Monthly Archives: December 2018

On December 20, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2019 examination priorities. OCIE publishes its exam priorities annually to promote transparency of its examination program and provide insights into the areas it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets.

As noted by the SEC in this report, in 2019 “particular emphasis” will be on “matters of importance to retail investors” including the protection of retail investors in the following areas of concern:

Senior Investors and Retirement Accounts and Products: OCIE will conduct examinations that review “how broker-dealers oversee their interactions with senior investors, including their ability to identify financial exploitation of seniors. In examinations of investment advisers, OCIE will continue to review the services and products offered to seniors and those saving for retirement. These examinations will focus on, among other things, compliance programs of investment advisers, the appropriateness of certain investment recommendations to seniors, and the supervision by firms of their employees and independent representatives.”

Proper Disclosure of Fees & Expenses: OCIE will conduct examinations that review “firms with practices or business models that may create increased risks of inadequately disclosed fees, expenses, or other charges. With respect to mutual fund share classes, OCIE will continue to evaluate financial incentives for financial professionals that may influence their selection of particular share classes. In addition, OCIE remains focused on investment advisers participating in wrap fee programs, which charge investors a single bundled fee for both advisory and brokerage services. Continued areas of interest include the adequacy of disclosures and brokerage practices.”

Conflicts of Interest: OCIE will conduct examinations that review firms that “provide incentives for financial professionals to recommend certain types of products and services” and advisers who “in some cases utilize services or products provided by affiliated entities.”

Mutual Funds and Exchange Traded Funds: OCIE will conduct examinations that review “mutual funds and exchange traded funds (ETFs) which are the primary investment vehicles for many retail investors” and “will assess industry practices and regulatory compliance in various areas that may have significant impact on retail investors” including “risks” that are associated with “index funds that track custom-built or bespoke indexes; ETFs with little secondary market trading volume and smaller assets under management; funds with higher allocations to certain securitized assets; and funds with aberrational underperformance relative to their peer groups.”

If you are an individual or institutional investor who has any concerns about your accounts or investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about some firms that failed to conduct reasonable diligence on private placements and failed to meet their supervisory requirements – especially in those circumstances when firms have an obligation to conduct a “reasonable investigation” through evaluation of the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering.

In particular, FINRA has observed instances where some firms’ reasonable diligence was not sufficient in scope or depth to be considered a “reasonable investigation of the issuer and the securities.”

According to FINRA, these regulatory examinations revealed that “some firms failed to perform reasonable diligence on private placement offerings prior to recommending the offerings to retail investors” and that, “in some instances, firms performed no additional research about new offerings because they relied on their experience with the same issuer in previous offerings.”

In other instances, FINRA noted that “some firms reviewed the offering memorandum and other relevant offering documentation, but did not discuss the offering in greater detail with the issuer or independently verify, research or analyze material aspects of the offerings. FINRA also observed that some firms did not investigate red flags identified during the reasonable diligence process.”

Finally, FINRA stated that “where some firms obtained and reviewed due diligence reports provided by due diligence consultants, experts or other third-party vendors, they sometimes did not independently evaluate the third parties’ conclusions, respond to red flags or significant concerns noted in the reports, or address concerns regarding the issuer or the offering that were
apparent outside the context of the report.” Of equal concern was the fact that “some firms used third-party due diligence reports that issuers paid for or provided in their due diligence analysis. While some of these reports provided valuable and relatively objective information, in some cases, firms did not consider the related conflicts of interest in their evaluation and assessment of the reports’ conclusions and recommendations.”

If you are an individual or institutional investor who has any concerns about your private placement investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about some firms that “maintained customer accounts that were concentrated in complex structured notes or sector-specific investments, as well as illiquid securities, such as non-traded real estate investment trust (“REITs”), which were unsuitable for customers and resulted in significant customer losses.”

A concentrated account is commonly considered to be an account which contains a significant percentage of its assets in one product, type of product or sector which exposes the account to excessive amounts of risk – especially during periods of extreme volatility as the markets have recently experienced in greater frequency.

In particular, FINRA noted that “some registered representatives recommended structured notes or sector-specific investment strategies to customers who may not have had the sophistication to understand their features and without considering the customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors.”

