments on notes sold in two of its earlier offerings.
From 2006 through 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by an affiliated issuer, Provident Royalties. These offerings were sold to customers through more than 50 retail broker-dealers nationwide and raised about $485 million from over 7,700 investors.
Most of the funds raised were transferred to Provident’s operating account in the form of undisclosed and undocumented loans, and were used to pay dividends and returns of capital to investors in the earlier offerings, without informing other investors of the situation.
“We are pleased to have put this matter behind us and to have fully cooperated with FINRA in achieving a settlement that returns money to Provident investors,” said John G. Cataldo, Investors Capital's chief compliance officer and counsel, in a statement.