A March 7^th article in the Sarasota Herald Tribune (“Business Development Companies: Good Income Investment or Trap”) properly noted that, “in today’s historically low interest rate environment, investors hungry for higher yields have stumbled upon a somewhat obscure class of securities called Business Development Companies (BDCs).”

BDCs, investment entities that were created by Congress in 1980, are traded on stock exchanges and are required to invest at least 70 percent of their assets in the non-public debt and equity of small and middle-market U.S. companies. They annually distribute at least 90 percent of their income to stockholders.

Investors may be failing to appreciate that there are a number of risks intrinsic to BDCs, however, including their: underlying company credit and investment risk; leverage risk, as BDCs borrow money to make investments; illiquidity risk, as the underlying companies may have no ready market; and capital-markets risk, as BDCs rely on being able to easily borrow money to make new investments.

The shorter-term performance of BDC’s has been disappointing with the average BDC down about 10 percent since the beginning of 2016, more than the S&P 500. The catalysts for this decline range from fears of rising interest rates to concerns about the soundness of their underlying investments.

Although, historically, BDCs have yielded over 1.5 percentage points more than high-yield bonds and 7 percent more than 10-year U.S. Treasury securities, BDCs are quite volatile investments compared with U.S. stocks in general and even more so with high-yield bonds. They have, for example, about 2.5 times the volatility of high-yield bonds.

Investors need to carefully analyze any BDC’s prospects before investing. Additionally, investors need to be confident they can deal with BDC’s high volatility. In short: BDCs are only suitable for aggressive investors.

If you are an individual or institutional investor who has any concerns about your investment in any BDC product, 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).

As disclosed by The Wall Street Journal on February 18, 2016 (“FBI Raids Headquarters of United Development Funding”), agents from the Federal Bureau of Investigation, armed with search warrants, raided the headquarters of this sponsor of real estate investment trusts and other investment vehicles and seized documents and other materials in what appears to be an expanding criminal investigation of UDF.

UDF, which has reportedly raised about $1 billion from retail investors for its non-traded real estate investment trusts, has been the subject of a number of criticisms and negative allegations in the past few months which have focused on the company’s concentrated lending practices (reportedly about 99% of the United Development Funding IV program’s loans have been made in Texas and, of that amount, approximately 67% of the loans have been advanced to a single borrower – Centurion American Development and its affiliates) and the contention that new money being raised has been used to repay earlier investors in its programs.

As to be expected with this latest development, shares of UDF’s largest fund, United Development Funding IV, crashed when news of the FBI’s raid hit the tape – falling 54% before trading was halted. Since December of 2015, the shares have now lost more than 80% of their value.

If you are an individual or institutional investor who has any concerns about your investment in any United Development Funding program, 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).

As noted in a February 5, 2016 article in The Wall Street Journal (“The Oil Rout’s Surprise Victims”), the epic collapse in the price of oil, from more than $100 per barrel less than two years ago to below $30 last week, has “crushed investors in the futures market, energy partnerships, high-yield corporate bonds and the shares of oil and gas companies.”

But there is another sector of the energy market – short term bonds and structured notes issued by major investment firms whose returns are linked to the price of oil or other energy-related assets – that could also be decimated in the coming months unless there is a significant recovery in oil prices.

These securities, which have been sold to wealthy families and individual investors who want to limit the risk or amplify the return of more-conventional investments, often carry such alluring nicknames as “Phoenix,” “Plus,” “Enhanced Return” or “Accelerated Return.” They typically mature in two years or less and pay commissions of about 2% to the brokerages that sell them which has included units of Bank of America, Citigroup, Credit Suisse, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and UBS.

Unfortunately, they use intricate combinations of options contracts to skew the payoffs from changes in energy prices: investors can make a lot of money if oil goes up a little, and they can lose much or all of their money if it goes down a lot. At current prices, most of these securities are underwater and there will have to be a significant increase in the price of oil (estimated at 50% to 100%) for them to return to their original value.

As noted by Craig McCann, principal at Securities Litigation and Consulting Group, a research firm in Fairfax, Virginia and one of the leading experts in the securities field, “this is not really an investment strategy so much as a wager on which way oil prices are going” and “some of the risks and costs of that wager are masked by the complexity of it.”

Furthermore, there isn’t any secondary trading in most of these securities, meaning that the issuing bank may often be the only buyer which, more often than not, does not benefit the investors who own them.

If you are an individual or institutional investor who has any concerns about your investment in any energy related bonds or structured notes, 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).

Junk bonds, better known as high-yeild debt have seen much better days and strategists say that investors may be focusing too much on the role energy has played in the decline while underestimating other risks.

According to Matthew Mish, global credit strategist at UBS “Energy, bond valuations are pricing in an uplift in underlying commodities, so there’s more downside risk if prices hold at these levels for a long time or go lower,” And elsewhere, he added, “we do not see a marginal buyer for lower-quality credit.”

David Kotok, chairman and chief executive of Cumberland Advisors, worries more about the currency risk. “Foreign currencies — even those in developed markets such as Canada — have been crushed under a strong United States dollar. Over the past year, the Canadian loonie has fallen 17 percent against the American currency; the Brazilian real has plummeted 34 percent”, says Kotok.

Joseph F. Kalish, chief global macro strategist at Ned Davis Research concern is for the market damage seems to be spreading beyond commodities. Kalish says, “That’s what has gotten me more concerned this time around, compared to the generalized, risk-off sell-off we had in the middle of last year,”.

Released by the Office of Compliance Inspections and Examinations of the Securities and Exchange Commission, Examination Priorities for 2016.