Some of the “recommendations involved illiquid securities with limited price transparency, which made it difficult for investors to know the true value of their investment and led them to believe that their investments would not fluctuate in value. In some instances, firms did not have
procedures or systems reasonably designed to identify and supervise the concentration of such products in customers’ accounts.”

If you are an individual or institutional investor who has any concerns about your concentrated investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about the suitability of investments that are being recommended to retail investors.

In fact, FINRA observed situations where “registered representatives did not adequately consider the customer’s financial situation and needs, investment experience, risk tolerance, time horizon,
investment objectives, liquidity needs and other investment profile factors when making
recommendations.”

In some cases, FINRA noted that “unsuitable recommendations involved complex products (such as leveraged and inverse exchange-traded products (ETPs), including exchange-traded funds (ETFs) and notes (ETNs)). In other cases, they involved overconcentration in illiquid securities, variable annuities, switches between share classes, and sophisticated or risky investment strategies.”

One of the products that was specifically discussed in this report was “volatility-linked” products that are being marketed to retail investors. As stated by FINRA, their examinations of firms indicated that, “despite prospectuses and other materials that included risk disclosures,
including explicit warnings about sales to retail customers, some firms nevertheless marketed volatility-linked products to retail customers who did not understand those products’ unique risks and made recommendations that were inconsistent with the investors’ investment profile, including risk tolerance and investment time horizon (e.g., in many of those instances, customers held the securities far longer than the holding periods – frequently one trading day – that were recommended in the product’s prospectus).”

If you are an individual or institutional investor who has any concerns about your volatility-linked investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On December 3rd, 2018, the Indiana Securities Division of the Secretary of State’s office announced that LPL Financial agreed to pay a civil penalty of $450,000 for “various deficiencies” related to supervision of its Indiana operations.

Indiana said an investigation found that LPL supervisors did not properly review a number of emails involving Indiana operations for several years. The investigation also found that LPL did not conduct annual compliance exams of its Indiana branches as required by law.

Boston-based LPL offers securities through numerous independent broker dealers across the country, including many in Indiana. If an investor has any questions about his/her dealings with LPL, or any losses in your accounts, you should contact our office for a free evaluation. We represent many individual and institutional investors in securities arbitration claims with FINRA. We are happy to give investors a no-cost, no-obligation evaluation of your specific facts and circumstances.

On November 26, 2018, in an editorial in the New York Times (“When Blue Chip Companies Pile on Debt, it’s Time to Worry”), it was noted that “fueled by cheap credit, American corporations have been gorging on acquisitions” and that “the party may soon be over.”

In fact, in the low interest-rate environment that has persisted for the last decade, “debt issuance exploded” as “the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion.”

This editorial observed that “much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum – meaning that the money borrowed remains at some danger, albeit low, of not being paid back. There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market. “

As interest rates rise and the economy appears to be slowing, the potential for debt default has become “a fear that has started to cause disturbing ripples in the debt and equity markets. “

One of the examples discussed in this article concerns General Electric (NYSE: GE) which has a reported $115 billion of outstanding debt, about $20 billion of which is due within a year. In October, “S&P lowered G.E.’s credit rating to BBB, and the cost of buying insurance against a default on G.E.’s bonds, so-called credit default swaps, has soared in November. That’s a sign of investors becoming nervous that G.E. might default.”

Another example is AT&T (NYSE: T) which has “about $183 billion of debt outstanding” and “is now one of the most indebted companies on the planet, thanks to its recent acquisitions of DirecTV and TimeWarner, which were paid substantially with debt. AT&T’s debt is also rated BBB, although only about $11 billion is coming due within a year.”

This editorial concludes that “there’s a lot at risk here. If these BBB-rated companies get downgraded further into ‘junk’ status — a distinct possibility if a slowing economy makes a dent in their profits or if their big acquisitions do not pay off — a vicious cycle is nearly inevitable. That means higher borrowing costs when it comes time to refinance or to obtain a new credit line and an increasing risk of default.”

If you are an individual or institutional investor who has any concerns about your fixed income investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).