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Industry Spotlight > Broker Dealers

7 BDs Fined Over RCS-Related Proxy Scandal

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Massachusetts regulators imposed fines of $238,000 on seven broker-dealers in connection with unauthorized proxy votes tied to an American Realty Capital investment program. 

The sanctions, announced Wednesday, came about six months after Secretary of the Commonwealth William Galvin fined Realty Capital Securities $3 million over the program’s fake proxy votes and RCS agreed to exit the securities business.

The fines, cease-and-desist order, censure and agreement to change supervisory policies and procedures tied to proxy voting involved Voya Financial Advisors, FMN Capital, Invest Financial, Newbridge Securities, Pariter Securities, Platinum Wealth Partners and TKG Financial.

The state’s investigation of American Realty Capital and related entities began in 2014, when American Realty Capital Properties disclosed that it had overstated its adjusted funds from operations by $23 million; soon afterward, Nicholas S. Schorsch, the company’s founder and chairman, resigned.

According to Galvin’s office, some registered agents of the seven broker-dealers submitted unauthorized proxy votes for clients with interests in American Realty Capital investment programs. “The proxy authorization forms were each identical and were prepared for the firms to submit by Realty Capital Securities,” the office explained in a press release.

“My office … uncovered how RCS’ own employees fabricated numerous shareholder proxy votes, but in these cases they were assisted by other financial service firms,” Galvin said in a statement. “A registered firm that fails to have reasonable compliance procedures in place to protect their clients’ voting rights creates a breeding ground to allow this to happen. That will not be tolerated in the Commonwealth.”

The state’s final orders concern votes taken in 2015 by American Realty Capital Trust V, American Realty Capital Healthcare Trust II and Business Development Corp. of America (or BDCA), all of which were investment programs sponsored by American Realty Capital.

“The right to vote is a fundamental right for a shareholder,” added Galvin. “It is the shareholder’s voice and is the only means to prevent a change in corporate structure that could be detrimental to their interests.”

Last year, Galvin’s office shared an RCS email to employees that read: “We need each and every one of you regardless of excuse and circumstance to focus on this all day today … this … is for your own personal well-being … [p]lease don’t put me in a position where I’m asking you why you are not working on Proxy.”

Furthermore, regulators said an RCS employee told them “if they did not participate in proxies, they would get a call from [RCS Chairman and American Realty Capital President & COO] Michael Weil and would risk termination”

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

The case in Massachusetts came about from an RCS employee who explained how RCS employees pretended to be shareholders and cast proxy votes in favor of management proposals.

“The investigation obtained from the proxy firm audio recordings of a June 23 call and a Sept. 29 call [in 2015], both purportedly from shareholders. The two shareholders denied their voices were on the call,” explained Galvin’s office, in December.

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In May, the Cetera Financial Group of independent broker-dealers said it became a stand-alone entity and that broker-dealer industry veteran Robert Moore is helping lead the company as nonexecutive chairman. Its parent company, formerly RCS Capital and recently renamed Aretec (or Cetera spelled backward), has wrapped up its bankruptcy proceedings and now serves as a non-operating holding company – with Cetera as its sole operating business.

“We have completed Cetera’s transformation to an independent privately held organization,” said CEO Larry Roth, in an interview with ThinkAdvisor. “We are recapitalized and have a new board of directors. It’s fantastic!”

“Today, we have a clear go-forward ownership structure, a healthy balance sheet, significant additional capital to continue investing in advisor-support resources and a battle-tested management team energized to help our advisors and institutions grow,” explained Roth.

Earlier this month, Cetera’s parent company named three new board members: Mary Cranston, a retired senior partner and past chair of the law firm Pillsbury Winthrop Shaw Pittman who is now on the boards of Visa, Chemours Co. and Myokardia; Robert “Bob” Dineen, most recently vice chairman of Lincoln Financial Network and a member of Lincoln Financial Group’s senior management committee, who also is a board member of life insurer Aegon; and Edmond Walters, the former CEO of eMoney Advisor.

Along with Moore, the remaining board members are Roth; Michael Kaufman, principal of Redwood Capital Management; and David King, managing director at Fortress Investment Group.

“I’m pleased to be working with Larry and his team, who have proven themselves through a time of adversity,” said Moore in an interview last month. “It is an honor and privilege to work alongside them … With the team assembled, I feel the conditions for success are better than ever.”

Earlier this year, RCS Capital filed for bankruptcy protection in Delaware. At the time, Cetera said it planned to spend some $50 million on programs to retain the roughly 9,000 independent advisors affiliated with its network of broker-dealers who are eligible for such funding. RCS Capital had close to $2 billion in assets and roughly $1.4 billion in debts, according to a Bloomberg report.

In early January, RCS Capital said it had obtained $150 million to restructure its finances from a group of key investors. Also, private equity firms Carlyle Investment Management and Fortress Investment Group, along with asset manager Eaton Vance Management, are letting the company forgo debt payments. These entities are poised to see the money they are lending to Cetera turn into equity shares in the group of independent broker-dealers.

In 2014, Lightyear Capital sold Cetera for $1.15 billion to RCS Capital, which at the time was led by Schorsch, who served as the firm’s executive chairman. (He is no longer involved in the management of RCS Capital, Aretec or Cetera.)


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