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AR Capital to Stop New Issues, Cetera Suspends Related Product Sales

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AR Capital, one of several companies linked to both troubled RCS Capital (RCAP) and American Realty Capital Properties (now VEREIT), said Monday that it would not issue new investment programs next year nor pursue sales of existing products to new investors starting Jan. 1.

“The proposed and pending regulatory changes suggested by the Department of Labor fiduciary standard as well as the valuation measures prescribed by FINRA’s 15-02 directive pertaining to the alternative investment industry remain largely opaque in terms of their implications and consequences for the alternative investment industry,” said William Kahane, founding partner of AR Capital, in a statement. “Until there is greater clarity, we have decided to sit this one out.”

Products sold by AR Capital — Business Development Corporation of America II, ARC Healthcare Trust III, New York City REIT II, ARC Hospitality Trust and ARC Global Trust II — have about $19 billion in assets.

In a memo to financial institution senior management, program managers and advisors obtained by REIT Zone, Cetera Financial Institutions President & CEO Catherine Bonneau wrote: “Due to recent news about events at AR Capital and RC Securities, we are temporarily suspending sales of all products sponsored by AR Capital effective immediately. This temporary suspension should not be construed as an indication that there are fundamental issues with products sponsored by AR Capital. Rather, until we learn more, we believe it prudent to take this action. Sales in the products listed will remain suspended until further notice: (1) American Realty Capital Global Trust II, (2) American Realty Capital Healthcare Trust III, (3) American Realty Capital Hospitality Trust, (4) Realty Finance Trust, (5) Business Development Corporation of America – II, (6) American Real Estate Income Fund – AREIX and (7) AR Mutual Funds.”

She added, “Any subscription agreements currently in process for any of the listed products will be promptly returned.” RCS Capital owns the Cetera group of independent broker-dealers, which includes about 9,000 affiliated reps.

Through the end of October, AR Capital had non-traded REIT sales of $2.2 billion, which represents a nearly 27% market share and is “down sharply from last year,” according to REIT Zone; in the year-ago period, AR Capital had raised $5.8 billion, earning it a 43% market share, says REIT Zone, citing data obtained from Robert A. Stanger & Co.

Cetera executives would not comment specifically on the matter. A spokesperson, though, said: “Consistent with Cetera Financial Group’s longstanding processes, we conduct ongoing due diligence of all products as part of our broader efforts to work with providers of investment solutions that meet the highest possible standards within our industry.”

An industry expert familiar with the company, who wished to remain anonymous, believes this step has likely been taken. “When there were accounting issues [tied to AR Capital] last year, Cetera did suspend these sales,” he explained. “It’s important for Cetera to demonstrate its independence…and management wants to do the right thing in a tough situation.”

Fraud Charges

Monday’s news follows a series of compliance issues at these companies, including Thursday’s actions by Massachusetts regulators, who charged RCS Capital with fraudulent proxy voting and are seeking to revoke the firm’s broker-dealer registration in the state.

In addition, RCS Capital says it received a notice from NYSE for noncompliance with the $1 minimum bid price rule. It shares are trading around $0.50. It shares traded near $0.28 on Monday.

Massachusetts’ Secretary of the Commonwealth William Galvin says RCAP fraudulently cast shareholder proxy votes on investment programs sponsored by American Realty Capital at the June annual meeting of the Business Development Corporation of America (BDCA), an investment sponsored by American Realty Capital, and at a special September meeting of BDCA.

The September vote was required as part of a proposed deal with Apollo Global Management to buy real estate assets from Nicholas Schorsch, according to Galvin’s office; this deal has since been cancelled, though a separate arrangement for Apollo to buy Realty Capital Securities is moving ahead at $6 million, “a considerably reduced asking price,” the regulators say.

Schorsch was formerly the chairman and chief operating officer of BDCA.

The complaint also alleges that Realty Capital Corp. was paid $375,000 by BDCA to solicit proxy votes “notwithstanding the inherent conflict with the brokerage firm’s vested interest in reaching an affirmative vote.”

These developments followed the debacle of October 2014, when American Realty Capital Properties (now VEREIT) reported $23 million of accounting errors. After that news broke, many broker-dealers stopped selling nontraded REITs and other products associated with American Realty Capital Properties, AR Capital and RCAP, ventures founded or led in the past by real-estate mogul Schorsch.

Last week, Hatteras Funds said it is buying its business back from RCAP in order to re-establish itself as an employee-owned alternative investment firm.

Meanwhile, speculation continues about the future of the RCAP-owned Cetera independent BD, led by Larry Roth, as RCAP’s stock has plunged.