CEO Lloyd Blankfien of Goldman Sachs plans on paying $5.06B to end federal and state investigations of its underwriting and sale of mortgage-backed securities from 2005 to 2007. The investment banking giant will pay $2.3B in civil penalties, $875M in cash payments, and $1.8B in consumer relief to settle all claims. The payout will lop off $1.5B from Goldman Sachs’ after-tax earnings, according to Law 360.

Each year, FINRA publishes its Annual Regulatory and Examination Priorities Letter to highlight issues of importance to FINRA’s regulatory programs, Regulatory and Examination Priorities Letter.

Many of the concerns in last year’s letter remain priority again for 2016. With the recent increase in interest rates, FINRA reiterates the worries mentioned in last year’s letter regarding interest rate-sensitive products. Firms are urged to evaluate their product offerings to determine where heightened concerns about interest rate sensitivity are relevant.

FINRA Chairman & CEO Richard Ketchum says, “Firm culture, ethics and conflicts of interest also remain a top priority for FINRA. A firm’s culture contributes to, and is also a product of, a firm’s supervision and its approaches to identifying and managing conflicts of interest and the ethical treatment of customers. Given the significant role culture plays in how a firm conducts its business, this year the letter addresses how we will formalize our assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices.”

As noted in a December 31, 2015 article in The Wall Street Journal (“The Year the Hedge-Fund Model Stalled on Main Street”), more “liquid alternative” mutual funds closed in 2015 than in any year on record, according to research firm Morningstar Inc., due, in significant part, to increased market volatility.

In all, according to Morningstar, 31 liquid-alternative funds closed in 2015, up from 22 a year earlier, as inflows dwindled and performance weakened.

The results show that enthusiasm is fading for what had emerged in recent years as one of the hottest products in asset management – funds that combine hedge-fund strategies like shorting stock with the daily liquidity of mutual funds.

Assets in liquid-alternative funds grew to $310.33 billion at the end of 2014 from $124.44 billion at the end of 2010. But the inflows have slowed as performance faltered in 2015 – in fact, it is estimated, according to the WSJ article, that just $85.1 million flowed into liquid-alternative funds in 2015.

The host of funds liquidated this past year included strategies run by J.P. Morgan Asset Management, Guggenheim Partners LLC and Whitebox Advisors LLC. The closed funds were a range of unconstrained bond funds; managed future funds, which bet on futures contracts in a number of markets; and equity funds that bet on stocks rising and falling – are of which tend to have highly concentrated bets that expose investors to riskier assets than typical mutual funds do.

If you are an individual or institutional investor who has any concerns about your investment in any liquid alternative fund, 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).

As noted in a December 24, 2015 article in The New York Times (“Obscure Corner of Wall St. Draws Skepticism from Investors”), one obscure sector of the stock market – Business Development Companies (“BDCs”) – has been the subject of increasing controversy over some of its results and fees.

BDCs are firms that were created by Congress in 1980 to encourage investment in small businesses whose growth may generate jobs. They sell stock to the public and then use some of the proceeds to make loans to emerging businesses for a variety of needs. The category has grown tenfold over the last decade, to $64 billion in assets. That is partly because business development companies offer higher yields in exchange for the high-risk nature of their assets, and partly because they cater to a market that big banks have retreated from since the financial crisis.

One of the most criticized business development companies, however, is Prospect Capital Corporation (NASDAQ: PSEC). With $6.6 billion in assets as of September 30, 2015, Prospect is a large player in the category. But in the last year and a half, its stock price and net-asset value per share have been steadily sinking. Even before the recent junk-bond market upheaval, Prospect has traded at a discount to net-asset-value of more than 30 percent this year, well below the average of less than 20 percent for such firms.

Some analysts have accused Prospect of charging what they say are conspicuously high fees, even as investor returns have faltered. And others have taken issue with the compensation paid its chief executive, John F. Barry III — more than $100 million annually in recent years, according to estimates by former employees and an outside analyst.

Prospect invests in high-yield, high-risk assets like stocks, loans and bonds of companies through private equity buyouts, finance companies, debt pools like collateralized loan obligations, real estate investment trusts, aircraft leasing and even online loans – a significant portion of which are leveraged. Prospect’s fees, however, like those of many business development companies, are similar to those of private equity funds. Its external manager charges a 2 percent annual management fee on all assets plus an incentive fee of 20 percent of certain income gains — and administrative expenses — at the high end of the sector. For its fiscal year that ended in June, the Barry-owned manager received fees and expenses totaling $240 million, or about 3.5 percent of its total assets, according to the company’s annual report.

Some analysts say Prospect has often paid out dividends above its earnings, and sold stock below its book value, both of which can hurt investors. Both moves have helped Prospect raise its assets tenfold since 2008, also increasing fees. With its shares down 34 percent in the last 17 months, Prospect has curtailed new stock sales. As a result, growth of its assets slowed to 5 percent in its latest fiscal year from an annual rate of 58 percent over the previous five years.

One reason for Prospect’s big discount to net-asset value, now 28 percent, is that some investors are skeptical of the value Prospect reports for some assets – commonly referred to as “Level 3” assets – which means that, rather than being priced based on actual trade prices, these investments are valued by management based on their own estimates and valuation models.

The combination of leverage, questionable Level 3 valuations and excessive fees are, more often than not, an indication of potential significant concern – especially in a rising interest rate environment.

If you are an individual or institutional investor who has any concerns about your investment in Prospect Capital Corporation or any other Business Development Company (“BDC”), 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).

The latest on broker Tom Buck, is a settlement has been made costing $4.1 Million for Merrill Lynch. For the all the details visit http://www.ibj.com/articles/56290-buck-settlements-cost-merrill-lynch-41m?utm_source=this-week-in-ibj&utm_medium=newsletter&utm_campaign=2015-12-19