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Regulation and Compliance > Federal Regulation > FINRA

FINRA Hits Broker for Recommending Nontraded REITs, BDCs to Seniors

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The Financial Industry Regulatory Authority’s Department of Enforcement filed a complaint against a broker, alleging he made unsuitable recommendations that five of his senior customers, who included three widows, make “high-risk” investments that violated FINRA rules and wound up costing them thousands of dollars.

Between June 1, 2014, and July 31, 2017, Mercer Hicks III recommended that the senior investors buy speculative nontraded real estate investment trusts and nontraded business development companies, according to FINRA. He also “failed to conduct reasonable due diligence on the REITs and BDCs and failed to understand the risks and features associated with those investments before recommending them to his customers,” according to FINRA.

The prospectuses and subscription agreements for the investments stated that they were “not suitable” for investors who required immediate liquidity, guaranteed income or sought short-term investments, and were “only appropriate for those investors who could afford a complete loss of their investments,” FINRA said in its complaint, filed Dec. 20.

None of the five senior customers was looking to make such “speculative, high-risk investments,” FINRA said, noting that when Hicks first recommended nontraded REITs and nontraded BDCs to them in 2014, their ages ranged from 73 to 87 years old and none of them were still working. The customers’ account documents indicated they were seeking “either to preserve their capital or for their capital to appreciate,” according to FINRA.

Some of the elderly customers “encountered difficulties liquidating the investments to obtain funds that they needed to pay for medical care,” FINRA noted.

In all, Hicks recommended 18 purchases of unsuitable nontraded REITs and nontraded BDCs to the five senior customers totaling about $665,000. Hicks received a 7% commission from each sale, totaling about $46,550.

By recommending the unsuitable investments to the five seniors and failing to conduct reasonable due diligence on the investments, Hicks violated FINRA Rules 2111 and 2010.

FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on information obtained via reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.

Rule 2010 requires that all FINRA members to observe high standards of commercial honor and just and equitable principles of trade while conducting business.

Hicks has been registered as a general securities representative with Charlotte, North Carolina-based brokerage Southeast Investments since April 2014. The firm did not immediately respond to a request for comment.

On July 1, FINRA made a preliminary determination to recommend that disciplinary action be brought against Hicks, alleging that he violated the two FINRA rules, according to his profile on FINRA’s BrokerCheck website.

In the broker comment listed with that disclosure on the website, Hicks said: “I deny the allegations and intend to vigorously defend myself.”

But this is hardly the first black spot on his record. There are nine disclosures on his BrokerCheck profile. In addition to one for the July 1 FINRA investigation, they include three employment separations after allegations. In the first of those, Robert Thomas Securities discharged him March 11, 1997, for not following firm policy — a violation he admitted to in a broker comment included.

In the second employment separation, dated April 1, 2009, Cantella & Co. permitted Hicks to resign after the firm said it found that a husband and wife who were customers of his were charged incorrect fees and he later improperly forged their initials on related paperwork even though they apparently authorized him to do so, according to FINRA.

In the third employment separation, Capital Investment Group discharged him after allegations that he misrepresented himself as a client while dealing with an insurance company, violating firm policy and industry standards. There were also five disclosures pertaining to judgments and liens, according to FINRA.

— Check out ‘Free Lunch’ Annuity Scheme by Unregistered Advisor Targeted Seniors: Galvin on ThinkAdvisor.


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