More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
FINRA said early Monday that it fined Berthel Fisher and its affiliate Securities Management & Research $775,000 for supervisory deficiencies, including the failure to supervise sales of nontraded real estate investment trusts, as well as leveraged and inverse exchange-traded funds. As part of the settlement, Berthel Fisher must retain an independent consultant to improve its supervisory procedures for sales of alternative investments.
"A strong culture of compliance is an essential element of the proper marketing of complex products,” said Brad Bennett, executive vice president of enforcement for FINRA, in a press release. “Berthel's supervision of the sales of nontraded REITs, inverse ETFs and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients."
For its part, Berthel Fisher says the settlement it reached with FINRA concerns "an issue involving their email retention systems, and the vendor who provides the services" for the firm.
"While the email issue was an outsourcing problem, Berthel Fisher handled it with FINRA," the company said in a press release. "Additionally at Berthel Fisher & Co. Financial Services, it involved transactions with nontraditional ETFs, other alternative investments, and a selling-away issue with a specific office. It is Berthel Fisher’s understanding that the ETF and other alternative investment matters were a result of a 'sweeps' done by FINRA throughout the industry."
Berthel Fisher notes that it has removed leveraged and inverse ETFs from its platform. Plus, the specific office in question "is no longer with Berthel Fisher, as regulatory action has been taken upon the specific representative for negligent business practices."
“We appreciate the need for compliance in our industry, and Berthel Fisher & Co. Financial Services as well as Securities Management & Research take that obligation very seriously,” said CEO Thomas J. Berthel, in a statement. “We worked hard to cooperate with FINRA and appreciate the guidance they are able to provide us in our heavily regulated industry.”
According to FINRA, Berthel Fisher had “inadequate supervisory systems and written procedures for sales of alternative investments such as nontraded REITs, managed futures, oil and gas programs, equipment leasing programs and business development companies” from January 2008 to December 2012.
In some instances, the regulatory group says, the Cedar Rapids, Iowa-based IBD “failed to accurately calculate concentration levels for alternative investments; thus, the firm did not correctly enforce suitability standards for a number of the sales of these investments.” Furthermore, it “failed to train its staff on individual state suitability standards, which is part of the suitability review for certain alternative investment sales.”
From April 2009 to April 2012, Berthel Fisher did not have “a reasonable basis for certain sales of leveraged and inverse ETFs,” FINRA notes. It also did not “adequately research or review nontraditional ETFs before allowing its registered representatives to recommend them to customers, and failed to provide training to its sales force regarding these products.” In addition, it “failed to monitor the holding periods of these investments by customers, resulting in some instances in customer losses.”
In settling this matter, Berthel Fisher and Securities Management & Research neither admitted nor denied the charges, according to FINRA; the company did consent to the entry of FINRA's findings.
According to Investment Advisor’s 2013 broker-dealer directory, Berthel Fisher had about 325 advisors last year. They had average client assets of $4.7 million and average yearly fees and commissions of $152,500.
Check out FINRA Plan Seeks ‘Clearer Picture’ of Nonlisted REITs on ThinkAdvisor.